Land reform in Akasaka

New issues of J-REITS and residential-backed mortgage securities will push Japanese securitisation to new heights of activity in 2001. Melvyn Westlake reports from Tokyo
Issuance in Japan’s securitisation market is expected to jump more than 50% in 2001, powered by new products, new issuers and a seemingly insatiable hunger among Japanese investors for increased returns on their investments.
Two major initiatives are already at the starting blocks. In March, the state-owned Government Housing Loan Corporation (GHLC) will make its debut in the market with a ¥50 billion ($430 million) issue, the first of four such offerings planned for 2001. As GHLC is the dominant source of housing finance in Japan, with more than 40% of the country’s ¥175 trillion ($1.5 trillion) residential loans, its involvement in the two-year old residential mortgage-backed securities market is set to transform the sector. Credit Suisse First Boston is structuring the transaction. Bankers are saying the GHLC issues will act as benchmarks, helping to develop a market that has been previously constrained by technical difficulties and the relative expense of such deals.

Yasuko Okamoto, JP Morgan: Illiquid real estate assets can be bought by J-REITS, releasing cash to companies
Print entire report

The second big development is also in the property arena. This is the launch in Japan of US-style real estate investment trusts (REITs). Until a recent change in the law, which comes into effect in April, the establishment of such trusts had been inhibited by technical restrictions and a double-taxation penalty. Although not strictly viewed as securitisations, so-called J-REITs are being planned by several Japanese and foreign banks. They are predicted to have a considerable impact on a property market that has slumped more than 80% from its peak at the height of Japan’s asset bubble in the late 1980s – when the imperial palace and grounds in Tokyo were valued at more than the whole of Manhattan. “The potential for the J-REIT to provide liquidity and help restore real estate as a viable asset class, and thereby inject market disciplines and management efficiency into the sector, is probably the single most exciting development we are likely to see this year,” says Thomas Dunn, Tokyo-based head of JP Morgan’s Asia credit markets.
Companies’ illiquid real estate assets can be bought by these vehicles, to provide a stream of rental income for different types of investors, while releasing cash for companies that need it, adds Yasuko Okamoto, vice-president for Asia debt capital markets at JP Morgan in Tokyo. The first J-REITS, which will trade like shares, are expected to be listed in June or July. Among the firms preparing to launch such a real estate vehicle are Mitsubishi Corporation and UBS Asset Management, which announced their intention to do so, jointly, last August. They are aiming for a trust with ¥100 billion under management.
Although institutional investors are likely to be attracted to this kind of vehicle, many of the investment trust shares are expected to be targeted at Japanese retail investors, who will then, indirectly, own bits of office buildings all over Tokyo and other cities. “Where securitisation comes into play, is that some amount of leverage will be desirable to provide an appropriate return to the equity holders,” explains Karl Essig, co-global head of securitisation at Morgan Stanley Dean Witter in Tokyo. So, the REIT will also often issue bonds, securitised against part of the property income. Typically, the REIT’s funding will come in equal parts from equity issuance and securitisations.
Securitisation is expected this year to be driven up sharply by all this activity in real estate, which is still easily the largest asset class in Japan, including government bonds. On some estimates, the country’s commercial real estate has a ¥700 trillion price tag even after the steep fall in property values, with barely 1% securitised so far.
According to rating agency Fitch, the amount of securitised debt issued last year in Japan reached the equivalent of $22 billion (¥2.5 trillion). Of this, more than a quarter represented commercial mortgage-backed paper – both performing assets (where debts on the property are being fully met) and non-performing. At $6 billion, commercial mortgage securitisations have now overtaken deals for equipment leasing, the mainstay of Japan’s asset-backed business. Together, commercial and residential mortgages accounted for 44% of all such activities in 2000.