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By Netty Ismail Sept. 2 (Bloomberg) — Oaktree Capital Management LLC , a private-equity fund with about $61 billion of assets, is seeking to merge its Japan property trust and buy buildings in Australia as a credit shortage makes distressed investments attractive. Oaktree is exploring merger opportunities for its Tokyo- based Japan Rental Housing Investments Inc. with other Japanese real estate investment trusts, said Robert Zulkoski , head of the special situations and real estate team in Asia. Oaktree “stands ready” to complete a proposal to merge Japan Rental Housing with New City Residence Investment Corp., the nation’s first failed REIT, should New City creditors reject a revised receivership plan from Lone Star Funds this month, he said. “We’re more than happy to engage with New City Residence’s creditors if they choose,” Singapore-based Zulkoski, 48, said in an interview yesterday. “We’ve always shown flexibility in terms of paying down New City Residence’s debt and fairly rescheduling the balance of the debt.” Private-equity funds are looking to buy distressed real- estate assets as cash-strapped property firms and other investors, including investment banks, sell at discounts. Fund managers and investors were seeking $92.5 billion for funds to buy properties and debt being sold by developers struggling to repay bank loans or finance construction amid the credit crisis, London-based Preqin Ltd. said in February. ‘Meat and Potatoes’ “Real estate is going to be the meat and potatoes of the distressed business,” said Michel Lowy, the former head of Asia-Pacific Strategic Investment Group at Deutsche Bank AG, who is setting up a Hong Kong-based distressed investment business. “What makes it so very interesting as an asset class is that there’s always a lot of leverage in real estate, especially for more mature markets like Australia or Japan.” It is likely there will be mergers among Japan’s 41 REITs as early as this quarter, Zulkoski said. Nippon Residential Investment Corp. and Itochu Corp.’s Advance Residence Investment Corp. announced the first merger of two Japanese REITs in August. Japanese REITs tumbled in value as subprime mortgages defaulted in the U.S., sending the global economy into a recession and choking off credit. The Tokyo Stock Exchange REIT Index is 61 percent below its May 2007 peak. Los Angeles-based Oaktree will provide additional financial assistance to Japan Rental Housing, previously known as Re-Plus Residential Investment Inc., if it acquires another REIT, Zulkoski said. “Even before the financial crisis, it was evident that there needed to be consolidation within the J-REIT sector,” Zulkoski said. “We and others who are looking to be catalysts for this are working very hard with relevant government agencies to make it happen.” New City New City in October became the first listed Japanese REIT to file for bankruptcy protection with 112.4 billion yen ($1.2 billion) of debt. Creditors are scheduled to consider a revised offer from Dallas-based Lone Star, the court-appointed receiver, by Sept. 9 after an initial plan was rejected in July. Lone Star beat Oaktree and other investors in the bidding contest for the property trust in April. Oaktree may face competition for the assets. Daiwa House Industry Co., Japan’s largest homebuilder by sales, said in August it’s gaining creditor support for a rehabilitation plan for New City over a rival bid from Lone Star. Daiwa House will seek receivership of New City if the Lone Star offer is rejected. A large portion of the “several hundred billion dollars” of loans to Japan’s real estate industry over the last five years will have difficulty being refinanced, Zulkoski said. Oaktree plans to buy the non-performing loans and work with borrowers or buy properties that back the debt as the loans come due for refinancing in the next few years, he said. “There is a ton of opportunities in real estate in all its forms: whether direct listed, mezzanine finance, REITs, public equities or private equity,” Lowy said. Australia Oaktree is looking to buy distressed real-estate assets in Australia, China and South Korea. The team has made more than $4 billion of Asian real estate related investments and targets an internal rate of return of at least 20 percent. Oaktree bought Singapore-based Pangaea Capital Management LP, founded by Zulkoski, to expand investments in Asian real estate two years ago. Zulkoski previously oversaw the expansion of Colony Capital LLC’s Asian investment business from 1998 till 2004. Oaktree is set to acquire buildings in Sydney and other major Australian cities by the end of the year, he said, without giving details. It also is seeking investments in the securitized debt market and property trusts, Zulkoski said. Writedowns The 16 members of the S&P/ASX 200 A-REIT Index reported combined losses of A$19.5 billion ($16.1 billion) and writedowns of A$21.7 billion in the year to June 30, according to data compiled by Bloomberg. Oaktree plans to restructure some of the financing provided by investment and commercial banks to Chinese developers whose initial public offerings were scuttled by the financial crisis. The private-equity fund expects in the coming months to conclude new transactions in South Korea, where it has made an investment every year since 1999. To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net