MUFG Repackages Real Estate Loans as Japan Property Credit Soars

  • To sell 100 billion yen of J-REIT claims a year to local banks
  • Central bank is urging lenders to manage real estate risk

Mitsubishi UFJ Financial Group Inc. is securitizing loans to real estate investment trusts and selling the products to margin-starved smaller banks as lending to Japan’s property sector hits record highs.

In May, Tokyo-based MUFG sold its first 50 billion yen ($440 million) securitization of claims from its 1 trillion yen J-REIT loan portfolio, said Shinichi Umeki, a deputy general manager of the division within the bank’s securities arm that managed the sale.

“The take-up has been strong -- we’ve almost sold out,” Umeki said in an interview. Japan’s biggest bank plans to sell about 100 billion yen a year in 50 billion-yen lots to regional lenders and credit unions, he said, without commenting on the yield or other conditions.

Investing in the products enables smaller banks to get a slice of REIT loans that they are unable to dole out themselves, while MUFG can earn fees and free up capital. Japanese bank lending to the real estate industry climbed to a record 12 trillion yen last year, fueled by unprecedented monetary easing and a property price recovery. The Bank of Japan has said that banks with large exposure to the sector should improve how they manage risks.

“Securitization enables a bank to transfer the risk from its exposure to real estate,” said Yukio Egawa, chief strategist at Shinsei Securities Co. “While such transactions enable the seller to reduce its risk, at the same time it increases the regional banks’ exposure.” 

Yuichi Yoshizawa, chief manager in MUFG’s structured finance division, said the bank is increasing loans to the J-REIT industry by about 10 percent a year and the securitization business will give room for further growth. “We want to expand our investor base while the REIT market environment is strong,” he said.

J-REITs mostly invest in commercial, office and retail real estate. The Tokyo Stock Exchange REIT Index, while down 9 percent this year, has recovered to a level of about 1,700 after falling below 1,000 during the global financial crisis. Tokyo office prices jumped almost 50 percent in the four years since Prime Minister Shinzo Abe came into power in 2012.

Falling Profit

Profit at Japan’s regional banks dropped 15 percent last year, Financial Services Agency data show, as loan margins shrank after the introduction of the central bank’s negative interest-rate policy. Near-zero returns on government bond investments have prompted local lenders to seek products that offer better returns yet still carry relatively low risk.

Securitization is the process of creating a financial instrument by repackaging other financial assets and marketing them to investors. Tokyo-based Rating and Investment Information Inc. gave an AAA evaluation to MUFG’s 41.5 billion-yen series A securitization, an AA- to its 2.5 billion-yen series B product, and an A+ to its 6 billion-yen series C product.

Still, concerns are emerging that Japan’s property rebound may run out of steam, putting banks at risk of incurring losses on loans to the industry.

“Developments in real estate markets continue to warrant careful vigilance,” the Bank of Japan wrote in its April Financial System Report. “Financial institutions with significant exposures related to real estate could experience non-negligible adverse effects and need to strengthen risk management.”

Even some property executives concede that prices in Japan might be close to peaking.

“The limit is coming” in terms of price rises, said Satoshi Horino, executive vice president of Mori Trust Co. and former head of its REIT investment unit. Investors “need to be very careful about borrowing for real estate investment.”

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