Tokyo residential-property prices are set for a ``full-blown'' drop after the number of unsold homes increased this year, said Minoru Mori, chairman of Japan's biggest privately held developer.

``Supply in the residential market has been excessive,'' Mori, who heads Mori Building Co., said in an interview in Shanghai on Oct. 25. ``Unlike commercial properties, residential real estate will face a full-blown decline.''

Japan's slowing economy and the credit crisis that tightened lending have damped demand for commercial and residential real estate in Japan. The slump in Tokyo's condominium market may last longer than the drop after Japan's asset-price bubble burst in 1990, according to an estimate by the Tokyo-based Real Estate Economic Research Institute.

The average price of an apartment in the Tokyo region, which includes the prefectures of Saitama, Chiba and Kanagawa, fell 6.9 percent to 44.7 million yen ($482,000) in September from the previous month, Real Estate Economic Research Institute Co. said in a report Oct. 15. The price per square meter fell 8.6 percent to 618,000 yen.

Unsold Properties

The number of apartments for sale in the Tokyo region amounted to 10,411 in September. That was down from 10,504 in August, the highest level since December 2002.

Commercial real estate is holding up better than residential property, said Mori.

``Tokyo's commercial property market remains relatively healthy,'' Mori said. ``The current price decline probably won't be more than 10 percent.''

The Topix Real Estate Index fell to a two-week low today, declining 4.7 percent to 832.75 in Tokyo, and the Tokyo Stock Exchange REIT Index also dropped to the lowest level in two weeks, falling 7.7 percent to 740.30.

Tokyo-based Mori is seeking to manage the impact of the global financial market turmoil. Lehman Brothers Holdings Inc., which last month filed for the largest bankruptcy in history, was a tenant of the developer's Roppongi Hills complex, occupying 275,000 square feet (26,000 square meters) of office space.

Nomura Holdings Inc., the Japanese brokerage that agreed to buy Lehman's European and Asian assets, has expressed an interest in taking over Lehman's lease at Roppongi Hills, Mori said in the interview.

Roppongi Tenants

Other tenants such as Goldman Sachs Group Inc. are under long-term agreements that incorporate increases in the rents they pay, Mori said. ``On a contractual basis, we don't foresee any problems,'' he said.

The capital value of grade A office buildings in Tokyo's business districts fell 2 percent on average as of March from three months earlier, according to an estimate by Jones Lang LaSalle.

As commercial prices decline, Mori said now is the time to prepare for land acquisition for large-sized projects similar to Roppongi Hills.

``We have plans to introduce second, third, fourth and fifth Roppongi Hills,'' said Mori. ``This is a good time to plan for large-size projects.''

Mori is in talks with local residents to redevelop Toranomon-Roppongi. The developer plans to build a 46-story commercial tower and a six-floor residential building on a 165,000 square-foot site in 2009.

Other projects under planning include Loop Road No. 2 from Toranomon to Shimbashi in central Tokyo and a waterfront development project in Yokohama, according to the company's Web site.

These projects will require infrastructure such as roads and large blocks of available land, both of which may take some time, he said.

Shanghai Skyscraper

Mori Building's Shanghai World Financial Center, China's tallest building, opened to the public on Aug. 30. Space in the building was leased ``faster than expected'' to almost 50 percent of capacity currently from 40 percent in August, Mori said.

Japanese financial institutions such as Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. have taken space, he said.

Demand for space may slow with the opening of new office developments in Shanghai, such as Sun Hung Kai Properties Ltd.'s Shanghai IFC complex, located next to Mori's building.

``As new developments come on line, it might be difficult to enjoy the same occupancy rates as before, and net demand might decline somewhat,'' Mori said.

SV Development