TOKYO -- Japan has seen a raft of property developers go to the wall this year as banks have refused to refinance their loans. Analysts say the bankruptcy filings are likely to set off a vicious cycle that will weigh on the sector's shares in the coming months.

The reason: Real-estate firms that have run into financial difficulty are selling off assets at fire-sale prices, which will put the value of properties under strain.

So far this year, 8,916 companies have filed for bankruptcy in Japan, a third of which were in construction or real estate, according to data compiler Tokyo Shoko Research Ltd. Big blowups include real-estate management firm Reicof and condominium developer Suruga. Just last week, Urban Corp., a Hiroshima-based condominium developer and sales agent, filed for bankruptcy.

Associated Press

Banks are likely to clamp down even harder on lending to property firms, and loans granted are likely to be on more onerous terms, potentially resulting in more bankruptcies. Recent earnings reports from Japanese banks have shown a sharp increase in bad debts amid an economic downturn.

"We fear a chain reaction of bankruptcies," said investment bank Goldman Sachs in a report to investors. Goldman has a "cautious" stance on the Japanese real-estate sector, which means the outlook is unfavorable. The benchmark Topix real-estate index has fallen by about half since June last year.

Problems started earlier this year when foreign investment banks, such as Morgan Stanley, Bear Stearns and Lehman Brothers, cut back on financing real-estate deals in hopes of reducing risk globally. As a result, Japan's fledgling commercial-mortgage-backed securities market has virtually ground to a halt.

The foreign banks financed some of the most aggressively priced deals by real-estate funds in Japan. In some cases, they lent up to 90% of the value of properties for sale in 2007.

Japanese banks are unlikely to pick up the slack. Their lending to the real-estate sector has already hit 14% of their loan book, which is higher than what it was during the Japanese real-estate bubble between 1986 and 1991, according to analysts at Credit Suisse. This is partly because companies in other sectors of the economy have been paying down debt and hoarding cash, and not borrowing so much from banks.

Real estate and construction, which employ about a tenth of the work force in Japan, have a big impact on the Japanese sense of economic well being. When the country's real-estate bubble burst in the early 1990s, it ushered in an economic slump lasting more than a decade.

Although the Japanese property market isn't imploding, a recent dip in real-estate indicators has sparked a rash of fretful domestic newspaper headlines. Credit Suisse expects office vacancy rates to rise to 5% in December from around 3% now. While that level is still low, the rise is likely to push real-estate shares lower. Credit Suisse rates Japan's real-estate sector "underperform," meaning it is likely to yield investors 10%-15% less than the benchmark over a year.

One area that is unmistakably in free fall is condominiums. The number of condos put on sale in Tokyo during July plunged 44.5% from a year earlier, and only half the condos put on the market were sold, according to the Real Estate Economic Institute Co., well below the 70% rate that condo makers need to turn a profit.

Analysts say that in the long run, investors may be able to unearth bargains in Japan's real-estate sector. Because Japanese real-estate prices didn't rise as much as in Europe and the U.S., analysts expect Japan to have a shorter correction. Japanese interest rates remain low, so the yield on properties is still relatively enticing.

They also believe that the three major developers, Mitsubishi Estate, Mitsui Fudosan and Sumitomo Realty & Development, which have strong relationships with lender banks, will weather the storm better than most.

Write to Alison Tudor at alison.tudor@wsj.com

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