Real Estate Securitization Gaining Favor in France & Japan

By Gelbtuch, Howard C.; Kataoka, Takashi | Real Estate Issues, August 1997 | Go to article overview

Real Estate Securitization Gaining Favor in France & Japan


Gelbtuch, Howard C., Kataoka, Takashi, Real Estate Issues


"Those who cannot remember the past are condemned to repeat it."

George Santayana, 1863-1952, American philosopher & poet

Just a few short years ago, the United States real estate market was characterized as overbuilt, illiquid, and even under-demolished. Steadily increasing loan delinquency rates at traditional institutional lenders such as commercial banks and life insurance companies contributed to a liquidity crisis, making new mortgage financing difficult if not impossible. The Resolution Trust Corporation ("the RTC") was formed to step in and dispose of the unwanted real estate assets of failed lending institutions, many of which had to be bailed out by the federal government because of their excessive amount of underor non-performing mortgages. In February 1992, the RTC concluded its first commercial property-backed securitized offering.

A few brave souls formed "vulture funds" to buy real estate and mortgages at depressed prices. Who can forget the infamous March 1993, Salomon Brothers report titled, "It's 50 Cents on the Dollar, Stupid"'? Mimicking the, "It's the Economy Stupid," it proved to be the undoing of re-election efforts for President George Bush. In the early 1990s, when a lack of transactions made real estate values largely conjectural, these contrarian investors made a fortune buying real estate assets at 50 percent of their previously reported value, later selling them at a substantial profit when the property markets and the national economy recovered a few short years later.

Now many domestic real estate markets are so strong that there is talk of renewed speculative construction ("although it will be different this time"), and from time to time, there are even isolated instances of purchases in excess of replacement costs. As a result, value-oriented investors are having a difficult time securing domestic properties at attractive prices. Fortunately, history has once again repeated itself, and there is now a golden opportunity for forward thinking investors who view the market globally: acquiring bulk real estate assets overseas in countries where prices have declined significantly, but whose economies can be expected to recover, specifically France and Japan.

FRANCE

Since the mid-1980s, France's economic growth has been modest. In the 10-year period from 1983 to 1994, Gross Domestic Product (GDP) grew by an average of only 2 percent annually. Starting with unemployment of 8 percent in 1983, the unemployment rate increased in seven of the following 10 years, exceeding 12 percent by the end of 1993. France had succumbed to the worldwide recession of the early 1990s.

A weakened economy, coupled with a series of internal corruption scandals, skyrocketing unemployment, and a budget deficit were the principal causes of the Socialist's downfall in 1993. A new political regime led by former Paris Mayor Jacques Chirac took office, one of whose first priorities was to create jobs and stimulate the economy. A loosening of monetary policy in 1995 has finally begun to reverberate throughout the French economy. Although unemployment remains high, currently approaching 13 percent, annual inflation is under 2 percent, and interest rates remain low. While anticipated GDP growth remains in the 2 percent to 2.5 percent range, consumer confidence is increasing. The reason that unemployment remains high is because of a strong increase in the French workforce, rather than a lack of jobs. Furthermore, President Chirac pledged to reduce the budget deficit from 4.2 percent of GDP in 1996 to 2 percent, a move that would allow the government to gradually reduce taxes.

If the French economy was sluggish during the last dozen years, the office market was on a roller coaster ride characterized by booms and busts. Until the 1970s, office facilities in France were largely constructed (and owned) by industrial companies for their own use. Service companies in need of accommodations sufficed by converting centrallylocated residential apartment buildings into suites by altering their interiors. …

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