Is it bubble time again for Japan's real estate companies?

[SINGAPORE] Japan's real estate firms are entering dangerous territory. That's the assessment of S&P Global Ratings, which said in a report on Friday that the sector's debt levels now eclipse that of the nation's bubble era.

Remember that? It was back in the 1980s, when newspaper headlines proclaimed that the grounds of the Tokyo Imperial Palace were valued at more than all of the real estate in California.

"Japan's real estate market is peaking out and ready to head down," S&P said. "Although the conditions in the office leasing market are solid, there are signs of a slowdown in corporate earnings, particularly among manufacturers. In addition, we expect major upticks in central Tokyo office building supply in 2020 and 2023."

Companies most at risk are Mitsubishi Estate Co, Mitsui Fudosan Co, Sumitomo Realty & Development Co and Nomura Real Estate Holdings Inc.

Although interest rates in Japan have been low for years, domestic lenders have seen their profitability weaken because of shrinking net interest margins. They've increased loans to developers because demand from other corporate customers remains relatively weak.

And developers have gone to town, undertaking large redevelopment projects or ramping up acquisitions.

S&P believes financial leverage will only increase, as real estate firms use more debt to finance growth investments and restrain any capital increases by raising total payout ratios.

"If banks reduce their loans to real-estate companies as financial conditions deteriorate, they could pull down property prices and push up debt financing costs," the ratings company said. "This, in turn, could worsen the financial standing of real estate majors."

BLOOMBERG