Private equity firm Blackstone Group LP is close to finalizing the purchase of property loans with a face value of around $1.1 billion owned by Morgan Stanley's Japanese operations, three sources familiar with the situation said.

The deal would mark Blackstone's first investment in Japan and could help breathe life into the world's second biggest real estate market which has yet to see a major investment since the since onset of the global financial crisis.

The proposed deal involves nonrecourse loans, which were backed by commercial real estate such as office buildings, that Morgan Stanley had extended with future securitizations in mind, the sources said.

The sources asked not to be identified as the deal is not slated to be made public.

The Nikkei business daily reported earlier that the collateral includes around 30 properties in the greater Tokyo area, where property prices are widely regarded to have bottomed.

The newspaper said Blackstone is likely to pay far less than the 100 billion yen face value of the loans being discussed, and is expected to target future profit from the deal by unloading the loans to a third party or selling the collateral.

Blackstone is also in talks with Bank of America to handle about $2 billion of the bank's real estate fund investments focused in Asia, the Japanese daily said.

A Morgan Stanley spokesman and a Blackstone official in Tokyo declined to comment.

An investment by Blackstone would underscore the bottoming out of real state prices in Tokyo.

I see a growing consensus that Tokyo's property prices have reached bottom, and increasing activity among Japanese REITs (real estate investment trusts) is also very encouraging, said Mizuho Investors Securities' senior analyst Takahiko Kishi.

But it's too early to say that other big investments by Americans or Europeans will follow, he said, adding that investors remained worried about Japan's weak economic fundamentals and political instability.

($1=87.42 Yen)

(Additional reporting by NR Sethuraman in Bangalore; Editing by Edwina Gibbs)

Investment Morgan Stanley Japan