Bricks and mortar and beyond: in a time of worldwide economic uncertainty, some investors are searching for safer options for their capital. Property has an inherently safe image and offers expanding and diversifying opportunities for investment. It is firmly on the agenda.

The biggest financial investment many people will make in their rives will be their home. Although not all homeowners necessarily see it this way, property is one of the most widely held investments in existence. From the basic starting point of home ownership, the real estate investment market branches out to include buying a second home to rent out, commercial property and real estate investment trusts (REITs), right through to securities based on real estate financing and refinancing. As these investments and the inevitable accompanying acronyms become more complex, many individuals will feel the desire to turn to trusted professionals to assist them in making the right choices.

In Japan, the rock-solid image of real estate investment has taken something of a battering as prices (though still high compared to those in other developed countries) have fallen steadily for over a decade. On the positive side, some deregulation has taken place, and the laws governing investment in real estate have been updated to allow for the kind of equity-type systems that exist in other countries. Trevor Reynolds, director of Banner K.K., an independent financial services company with over two decades of experience in Tokyo, says the falling prices may help to give some sense of sanity and perspective to the Japanese market, "finally bringing it back to reality. There are still great inefficiencies in the Japanese real estate market, and the falling prices could bring an opportunity for these to be fixed. Time will tell."

Andrew Savage, an associate at legal firm RIS International Incorporated, also sees positive outcomes from the declining real estate prices. "Falling property prices have encouraged foreign investment and changed the face of the market. Foreign interest in REI in Japan is growing, and we believe we are well-placed to assist in that regard." RIS provides a comprehensive system of support services for businesses and individuals looking to invest in or do business with Japan, including all the lawyers, surveyors, real estate brokers and other specialists required to keep real estate transactions moving as smoothly as possible. RIS does not, however, restrict its business to property matters, but covers a wide range of expertise among its 35 qualified staff, which includes local Japanese and foreign professionals. "This allows us to provide the full gamut of services from analysis of real estate property through to visa and immigration advice and tax and financial advice." Savage explains how RIS's all-encompassing capabilities can ensure a long-term holistic approach for their clients: "We provide a service that looks beyond the immediacy of the business decision at hand, and we integrate our own experience with that of our network of affiliated accounting and tax professionals to provide 'big picture' advice and consulting. Our key words are 'planning' and 'management,' provided in a seamless 'one-stop' format."

In the not too distant past, ordinary investors who wanted to enjoy the benefits of the real estate markets had limited options. Those unwilling or unable to purchase a second house or apartment could perhaps buy equity in a property company and take their chances with the vagaries of the markets (although property companies are noted for being some of the most defensive stocks around). Recent developments, however, have enabled individuals with limited capital and/or a diversified investment approach to benefit more directly from property investment. One of the biggest opportunities in this area has been the rise of Real Estate Investment Trusts, or REITs. These are similar to mutual funds/unit trusts that can be traded on the major exchanges, but instead of stocks, REITs invest in property. The two main types are Equity REITs and Mortgage REITs. Equity REITs generate income mainly from the rents of properties that they own or are invested in. Mortgage REITs deal with property mortgages, lending capital to real estate owners or buying existing mortgages and generating income from the interest earned on the loans. There are also Hybrid REITs, which combine the characteristics of both Equity and Mortgage REITs.

The market for REITs in the United States has been booming in recent years, increasing the daily trading volume to over a quarter of a billion dollars. The market in Japan has only been in operation for a couple of years, but companies are having some success in attracting at least a small portion of the billions of yen sitting in virtually zero-interest postal savings accounts for investment in JREITs. The folks at Banner K.K. are launching their own J-REIT. "Banner has set up structured funds for the benefit of our clients," says director Reynolds. "The next fund we have coming online is a domestic Japanese REIT that will be available in June of 2003, with target returns in yen of 8-12%. This will be arranged with a major European Bank." Banner also provides a way to take advantage of Japan's ultra low interest rates by arranging multi-currency loans for international property purchases and refinancing options for property in the US, Canada, UK, Australia and New Zealand.

GMAC Commercial Holding Asia (GMACCH Asia) is the Asian presence of US-based GMAC Commercial Holding Corp.-the commercial real estate finance arm of GMAC Financial Services, which is in turn a subsidiary of General Motors Corporation, the world's largest automotive manufacturer. They aim to bring to Japan the standards of service and expertise that have made them market leaders in the US. Wendy Wisniewski, senior vice president and director of administration for Asia, explains: "GMACCM Asia is one of the few corporate groups in Japan able to provide its clients with a complete range of services for commercial real estate. We are ideally organized to offer a variety of services that cover every area of real estate financing, from loan origination, servicing and securitization to real estate investment, investment advisory services and property management."

There is undoubtedly some uncertainty in the future of the Japanese real estate market; for some, this offers an opportunity for investment and growth, while for others it's a good reason to stay away. Ray Klein, co-founder of property investment firm American Life, sees the Japanese market as problematic. "The macroeconomic trend of a declining population for the next 30 years makes Japanese real estate investment unappealing for the retail investor. Although there is room for professionals to make money in any market, for buy and hold investors, we see the opportunities in Seattle making it the place to be." American Life Investment Partnerships consists of investments in income-producing real estate in downtown Seattle, Washington. As the key port of entry for the Northwestern US, Seattle has a strong independent economy and is the home base of Boeing Aircraft, Microsoft Corporation, Starbucks Coffee and a host of leading biotechnology and medical product firms. One point that distinguishes American Life from other real estate operations is that their property portfolio is largely unleveraged. This lack of debt keeps cost lower, allowing for immediate income to be generated from rents without relying on capital gains from constant property sales, as many REITs do. Capital gains can then be paid in for the future, free from any of the risk that comes with debt. American Life's Klein spells out why he believes their system provides the best of both worlds. "People also forget that borrowing money has a cost. The interest cost reduces current income. We prefer to pay our investors higher current income while lowering their risk. Future capital gains are a bonus. As far as I know, what we are doing simply has not been done before."

In the late 1980s, a new form of security came into being, offering different levels of yield and risk for investors within the same bond. Collateralized Debt Obligations (CDOs), as they are known, took the basis of their structure from Collateralized Mortgage Obligations (CMOs) and seek to pool a variety of loans, bonds, mortgages and other assets that can include non-performing loans into a single entity--spreading risk while providing high yields. Within that single entity, tranching is used to create various ranks of risk and return to suit different investors. The different tranches might then appeal to pension funds, hedge fund managers or individual investors depending on what kind of risk/yield trade-off they are looking for.

Two further kinds of investment instruments available are Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS). MBS are made up of loans to businesses or homebuyers, allowing smaller banks to lend mortgages to customers even if they don't have the assets to cover them. The principal and interest from the individual mortgages are then used to pay principal and interest on the MBS. An ABS is similar in nature but backed by non-property assets such as credit-cards, consumer finance loans or leases, et cetera.

Those wishing to increase their knowledge of real estate investment, including the investment vehicles briefly introduced above and many more, should be sure to attend the Fourth Annual Summit on Japanese Asset & Mortgage Securitization, to be held on May 13 and 14 at the Royal Park Hotel in Tokyo. Presented by the Information Management Network (IMN), it will be a high caliber event bringing together leading executives, researchers, investors, issuers and other market participants from their respective fields. Sponsors and speakers will represent international and Japanese law firms, banks, rating agencies, financial service companies and media organizations. Topics will include the ABS/MBS markets in the US, Europe, Japan and Asia, securitization and real estate in Japan, credit derivatives, hotel investment opportunities, CDO class investments, the rating of non-performing loans, REITS and commercial and residential mortgage securitization. These events have in recent years drawn around 500 participants, making them invaluable networking opportunities in addition to presenting sterling content. For further information, visit IMN's Web site (www.imn.org/a455/jim).