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CRE Finance World, Autumn 2013

Although the CMBS new issuance market is very slow, Japanese banks are quite aggressive in making new loans. As major banks in Japan are utilizing the Internal Rating Based (IRB) method under Basel II (which allows banks to rate loans themselves and calculate risk weight based on their internal ratings), they do not need ratings from the rating agencies. Because implementing an IRB process is relatively difficult for smaller banks, such banks need ratings for the purpose of calculating asset risk. Therefore, there are cases in Japan where borrowers get financing from banks while senior loans are extended by major banks without external ratings. Because the size of mezzanine loans tends to be small, they usually require one rating, typically from a local agency. CRE Prices Have Bottomed The historical pattern of new issuance in Japanese CMBS has followed a similar trajectory as CRE prices in Japan. The ARES Japan Property Index (AJPI) — an index of appraised values for CRE included in the portfolios of listed Japanese REITs (J-REITs) and unlisted core funds — peaked in 2008. Since then, the total property index has had consecutive quarterly declines, and through first quarter 2013 was 22% lower than peak levels. All major property types are still below peak levels, with office lower by 27%, retail by 19%, and residential by 18% (see Chart 8). In Standard & Poor’s view, CRE prices in Japan have bottomed out, and the risk of a further decline in value for the remainder of 2013 is limited. In fact, the total acquisition amount of J-REITs increased by about 45% in 2012, according to the Association for Real Estate Securitization (ARES). Tokyo’s office market took in a large supply in 2012, which caused vacancy rates to rise above 9% compared with 2.5% in 2007 and led to a decrease in rents. Given that the supply is being absorbed, rents for class A Tokyo office properties grew by 2% in the first quarter 2013, according to Colliers International. The Japanese CRE market has been recovering in part due to the Bank of Japan’s monetary easing policies. However, Japan, which has jumped from recession to one of the fastest growing economies, could see its rate of economic growth slow. The International CRE Finance World Autumn 2013 34 Monetary Fund in its July 2013 World Economic Outlook lowered its economic growth forecast by 0.3 points in 2014 to 1.2%, which could temper demand for tenant space. Chart 8 ARES Japan Property Index Source: ARES Due to their short note term, CMBS loan maturities peaked in 2009-2011, with 2010 seeing the highest peak in maturities of about ¥1.2 trillion. As the typical loan term in Japanese CMBS is three to five years, almost all of the loans have matured. In the first half of 2013, two loans matured. Currently, there are only five loans with future scheduled maturity dates, with two scheduled to come due in the second half of this year. All of the other loans have already matured and either fully paid or defaulted. From the third quarter of 2008, when the first Japanese CMBS transaction loan defaulted, through the end of 2012, the maturing loan default rate averaged about 47%. Compared with 2011, when 53% of the maturing loans defaulted, 2012 experienced improving conditions, as 43% defaulted, 52% repaid by their due date, and 5% extended (see Chart 9). CMBS Global Recovery Continues to Be Slow and Uneven


CRE Finance World, Autumn 2013
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