Third Consecutive Year Increase and Positive Expectations on Amendment to Real Estate Specified Joint Enterprise Act
On May 24, 2013, Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT) announced the results of its recent nationwide survey of real estate securitization transactions (Japanese text is available here).  The results revealed that the total asset value of properties and trust beneficiary interests that were acquired for securitization during 2012 amounted to JPY3.345 trillion, which is the third consecutive year this amount has increased. In addition, the bill to amend the Real Estate Specified Joint Enterprise Act (fudosan tokutei kyodo jigyo ho) (Act No. 77 of 1995, as amended, the REJA Act), which is expected to accelerate this trend, was promulgated by the Government of Japan on June 21, 2013.

Survey Results
The following chart (an English translation of a chart posted in the above website) shows the historical movement of securitization transactions covering the overall activities of both publicly traded REITs and private real estate funds.  In 2012, securitized asset values increased 1.5 times when compared to the previous year. Also, acquisitions by J-REITs (Japan Real Estate Investment Trusts) reached JPY1.6 trillion (accounting for around 46.5% of the overall acquisitions in 2012); double the amount from the previous year. Additionally, the number of the other private funds’ activities has also increased in asset value from JPY1.54 trillion in 2011 to JPY 1.79 trillion in 2012.

(Excerpt from http://www.mlit.go.jp/report/press/totikensangyo03_hh_000140.html)
Note 1: Transactions surveyed after 2009 excludes acquisition by tokutei mokuteki kaisha of real properties.
Note 2: The acquisition by J-REITs excludes acquisition of tokumei kumiai (silent partnership) interests.
Note 3: Values surveyed for 2003 through 2009 include re-financing without asset acquisition/transfer.
Note 4: Figures are rounded.

Outline of Major Fund Structures and Amendment to REJA Act
In Japan, real estate securitization is implemented mainly through the following structures:

• J-REITs
• TMK (Tokutei Mokuteki Kaisha)
• GK-TK Scheme
• Real Estate Specified Joint Business.

J-REIT
A J-REIT is a scheme where an investment corporation that is established and operated under the Investment Trusts and Investment Corporations Act (toshi shintaku oyobi toshi houjin ho) (Act No. 198 of 1951 as amended) acquires, leases, sells and disposes of real estate property. Unit interests in an investment corporation can be listed on a stock exchange whereby it can attract a wide range of investors. There are also non-listed investment corporations into which institutional investors like pension funds can make an investment.

TMK
A TMK is a special purpose company established under the Asset Securitization Act (shisan no ryudo ka ni kansuru horitsu) (Act No. 105 of 1998, as amended) for the purpose of asset securitization which, in accordance with an asset securitization plan prepared and adopted by it, collects funds from financial institutions and investors (generally by way of loans, specified bonds and preferred shares), acquires assets, including real estate, and distributes profits from the acquired assets to investors. This scheme was introduced by the Government with the intent to attract more private equity funds into the real estate market in Japan. However, due to its cost and inflexible regulatory structure, many investors prefer the GK-TK structure.

GK-TK Scheme
A GK-TK Structure is a scheme where a special purpose vehicle, Godo Kaisha (a limited liability company established under the Companies Act (kaisha ho) (Act No. 86 of 2004, as amended)) is funded with an equity investment by a Tokumei Kumiai (a silent partnership established under the Commercial Code (shou ho) (Act No. 48 of 1905, as amended)) and loans from financial institutions to acquire and hold beneficiary interests in real estate trusts. A GK-TK is a popular structure for private real estate funds because it is easier to establish and set up than a TMK. However, in addition to review of the regulations under the Companies Act and Commercial Code, careful consideration of the Financial Instruments and Exchange Act (kinyu shouhin torihiki ho) (Act No. 25 of 1948, as amended, the FIEA) and tax implications on the overall transaction structure needs to be given as to the establishment and operation of the structure.

Real Estate Specified Joint Business
A Real Estate Specified Joint Business is a scheme under the REJA Act where a company (eg, real estate company) collects funds from investors to acquire, lease, and dispose of real estate. Unlike the other three schemes, the company needs to comply with certain capital and human resource requirements under this law (ie, a special purpose vehicle cannot qualify). Due to these requirements, this scheme has been less popular than the others. However, a bill to amend this law, which will be implemented six months after being promulgated on June 21, 2013, will enable a special purpose vehicle to be used under this structure. Similar to a GK-TK, this transaction structure is expected to be more reasonable and flexible than a TMK and has the added attractiveness of not being regulated under the FIEA. Concurrent with the introduction of the new law, there are planned tax law amendments for 2013 that reduce the rates of real estate registration and transfer taxes for this new structure under the REJA. Therefore, structures under the REJA should become more attractive for private equity investors, especially those seeking the bankruptcy remoteness of a special purpose vehicle structure under the REJA Act.

Outlook
Breaking down the survey results above, GK-TK structures accounted for JPY995 billion of the acquisitions and TMK schemes amounted to JPY637 billion. On the disposition side, TMK schemes top the disposition of held properties in the amount of JPY2.212 trillion. With respect to development-type securitization (ie, where costs for the development of property are funded by securitization), the results identified 30 projects with an aggregate value of JPY190 billion, which was a decrease in the number of projects in 2011(36 projects) but an increase in value to JPY50 billion.

Indeed, the Japanese real estate market was no exception to the global real estate downturn which resulted from the financial crisis. A number of schemes defaulted, lenders stepped in, and asset managers were kicked out.

However, the recent survey by the MLIT indicates that there is steady recovery in the market and the amendment to REJA Act is likely to offer opportunities for private equity funds in the Japanese real estate market.