Bricks and mortar and beyond: in a time of worldwide economic uncertainty, some investors are searching for safer options for their capital. Property has an inherently safe image and offers expanding and diversifying opportunities for investment. It is firmly on the agenda - Real Estate Investment - Industry Overview

Japan, Inc.,  May, 2003  by Gavin Blair

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GMAC Commercial Holding Asia (GMACCH Asia) is the Asian presence of US-based GMAC Commercial Holding Corp.-the commercial real estate finance arm of GMAC Financial Services, which is in turn a subsidiary of General Motors Corporation, the world's largest automotive manufacturer. They aim to bring to Japan the standards of service and expertise that have made them market leaders in the US. Wendy Wisniewski, senior vice president and director of administration for Asia, explains: "GMACCM Asia is one of the few corporate groups in Japan able to provide its clients with a complete range of services for commercial real estate. We are ideally organized to offer a variety of services that cover every area of real estate financing, from loan origination, servicing and securitization to real estate investment, investment advisory services and property management."

There is undoubtedly some uncertainty in the future of the Japanese real estate market; for some, this offers an opportunity for investment and growth, while for others it's a good reason to stay away. Ray Klein, co-founder of property investment firm American Life, sees the Japanese market as problematic. "The macroeconomic trend of a declining population for the next 30 years makes Japanese real estate investment unappealing for the retail investor. Although there is room for professionals to make money in any market, for buy and hold investors, we see the opportunities in Seattle making it the place to be." American Life Investment Partnerships consists of investments in income-producing real estate in downtown Seattle, Washington. As the key port of entry for the Northwestern US, Seattle has a strong independent economy and is the home base of Boeing Aircraft, Microsoft Corporation, Starbucks Coffee and a host of leading biotechnology and medical product firms. One point that distinguishes American Life from other real estate operations is that their property portfolio is largely unleveraged. This lack of debt keeps cost lower, allowing for immediate income to be generated from rents without relying on capital gains from constant property sales, as many REITs do. Capital gains can then be paid in for the future, free from any of the risk that comes with debt. American Life's Klein spells out why he believes their system provides the best of both worlds. "People also forget that borrowing money has a cost. The interest cost reduces current income. We prefer to pay our investors higher current income while lowering their risk. Future capital gains are a bonus. As far as I know, what we are doing simply has not been done before."

In the late 1980s, a new form of security came into being, offering different levels of yield and risk for investors within the same bond. Collateralized Debt Obligations (CDOs), as they are known, took the basis of their structure from Collateralized Mortgage Obligations (CMOs) and seek to pool a variety of loans, bonds, mortgages and other assets that can include non-performing loans into a single entity--spreading risk while providing high yields. Within that single entity, tranching is used to create various ranks of risk and return to suit different investors. The different tranches might then appeal to pension funds, hedge fund managers or individual investors depending on what kind of risk/yield trade-off they are looking for.