SINGAPORE (Reuters) - Mikihisa Hirai, president of Atlas Partners Japan Ltd., should be giddy with excitement as European and Middle Eastern clients

SINGAPORE (Reuters) - Mikihisa Hirai, president of Atlas Partners Japan Ltd., should be giddy with excitement as European and Middle Eastern clients are due to almost double the size of his property funds to just over $800 million.

But Hirai knows he has his work cut out for him.

With Tokyo office rents expected to rise another 60 percent to a peak in 2010 because of shrinking vacancy rates, now at just 2.7 percent, Japan is a popular place for property investors.

But average prices for commercial buildings have already jumped 25 percent in the last couple of years, and competition for assets between real estate investment trusts, private equity funds and institutional investors is hotting up, eating away at returns.

"There are no simple and easy deals," Hirai said. "I feel there are more deals where bid prices are ridiculously high."

With rock-bottom interest rates despite an economic recovery, Japan drew 55 percent of the $94 billion in property transactions in Asia last year, including an increasing amount of petrodollars from the Middle East.

But now, yield-hungry investors are having to scour the country for more complex deals.

For example, Australian listed property trusts (LPT) are starting to buy Japanese buildings, but employ heavy borrowing and currency hedging to artificially lift a property yield of 5 percent into a more attractive 7.7 percent yield for investors back home.

Four property trusts carrying Japanese assets have listed in Australia in the past two years, including Babcock & Brown Japan Property Trust (BJT.AX: Quote, Profile, Research) and Galileo Japan Trust (GJT.AX: Quote, Profile, Research).