Shares of midsize Japanese real estate companies sank on Tuesday after property developer Zephyr Co (8882.T: Quote, Profile, Research, Stock Buzz) folded with $893 million in debt in the largest failure of a listed firm in Japan in nearly five years, sparking speculation that others in the struggling sector may fail.

Japanese banks, reeling from the credit crunch, have been tightening lending to real estate companies now seen as risky as sales of apartments weaken and the outlook for the world's second-largest economy dims.

Many developers are now looking to shore up their finances by selling vacant land and buildings, but the extra supply has depressed prices and potential buyers are finding it more difficult to secure loans.

"Even if they sell excess property, buyers would not pay much and seek a big bargain," said Yutaka Kakizaki, a real estate sector analyst from Chibagin Asset Management, adding that this meant developers end up selling property at a loss.

"It will just be a matter of time until we see the next (corporate failure)," Kakizaki said.

On Tuesday, shares of midsize developer Urban (8868.T: Quote, Profile, Research, Stock Buzz) lost 16.7 percent to 140 yen, their lowest close since February 2004. Shares in C's Create (8921.T: Quote, Profile, Research, Stock Buzz) fell 14.6 percent to 5,850 yen and those of Joint Corp (8874.T: Quote, Profile, Research, Stock Buzz) shed 16.1 percent to 401 yen.

Sparking the sell-off was Friday's announcement by Zephyr that it had filed for court-led rehabilitation due to difficulty raising funds in the wake of the bankruptcy of wholly owned subsidiary Kondo Sangyo in late May.