Home > About J-REITs > Overview
A Short History of J-REITs
While REITs have a history of over 40 years in the United States and Europe, real estate investment trusts in Japan (J-REITs) are a relatively new financial instrument. The real estate investment trust system was first introduced in Japan following amendments to the Investment Trusts and Investment Corporation Law in November 2000. The following September the Tokyo Stock Exchange established a trading system for J-REITs, and within that first month the first two J-REITs were listed. Since then, the J-REIT market has grown exponentially to become the world's fourth largest in terms of number of REITs listed and 5th largest with regard to total market capitalization (as of September 2007). The J-REIT market was the first such market established in Asia and remains the region's largest.
The Structure of J-REITs
A parent (sponsor) company and asset manager establish an investment corporation which acts as a fund (securitization) vehicle for the J-REIT. The investment corporation then gathers pools of investors' money through issuance of shares (investment units) and uses these funds to invest in real estate property in a so-called collective investment scheme. The proceeds from rents and sales of these properties are then returned to the investors as dividends (distributions). Similar to the U.S. REIT system on which it was modeled, J-REITs function as a pay-through conduit in that they are able to deduct distributions paid to investors from their taxable income when certain requirements are met, thereby largely avoiding the double taxation of income earned from their assets.
Although J-REITs may exist as either corporate or trust entities, the overwhelming majority are corporations which have no employees and are considered more attractive to investors for their inherent transparency. Essentially, an Investment Corporation is set up as a securitization vehicle to procure equity financing from investors and debt financing from banks and these funds are then used to acquire real estate and develop a competitive portfolio of properties. These properties are managed through an asset manager which develops the asset management strategy for the fund, including the purchase and sale of real estate properties, and provides direction with regard to soliciting tenants and maximizing the asset's earnings. Almost all aspects of direct management of the properties, including maintenance and tenant relations, are entrusted to property managers which may or may not be the asset manager for the property.
The J-REITs determine the amount of distributions for each fiscal period. The amount must exceed 90% of the J-REITs distributable income as stipulated in Article 67-15 of the Special Taxation Measures Law or the aforementioned conduit status will be lost and taxes will increase to the levels of normal corporations. Revenues are essentially derived from real estate rental income and therefore are relatively stable. Similar to REITs in other countries, the advantages of J-REITs are that they increase the liquidity of real estate investment, avoid double-taxation of such investment, provide protection to investors should any parties in a REIT's structure face bankruptcy, and give the retail investor the ability to invest in large real estate properties.
The J-REIT Market
Although initially dominated by office properties, J-REITs have diversified in recent years to include retail properties, residential properties, logistics facilities, hotels, infrastructure and even senior care facilities. Competition among J-REITs has contributed to an upturn in real estate values, particularly in central Tokyo and other major cities, and this increased competition has also had a stabilizing effect on distribution yields. J-REITs generally continue to enjoy a favorable environment for raising capital due to their high yields compared with Japanese government bonds and investor confidence in their regulatory bodies and investment sponsors. This situation, however, will depend in the future on the Japanese real estate market and macro economy as well as global economic conditions.
The Future of J-REITs
Growth of the J-REIT market stunted in 2007 due to closer review of applicant J-REITs, stricter assessment of properties in portfolios and new government regulations towards the end of the year along with effects from the subprime problem which forced overseas investors to refrain from investing new capital and apply previous capital elsewhere. Overall the J-REIT market did enjoy consistent growth through the summer of 2007 and is expected to once again embark on further growth and diversification in the near future. In recent years, market forces have heightened competition and as a result J-REITs continue to specialize as they focus on maximizing return on assets through practical knowledge of specific real estate industries. Regulatory reforms have also been instituted to assure proper disclosure and protection of investors as the market expands and to instill further credibility with investors and the society at large that J-REITs constitute a profitable securitization system that contributes to the sustainable development of the Japanese real estate market and economy.
