Real Estate or Property Securitisation

There exist different definitions about Property or Real Estate Securitisation in the literature. Even though there are not many sources. Most sources have originated out of Singapore and the Singapore structure,¹⁶⁰ and out of Europe and the Operating Company transactions.¹⁶¹ There exist some sources in Germany.¹⁶²

Definition from Singapore:

“[Real Estate] Securitisation refers to a contractual arrangement whereby real estate owners sell their real estate asset(s) to a special purpose vehicle (SPV) that issues debt instruments to finance the purchase. The debt instruments are

158 Cf. Levitin (1987), p. 28.

159 Cf. Fiedler and Devoe (1995), p. 10.

160 Cf. Heng (2002), p. 36; Ooi, et al. (2002), p. 1; Quek (1996), p. 20; Sing, et al. (2003), p. 75.

161 Cf. Pickersgill (2001), p. 125.

162 Cf. Lehmann and Danielewsky (2003), p. 53; Rügemer and Siemes (2002), p. 771.

backed by cash flows generated from the real estate asset(s). The legal transfer or separation of the asset to a SPV is the key feature that distinguishes a [Real

Estate] Securitisation arrangement from the traditional mortgage-backed or collateralised bond issues.”¹⁶³

Definition Europe:

“Real Estate Securitisation is the Securitisation of predictable and dependable real estate income streams or receivables.”¹⁶⁴

Definitions Germany:

“Real Property is a direct type of real estate financing... it is not based on the Securitisation of mortgage loans, but it is used as direct financing for real estate

investments.”¹⁶⁵

“Real Estate Securitisation securitises direct cash flows from real estate, i.e.

receivables from real estate lease contracts, future lease contracts, real estate values and future real estate sale proceeds.”¹⁶⁶

“Real Estate Securitisation is the transformation of illiquid real estate assets into tradable securities. Securitisable assets are all kinds of real estate receivables

and physical real estate that incorporate a constant and predictable cash flow.”¹⁶⁷

Summarizing the previous definitions, the following statements can be derived:

• Real Estate Securitisation is the transformation of illiquid real estate assets into securities – hence, this is why it is called Real Estate (real estate assets) Securitisation (tradable securities).

• Real Estate Securitisation (sometimes also called Property or Real Property Securitisation) can be used as a divestment vehicle or as a direct financing instrument.

163 Ooi, et al. (2000).

164 Pickersgill (2001), p. 125.

165 Lehmann and Danielewsky (2003), p. 53.

166 Rügemer and Siemes (2002), p. 771.

167 Schulte (2005), p. 618.

• Transactions are based on and backed by solid and predictable cash flows derived from real estate assets or real estate operations.

• Real estate assets can be physical assets as well as non-physical assets, including receivables from real estate lease contracts, future lease contracts, real estate values and future real estate sale proceeds (inter alia).

In its definition, Real Estate Securitisation is close to Future Flow Asset-Securitisations like Whole Company Asset-Securitisations. This is why some industry people use this Analogy to compare Real Estate Securitisations to Asset-Backed Securities i.n.S..¹⁶⁸ However, Real Estate Securitisation are really overlapping with both: CMBS and ABS i.n.S. – it could fall in either category depending on what the asset and the collateral are.

If used as a divestment vehicle, Real Estate Securitisation essentially allows property assets to be taken off the balance sheet and thus improving the liquidity of companies as well as enhancing their return on capital. Typically, capital markets for real estate can be classified into two categories: equity and debt capital markets.

The motivation for tapping into real estate capital markets can be one of the following:

1. Source of finance.

2. Mortgage originators wish to sell mortgages, replenish funds to originate new mortgages.

3. Geographic flow of funds from regions with surplus funds to regions with high demand for housing.

4. Deregulation in financial institutions, 5. Corporate restructuring.

Typically, there are two types of Real Estate Capital Markets: Equity and Debt.

Real Estate Securitisation is often confused with equity capital markets, but it belongs to the category of debt.

Equity Capital Market

1. Listed Property Companies

2. Open-ended Funds (only to a certain degree) 3. Property Trusts

4. Real Estate Investment Trusts (REIT) Debt Capital Market

1. Mortgage Backed Bonds 2. Mortgage Backed Securities

3. Real Estate Securitisation (Real Estate ABS)

In Mortgage Backed Bonds (MBB), an agency creates mortgage pools and issues bonds based on these pools of mortgages. The mortgages are pledged as collaterals, and the agency retains ownership of the mortgages. MBBs are similar to covered bonds.

Mortgage Backed Securities are also pools of mortgages bought by investors and each mortgage in the pool is serviced by originator. However all payments (interest and principal) are passed-through to investors. MPTs are also known as Mortgage Backed Securities (MBS).

In Real Estate Securitisations, special purchase vehicles (SPV) are used to purchase property assets using funds raised by debt instruments. The debt in the Real Estate Securitisation is backed by cash flows generated from the real property.¹⁶⁹

Real Estate Securitisation as a Concept for Disintermediation of Lending Institutions

In recent times financing for real estate companies has become more and more difficult because banks have become very cautious with loan origination. This is due to the fact that a lot of banks have made an enormous amount of bad loans during the last decade and now those big bad loan portfolios weigh hard on the

168 Cf. Yang (2003), Interview 16, p. 554.

169 Cf. Sing, et al. (2003), p. 22.

banks’ balance sheets.¹⁷⁰ However, Capital markets dictate that banks are more bottom line oriented. Therefore a lot of big commercial banks have decided to go away from the classic lending business and go into fee income business. This goes in hand with a second big trend, a trend that has been going on in the financial industry for many years. It can be described as the disintermediation of financial intermediaries; lending banks as such intermediaries will be more and more cut out of the lending process as they only function as an intermediary between the borrower and the capital market.

Therefore the current trend in the banking industry can be described as a shift