Japanese commercial mortgage backed securitization has only taken off in the past year, but some asset-backed pros in Tokyo are already looking ahead to the next phase: commercial real estate conduits.

Several firms in Tokyo have begun the preliminary work to set up Japanese commercial real estate conduits, and as many as four are expected to close in a year's time. "It's mostly the foreign banks who are working on this, since they have the expertise to put them together. But many people have been thinking of doing this," said one pro in Tokyo.

Firms reportedly working on the conduits include Nikko Salomon Smith Barney, J.P. Morgan and General Motors Acceptance Corp., which acquired the real estate operations of the defunct Japan Leasing Corp. last year.

Nomura Securities Co., which set up a subsidiary last year concentrating on the origination and securitization of non-recourse real estate loans, said that it would focus on real estate conduits (ASRI 10/18/99, p.6).

Until now, most commercial mortgage-backed securitizations in Japan have involved a single borrower securitizing real estate assets whose lease income provides cashflow to the investors. Commercial real estate conduits are trickier to structure, since the underlying assets are typically smaller-sized loans made to several different borrowers and backed by as many different properties.

"[They] are relatively difficult to put together initially, since you have to put in place the different procedures deciding what the conduit is allowed to do, what are the limits, how the loans will be underwritten," explained Frederic Drevon, managing director of Asian Pacific structured finance at Moody's Investors Service in Hong Kong. Commercial real estate conduits have not yet been done anywhere in Asia, though they are common in the U.S., he added.

Commercial real estate conduits could do very well in Japan, where there are a large number of potential sellers with real estate assets.

"For originators, conduits could offer a lower cost of capital since they are being funded with highly rated notes. And for investors, they offer higher diversification, since they are backed by a greater number of assets than traditional CMBS deals," said an ABS head at a global firm in Tokyo.

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