By Junko Fujita

TOKYO, July 23 (Reuters) - U.S. private equity firm Lone Star [LS.UL] will start extending loans for real estate deals in Japan, eyeing a rush of property to be put on the block by developers keen to raise funds, sources familiar with the matter said.

Lone Star, which has already established itself in the Japanese real estate market by buying golf courses, hotels and financial institutions, has now decided to branch out to provide mezzanine loans to property buyers, three sources told Reuters.

Lone Star will offer loans through a company called Star Finance Co Ltd, said the sources, who asked not to be identified because the fund has not yet publicly announced its plans for the new business.

Japanese megabanks such as Mizuho Financial Group Inc (8411.T: Quote, Profile, Research) and Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research), as well as overseas banks such as Citigroup Inc (C.N: Quote, Profile, Research) and Merrill Lynch and Co MER.N, are cutting their exposure to senior loans after being hit by the subprime loan crisis.

That is helping boost demand for mezzanine or junior loans, which are considered riskier but fetch higher interest payments than senior loans.

Lone Star hired Michael Griffin, a former real estate securitisation banker at Morgan Stanley (MS.N: Quote, Profile, Research) in Japan, to lead the fund's effort to find deals to finance, said the sources.

Overseas investors are raising funds to invest in Japan's real estate market, sensing an opportunity to buy assets cheaply with sector share prices sliding and developers looking to offload assets to stay afloat.

Last month MGPA, a private equity real estate investment firm that is half owned by Australia's Macquarie Group (MQG.AX: Quote, Profile, Research), said it planned to raise a new Japan fund worth more than $1 billion. [ID:nSP202816]