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Japan Structured Finance 2020 Outlook: Potential Apartment Loan RMBS Woes Amid General Tranquility

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Japan Structured Finance 2020 Outlook: Potential Apartment Loan RMBS Woes Amid General Tranquility

S&P Global Ratings expects the assets underlying residential mortgage-backed securities (RMBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS)--the asset classes we consider to be representative of Japan's securitization market--to continue performing steadily in 2020. However, we anticipate a somewhat negative performance for assets backing apartment loan RMBS. In this report, we discuss our views on the performance outlooks for Japanese RMBS, ABS, and CMBS deals in 2020.

Table 1

Outlooks By Asset Class
Underlying asset class Performance outlook for asset class Expected rating trend
Owner-occupied housing loan receivables; condominium investment loan receivables Somewhat positive Stable
Apartment loan receivables Somewhat negative Somewhat negative
Consumer receivables (auto loan receivables, shopping credit receivables, credit card shopping and cashing receivables, consumer loan receivables) Stable Stable
Corporate receivables (equipment lease receivables, auto lease receivables) Stable Stable
Commercial mortgage loan receivables Stable --*
*No rated transactions remain. Source: S&P Global Ratings.

Japan Macroeconomic Scenario

Japanese economy maintains growth in 2020

Growth in Japan's economy is one of the key factors shaping our performance outlook for Japanese securitizations in 2020. We forecast Japan's real GDP will grow 0.1% in 2020 (see "Credit Conditions Asia-Pacific: Rate Relief, Risks Remain," published Dec. 3, 2019). Global economic growth has slowed, affected by U.S.-China trade friction and other factors. Trade tensions with South Korea are an additional headwind for the Japanese economy. However, we expect the Japanese economy to keep growing in 2020 and beyond. While the consumption tax hike implemented in October 2019 is likely to cap real GDP growth at 0.1% in 2020, we expect the growth rate to recover to about 1% in 2021 and stay at around that level the following year (see table 2).

Chart 1


Table 2

Expected Real GDP Growth Rates In Japan
(%) 2020 2021 2022
Outlook 0.1 0.8 1.1
Source: S&P Global Ratings.
Employment conditions continue to support structured finance transactions

Employment and income conditions affect the performance of loans extended to individuals, such as those for owner-occupied housing and autos. Japan's unemployment rate has been improving since 2010, and has recently been about 2% (see chart 2). We forecast that the rate will remain at around 2.2% in 2020 (see table 3). The active jobs-to-openings ratio has been rising since it exceeded 1.0x at the end of 2013. It has been about 1.6x in recent years, its highest since 1974. Since macroeconomic indicators related to Japan's employment and wage conditions shows a moderate improvement in recent years, we expect the employment and income environment for obligors will have a positive impact on structured finance transactions.

Chart 2


Table 3

Outlook For Major Indicators
(%) 2020 2021
Unemployment rate 2.2 2.2
Consumer price index 1.3 0.9
Source: S&P Global Ratings.

While macroeconomic indicators have continued to improve, there have been drastic changes in obligors' mindsets toward work and family. The government has also taken notable measures to address work environment issues in recent years. We consider the above factors to have the potential to affect the performance of structured finance transactions.

For example, the government is promoting work-style reform measures to counter a labor shortage that has in part been triggered by a declining birth rate and aging population. The reforms aim to bring diversity and flexibility to the way people work. Such reforms include legal revisions that ban long working hours and secure fair treatment from employers regardless of a worker's status.

Regarding employment, the government intends to diversify styles of work to suit various lifestyles, instead of distinguishing only between permanent and part-time status. Changes in obligors' lifestyles may change the balance of their earnings and spending. For example, in typical housing loan cases, loans were repaid through the salary of either the husband or wife, with any outstanding balance prepaid in full through retirement allowance. Changes in obligor lifestyles may cause their income to increase or decrease, impacting default rates and prepayment patterns. In addition, re-employment after retirement may possibly extend loan maturity dates. Consequently, diversification of employment may change patterns of repayment by obligors. This in turn may mean underlying assets backing transactions may perform differently to how they have in the past, in our opinion.

When we observe a material change in performance of a loan asset, such as a default, we confirm the reason or background of the event as a part of our surveillance. We have not yet observed any significant change in the performance of underlying assets caused by changes in the way people work. However, we recognize the need to confirm the reason and background to any changes in asset performance patterns we observe in the future.

We view the total number of corporate bankruptcies as a key indicator in forecasting the performance of structured finance transactions backed by corporate receivables. The number of bankruptcies has trended at a low level since the end of the global financial crisis and continued to do so in 2019. We have observed some risk factors specific to transactions, such as concentrations of obligors and sectors. However, we don't expect drastic changes in transaction performance for corporate receivables because we think the number of corporate bankruptcies will likely trend around the same level in 2020.

Owner-Occupied RMBS And Condominium Investment RMBS

Performance outlook for underlying assets is somewhat positive

We expect the performance of the assets underlying RMBS transactions backed by loans for purchasing owner-occupied houses (owner-occupied RMBS) and RMBS transactions backed by loans for investments in condominiums (condominium investment RMBS) to remain favorable in 2020. Our performance outlook for these assets is somewhat positive.

Performance of loans backing owner-occupied RMBS and condominium investment RMBS continued to be positive in 2019, with few delinquencies and defaults. The consumption tax hike implemented in October 2019 is likely to have an adverse effect on households. However, we believe its impact on the performance on housing loans is likely to be minimal. This is because the government has launched various measures to support the economy and because housing loan borrowers put higher priority in repayment than most expenses.

Our performance outlook for owner-occupied RMBS and condominium investment RMBS reflects the following factors:

  • The unemployment rate has been low and stable;
  • The recovery of real estate prices has spread from metropolitan areas to rural areas, leading to a marginal rise in prices nationwide; and
  • Limited risk of an increase in debt-servicing burdens because of a rise in interest rates is unlikely.
Rating trend will likely be stable

We expect the overall rating trend of owner-occupied RMBS and condominium investment RMBS for 2020 to be stable.

Our expectations for owner-occupied RMBS reflect our view that loan defaults and delinquencies are likely to remain low, backed by favorable employment conditions. The underlying assets backing Japanese owner-occupied RMBS transactions are largely housing loans with fixed interest rates for their entire loan periods. Therefore, obligors face extremely limited risk from rate hikes, which is another factor supporting the ratings.

Similarly, we expect our ratings on condominium investment RMBS to remain stable in 2020. This reflects our view that loan delinquencies and defaults will likely to remain low, backed by a moderate rise in real estate prices in metropolitan areas, where many underlying properties are located. Condominium investment RMBS are backed generally by housing loans with floating interest rates. However, increased seasoning (time elapsed since transaction closing) and credit enhancements in line with progress in redemption of senior classes provide a buffer sufficient to offset future shocks, including an unexpected increase in interest rates.

Apartment Loan RMBS

Performance outlook for underlying assets is somewhat negative

We expect the performance outlook of assets underlying RMBS transactions typically backed by loans to landowners who build rental apartment buildings (apartment loan RMBS) to be somewhat negative in 2020.

The assets underlying apartment loan RMBS transactions performed well in 2019, with few delinquencies and defaults. The strong performance of these assets is attributable to the use of master lease contracts. Developers of the collateral apartment buildings frequently enter into master lease contracts with the borrowers of the underlying loans. These contracts allow the borrowers to receive stable rent income, regardless of actual occupancy rates or apartment rent levels. As of 2019, master lease contracts have remained effective, allowing borrowers to repay apartment loans mostly with income from master lease contracts.

We believe the performance of apartment loans in 2020 will be supported by:

  • Low interest rates likely keeping a lid on loan repayment costs.
  • The increased portion of equity, as contractual repayments have been made over a long period.

Meanwhile, defects in some of apartment buildings constructed by Leopalace21 Corp., a major apartment builder in Japan, may hurt the performance of apartment loans. Since April 2018, when the company disclosed defects in some of its apartment buildings, the company has been examining all its buildings and conducting repair work at its own cost. Given the large number of buildings that need repair work and that this has meant relocating some tenants, the vacancy rate of the apartment buildings under its management has been surging. In general, rent under master lease contract is reviewed on a regular basis. A material decline in the rent amid a rise in the vacancy rate may pressure the performance of apartment loans.

Meanwhile, a revision to inheritance tax laws in 2015 reduced basic exemptions. After this, an increasing number of landowners built apartments to save tax. And overall, the competitiveness of the apartment buildings that back apartment loan RMBS has been weakening as a whole, due to an increasing number of newly-built apartments and the aging of collateral apartment buildings.

Rating trend will likely be somewhat negative

We expect the overall rating trend of apartment loan RMBS for 2020 to be somewhat negative. Our view reflects a potential decline in rent levels and potential increase in vacancy rates. These factors are likely to materialize, in our view, because of the increasing intensity of competition of the entire apartment industry and the aging of collateral apartment buildings. In addition, it also reflects a possible increase in loan defaults and delinquencies caused by the negative impact of factors such as declines in master lease rent.

ABS Backed By Consumer Receivables

Performance outlook for consumer receivables is stable

We expect the performance of consumer receivables--auto loan receivables, shopping credit receivables, credit card receivables (shopping and cashing receivables), and consumer loan receivables--backing ABS transactions to remain stable in 2020.

In our projections for performance of auto loans, the October 2019 consumption tax hike may affect the debt-servicing ability of retail obligors. Accordingly, we have been paying closer attention to the performance of auto loans after the tax increase. However, we haven't observed any material changes so far. We have no material concerns over the future performance, because at 2 percentage points, to 10% from 8%, the hike was relatively small. Taxpayers' benefit programs, including the introduction of certain forms of tax relief and points reward systems, also helps alleviate taxpayer burdens.

We expect Japan's unemployment rate to remain at the 2% level in 2020. The unemployment rate surged to nearly 5% at the time of 2008-2009 financial crisis. However, the employment environment, which could impact consumers' debt servicing ability, is likely to remain stable in 2020, in our view. In addition, the default rate of auto loan-backed ABS in 2008-2009 did not rise significantly. With these factors in mind, we do not expect a material deterioration in the performance of auto loans in 2020.

In addition, obligors may sell their vehicles and use the proceeds to repay auto loans if they face difficulties. In such cases, conditions in the used car market may affect the performance of auto loans.

According to Japan Automobile Dealers Association, the number of registered used cars has been increasing moderately since 2015. The increase is attributable to the internet facilitating used car deals in addition to those done through conventional dealerships. This has helped expand the used car market by exposing it to a wide range of potential buyers, and particularly consumers in their 20s. Stable vehicle prices because of the revitalization of the used car market is likely to be a positive factor for performance of auto loans, in our view.

Meanwhile, we will also keep a close eye on the environment of the overall automobile industry, amid tightening regulations on environmental protection. This is because new technologies, including electric vehicles, and the introduction of fuel regulations may lead to a decrease in sales of older models and a decline in the prices of used cars.

Rating trend will likely be stable

We expect our ratings on ABS transactions backed by consumer receivables to remain stable in 2020. We expect consumer receivables backing the rated transactions to perform steadily. The ratings will also be supported by the fact that underlying auto loans carry fixed interest rates. This is because interest rates on loans are not raised even when the market rate goes up.

In addition, credit enhancements for ABS transactions that employ sequential pay structures have risen, reflecting increased seasoning. This also increases the stability of the ratings.

ABS Backed By Corporate Receivables

Performance outlook for corporate receivables is stable

We expect the performance of corporate receivables (equipment lease and auto lease receivables) backing ABS transactions to remain stable in 2020.

The default rates of pools of corporate receivables generally trend in line with corporate bankruptcies in Japan. For auto lease receivables, in particular, we focus on changes in bankruptcy numbers in the trucking industry, because the asset pools generally have a high percentage of leases extended to small and midsize trucking companies. The number of bankruptcies have been increasing slowly starting from 2019 on a year-on-year basis. According to data from Teikoku Databank Ltd. and Tokyo Shoko Research Ltd., the number of bankruptcies in the transportation sector stood at 243 and 234 respectively during the period of January to November 2019, exceeding the numbers of the same period of last year, 241 and 216, respectively. Data for December 2019 had not been disclosed at the time of publishing this article. However, the number of bankruptcies disclosed by Tokyo Shoko Research decreased for six straight years until 2018. Therefore, the data from January to November suggests the decline in the number of bankruptcies is over after several years. Yet, the number of bankruptcies for now remains low from a long-term perspective.

In fact, default rates of loans underlying rated ABS backed by equipment lease or auto lease receivables remained generally low and stable throughout 2019.

Teikoku Databank pointed out that one of the factors for bankruptcies in the transportation sector is a decrease in orders receipt due to a shortage of workers. To tackle this issue, the Ministry of Land, Infrastructure, Transport, and Tourism revised the Motor Truck Transportation Business Act. One of the goals of the revisions was to improve the working conditions of truck drivers and prevent the shortage of truck drivers reducing logistics efficiencies. The amended law has been applied to businesses registered from Nov. 1, 2019, onward. We will monitor the effects of the revised law on the chronic shortage of workforce in this industry. Rising costs because of higher fuel prices were another factor behind bankruptcies. Fuel prices depend on various uncertain factors, including decreases in production in oil producing countries, changes in the balance of supply and demand because of global economic trends, and environmental protection. Fuel prices will remain a concern to many transport operators, especially small and midsize ones.

Meanwhile, we expect the Japanese economy to maintain a moderate pace of recovery in and after fiscal 2020. We do not expect a material deterioration in the entire transportation industry. We believe that the performance of the underlying loans backing corporate receivables in the transportation industry will be generally stable, despite the risk of short-term volatility of performance in some asset pools for which obligors are concentrated in a certain region or in which there are large-lot obligors. The performance of such asset pools may deteriorate subject to regional economic conditions, including the impact of any natural disasters or defaults of large-lot borrowers.

Rating trend will likely be stable

We expect our ratings on ABS transactions backed by corporate receivables to remain stable in 2020. The ABS transaction we rate that is backed by auto lease receivables has seasoned for more than three years. Accordingly, credit enhancement on the outstanding transaction has risen, reflecting progress in principal redemption and accumulation of cash reserves. The performance of the underlying receivables has been favorable so far, in line with our initial assumption. We consider the stability of the ratings has increased.


Outlook for commercial real estate prices is stable

We expect the value of properties backing Japanese commercial real estate CMBS--such as office buildings, rental apartment buildings, and distribution and warehouse facilities--to stay nearly flat year on year in 2020. Meanwhile, Japan's real estate market has peaked and is ready to head downward, in our view.

Office buildings

We expect the value of office buildings to remain almost flat in 2020. However, the values of such buildings may come under downward pressure over the medium-term. The office rental market has been steady. According to data from Miki Shoji Co. Ltd., the average vacancy rate of office buildings in Tokyo's business districts as of end-October 2019 was 1.63%, down 0.57 percentage point from a year earlier. Meanwhile, average rents for those buildings rose 6.9% over the same period. However, the rental market may slacken, because a large amount of new office space is likely to be available in central Tokyo in 2020 and 2023. The Japan Real Estate Institute's (JREI) survey on real estate investors shows that cap rates have remained nearly flat in central Tokyo. However, considering that real estate trade volume has been shrinking due to real estate values rising, we believe real estate value may come under pressure over the medium term.

Rental apartment buildings

We expect the value of rental apartment buildings to remain about the same in 2020, amid moderate positive growth of the Japanese economy and a low and stable unemployment rate. However, values may adjust in less competitive submarkets. In the owner-occupied residential property market, existing condominium values are at their highest level since the crisis surrounding the bankruptcy of Lehman Brothers Holdings Inc. In addition, supply in the new condominium market is beginning to decrease, and the contract rate (the number of new condominiums sold divided by the number of new condominiums on sale) has been declining. Although CMBS transactions are backed by rental apartment buildings, we consider that property value trends for owner-occupied condominiums are likely to affect rental apartment buildings.

Distribution and warehouse facilities

The distribution and warehouse facilities rental market has been improving, backed by strong demand from corporate tenants involved in e-commerce and logistics industries. We expect the market to remain nearly flat in 2020. Values of distribution and warehouse facilities may be affected by a decline in investor appetite. However, there is strong demand for such facilities because of the low volatility of their net cash flow. This stabilizes such properties' values and will underpin the real estate trade market, in our opinion.

Vacancy rates for distribution and warehouse facilities have been steadily improving, standing at 2% or so in the greater Tokyo area and 5% or so in the Kinki (greater Osaka and nearby prefectures) region in the third quarter 2019, according to CBRE Inc. Furthermore, we have observed strong leasing space demand for large-scale new properties from tenants in various sectors. For example, pre-leasing contracts have been entered ahead of the completion of construction.

Related Criteria

  • Global Equipment ABS Methodology And Assumptions, May 31, 2019
  • Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
  • Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
  • Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014
  • Methodology And Assumptions For Rating Japanese RMBS, Dec. 19, 2014
  • Global Methodology And Assumptions For Assessing The Credit Quality Of Securitized Consumer Receivables, Oct. 9, 2014
  • Rating Methodology And Assumptions For Japanese CMBS, Jan. 22, 2014
  • Understanding S&P Global Ratings' Rating Definitions, June 3, 2009

Related Research

  • Credit Conditions Asia-Pacific: Rate Relief, Risks Remain, Dec. 3, 2019
  • Bumpy At Best: A Conversation On Credit Conditions In Asia-Pacific, Oct. 22, 2019
  • Japanese Securitizations' 2019 First Half Rated New Issuance Worth About ¥1 Trillion; One Upgrade And One Downgrade, July 31, 2019
  • Default, Transition, and Recovery: 2018 Annual Japanese Structured Finance Default Study And Rating Transitions, March 26, 2019
  • Japanese Structured Finance Scenario And Sensitivity Analysis 2017: The Effects Of The Top Five Macroeconomic Factors, Dec. 26, 2017
  • Application Of CMBS Global Property Evaluation Methodology In Japanese Transactions, Jan. 22, 2014

This report does not constitute a rating action.

Primary Credit Analyst:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
Secondary Contacts:Toshiaki Shimizu, Tokyo (81) 3-4550-8302;
Yuji Hashimoto, Tokyo (81) 3-4550-8275;

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