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Securitization of Real Estate Gathers Pace

May 2, 2000

A growing number of large pieces of real estate, such as inner-city skyscrapers, are being securitized as a means of parceling them into smaller lots for sale to a wider range of investors. Sparked by the Special Purpose Company (SPC) Law, which came into force in September 1998 to free up real estate, securitization is beginning to be actively employed by companies as a means of selling off assets as part of restructuring, reducing their interest-carrying liabilities, and procuring funds. Economic circles are nursing increasingly high hopes that the smooth expansion of this trend could break real estate trading out of its long slump and help to stabilize land prices.

Assets Sold to Reduce Liabilities
Shinjuku Sumitomo Building, an imposing 52-floor skyscraper in the middle of Shinjuku, Tokyo, that houses around 150 tenants, welcomed the New Year with the renovation of its entrance. Such sprucing up of what is effectively the face of the building was part of preparations for the building's securitization in mid-March 2000.

Securitization comprises the issuance of securities with real estate as the collateral and the selling of these securities to investors. Given the current real estate trading slump, the blanket sale of large or expensive pieces of real estate to single buyers is next to impossible. Securitization, on the other hand, allows real estate to be broken up into small lots and released on to money markets where it can be picked up by a wide range of investors, greatly facilitating sales of even large chunks of real estate.

Investors who have purchased securities receive interest and dividends from sources such as rent income from tenants. Companies can reduce their real estate acquisition tax burden by establishing SPCs based on the SPC Law and having these acquire real estate and issue securities.

Investors are seeking profitable ways to manage their capital given extremely low interest rates. Companies want to reform their financial structures to help them survive the rigors of the current economic climate, selling their assets and reducing their interest-carrying liabilities. The government and economic circles are eager to stimulate sluggish real estate trading in order to boost the chances of a solid economic recovery. The securitization of large pieces of real estate is seen as the answer to all of the above, with as many as 30 properties already securitized based on the SPC Law alone.

From Skyscrapers to Luxury Hotels
One representative example of securitization to date is the Akasaka Tokyu Building in Chiyoda Ward, Tokyo, which houses the Akasaka Tokyu Hotel and numerous offices. The owners apparently collected 18 billion yen (171.4 million U.S. dollars at 105 yen to the dollar) from the sale. Securitization of the Shinjuku Sumitomo Building mentioned earlier is expected to draw around 100 billion yen (952 million dollars), the largest such sale to date in Japan. Building rents will be used to cover interest payments, while profit from the sale will be counted as special profit and used to cover restructuring losses such as the disposal of bad loans, as well as to reduce interest-carrying liabilities. Institutional and other investors are already eyeing the securities with interest, and many investors are apparently giving serious consideration to making a purchase.

Securitization-based asset sales have recently expanded, with total securitization including that scheduled up to March 2000 passing the 700 billion yen (6.7 billion dollars) mark according to the estimate of one trust bank. The Shinjuku Center Building in west Shinjuku, the Sheraton Grande Tokyo Bay Hotel in Urayasu, Chiba Prefecture, and many other major pieces of real estate are also awaiting securitization.

Even as this boom gathers momentum, there are still many obstacles in the way of more widespread securitization. Most current buyers are professionals, for example, such as institutional investors, but the further spread of securitization will require mechanisms allowing private investors to feel comfortable laying down their money. No distribution market has yet been established to gather information on the buying and selling of SPC-issued securities, and securities still have limited convertibility. Furthermore, if land prices continue to tumble, securities will become increasingly likely to drop below their original value. The investment environment and information disclosure will need to be further improved to open the way for private investor participation.

Trends in JapanCopyright (c) 2000 Japan Information Network. Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.