From the viewpoint of ordinary investors, genuine real estate securitized products must have the following three characteristics to be attractive:
- offer the advantages of real estate investment at relatively low investment denominations
- assure liquidity
- have rational methods for risk evaluation
Traditionally, the merits of real estate investment have consisted of tax benefits from depreciation and capital gains from rising land prices. However, the collapse of the asset bubble has practically eliminated hopes of capital gains.
Still, capital gains are essentially generated not from speculation or unearned income from owning unproductive land, but from land rent, which represents the use value of appropriately managed and utilized land. Both the income generated from such property, as well as the value (price) of the real estate itself will rise in the long term as the economy grows, and act as a hedge against inflation where fixed income bonds and savings deposits cannot. Thus good quality real estate still offers attractive investment opportunities.
After the asset bubble collapsed and brought about the first postwar plunge in land prices, the real estate market acquired a cynical mood and investment behavior that seeks capital gains from rising land prices seems to have disappeared. Nevertheless, it should not reject, even by international standards, behavior in which the real asset value is maintained or capital gains are obtained through the effective use of land.
Compared to other financial products, real estate has been a high-risk investment due to the large investment denominations required, uniqueness of each property, and low liquidity. The purpose of genuine securitization of real estate is thus to offer investment opportunities in real estate that ordinary investors can access in relatively small denominations.
The second characteristic of assuring liquidity is the completely reasonable condition that investors be able to easily transact financial products as necessary.
The third characteristic of providing rational evaluation of investment risk refers to clarifying the relationship between risks and returns, providing information to enable comparison with other financial assets, and having ratings institutions and investment advisors who can evaluate products for investors.
Securitized products with such characteristics already exist in the U.S.: REIT (real estate investment trusts) and MBS (mortgage backed securities). A REIT collects investments from many small investors−the minimum investment is approximately 100,000 yen−and is an attractive product among individual investors. An MBS is a bond backed by residential mortgages or properties.
The securitization market in the U.S. was not large from the beginning. REITs, which have had two market crises in the past, today enjoy a robust market among individual investors, particularly baby boomers who are managing their assets in preparation for retirement.
1
The success of securitized products in the U.S. has come about after having undergone a variety of experiences and becoming refined into attractive products for investors. In addition, these products are monitored similar to stocks and bonds by the Securities and Exchange Commission (SEC), which protects investors by rigorously overseeing issuers and requiring them to publicize information such as the terms of rental contracts and revenue projections.
1 REITs became popular against the backdrop of a real estate boom that appeared in the 1960s. However, they faltered between 1973 and 1983 as many went bankrupt. They recovered, but met a second crisis in the late 1980s due to the stock market decline and real estate slump. However, they recovered as the real estate market recovered in the 1990s, and reach a market value of $88.7 billion in 1996. Half of the investors are individuals.
The MBS market in the U.S. became full-fledged in the 1970s with the public subscriptions of federally guaranteed products (GNMA, FHLMC, etc.). In the 1980s, products appeared that reduced the prepayment risk peculiar to MBS, and products with different combinations of principal and interest. The late 1980s saw the appearance of commercial mortgage backed securities (CMBS), which involved commercial properties. The CMBS became more advanced due to the RTC's disposal of the failed assets of S&Ls, becoming the main form of securitized product.