On May 23, the Diet approved a series of legal changes concerning securities investment trusts, securities investment corporations and SPCs (special-purpose corporations) that will further advance securitization of real estate in this country.

The changes, which will be implemented in due course, will make it easier to create new real-estate- related financial products and to offer attractive financial instruments to investors.

The passion for securitizing real estate, which began with the introduction of the SPC law in 1998, has been gaining momentum, and for good reason.

Though it may sound too technical for some readers, I feel driven to describe recent developments in this field because they have important bearings on three things:

* real estate prices, especially land;

* efficiency of land utilization;

* and, amazingly enough, on returns for Japanese investors, who can expect virtually zero interest on their bank deposits.

Incidentally, what we call securitization of real estate is the process of creating a new financial asset that is based on real estate property, such as land, thereby enabling you to receive new money and in most cases, to give up the property. The new financial asset often takes the form of a security.

One thing real estate securitization is closely related to is the efficiency with which Japan’s gargantuan savings are managed.

At the end of March 1999, the total of Japanese households’ financial funds amounted to 1.316 quadrillion yen, or $11.96 trillion (at an exchange rate of 110 yen to the dollar), according to a report by the Bank of Japan. Of this amount, 364 trillion yen ($3.3 trillion) is entrusted to private pension funds and insurance companies. In addition, there is about 213 trillion yen ($1.94 trillion) sitting in public pension funds.

So far, households and pensioners, both present and future, have been extremely cautious in managing their funds. As much as 55 percent of their financial assets is in the form of bank deposits while another 28 percent is entrusted either to insurance companies or private pension funds.

The relative decline in the importance of banks in the financial sector, a trend we have been observing, may further reduce the attractiveness of bank deposits.

In the future, people may be likely to invest a larger portion of their total savings in securities. New types of financial assets related to real estate are expected to meet the demand of investors and pensioners who are eager to improve the overall “performance” of their investments. In other words, they can expect to get better returns by investing in these new assets, if they are successful.

Second, securitization satisfies the demand of landholders, especially those in the real estate business who have excessive holdings of land. Faced with declining prices, they have a naturally strong desire to sell off redundant holdings. By selling, they could eliminate elements of uncertainty in their financial statements which could be caused by future developments in land prices. Applying new methods of securitization made possible by recent legislation would give additional opportunities to cash in on their real estate holdings.

Third, securitization of real estate would spur more efficient use of land.

A piece of land with a handsome cash flow translates into an attractive financial instrument, while one with a modest cash flow looks less appealing. Thus, through securitization, it becomes more visible which pieces of real estate are important and which are not. Basing land holdings on cash flow is synonymous with efficient use of land.

These are reasons to believe we will see further advances in the securitization of real estate, which is a positive development. But there are two important things that need to happen for this kind of securitization to expand.

First, there is a strong need to further disclose relevant information on real estate. Among other things, basic real estate data such as prices of specific real estate transactions and their locations should be made available to anyone interested in them. The healthy development of real estate markets cannot be expected until these basic data are disclosed, to say nothing of efficient and transparent markets for real-estate-linked financial instruments.

Second, we are in need of much more enterprising spirits, both for businesspeople and investors. Even if good opportunities arise as abundantly as in the business of securitizing real estate, good results will not be obtained if we do not try.

The above-mentioned findings are some of those detailed in the “Report on Securitization of Real Estate,” which is published by the National Land Agency. Interested readers may well have a look at the paper, which is the result of an intensive analysis conducted by true experts on the subject from the private and public sectors. Unfortunately, this report is available only in Japanese.