Mezz Burst!

There is no sign at all that the economy has been bottomed out. This is true of the propert industry. What we have seen is the news of insovent developers and construction firms.

Now, turning to the commercial real estate, WSJ.com recently mentioned that many of mezzanine loans went to the toilet. or at least are in the situation of so-called "unerwater". Mezz. finanicing has played a big part in leveraged equity investments into properties. It worked well like a magic when lenders asked us for more equity contributions.

Sadly, the current market turmoil looks to have wiped out not only the equity, but also all or a substantial part of mezz. in the leveraged equity investments here. For example, let's take a look at residential properties in Tokyo. Many Private funds here had bought them at a cap rate of 4-5.5% over the past few years. Now, if we try to sell them in the current market, we will definitely have challenges and difficulties identifying a prospective buyer. There is no demand for them in the market; therefore, we need to increase a cap rate to lure buyers into the deal. I would say 8 to 10% for a good area is needed. Having said that, the cap rate for the next buyer is almost twice as high as that at the time of acquisitions. Given the current market conditions, all equities, mezz. and probably a substantial part of loans are gone, regardless of the level of LTV.

The market is now turning on to the commercial real estate from residential one in the US. We need to stop this vicious circle anyhow, but we do not know how, quite frankly.