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Monday, 04 July 2011 09:08

After about 50 years of land price increases, the “Bubble Economy” collapsed revealing the dire need to attempt to create a retail market for commercial real estate, which was implemented via: the Real Estate Special Joint Venture Law of 1995; the SPC (Special Purpose Company) Law of 1998 (revised 2000); and the Investment Trust Law (ITL) of 2000. These have been further refined via the Tokyo Stock Exchange Offering Standard (TSE OS); the Corporate Tax Law (CTL); and the Special Tax Measure Law (STML). The Law of Investment Trusts and Investment Companies (LITIC), created 2 different legal systems for J-REITs: the Investment Corporation System; and the Investment Trust System. Although J-REITs may exist as either corporate or trust entities, the overwhelming majority operate under the former and are structured as a SPIVs (Special Purpose Investment Vehicles) which have no employees and are considered more attractive to investors for their inherent transparency, and which procure equity financing from investors and debt financing from banks to acquire real estate and develop a competitive portfolio of properties, but which must : -

  • Pay out at least 90% of taxable income to shareholders as dividends (CTL), and
  • Hold at least 75% of total assets in real estate and real estate related instruments (TSE); and
  • Engage only in the real estate, and
  • Hold at least 70% of assets in direct real estate (95% including “certificates”, and other such real estate “paper”), of which 50% must be in stable, cash generating properties (TSE), and
  • Have at least 50 shareholders or only qualified institutional investors (STML); and
  • Not allow the 3 largest shareholders to own over 50% (STML); and
  • Not allow the 10 largest shareholders to own over 75% (TSE); and
  • Have at least ¥5bn / about USD$65m in capital with ¥1bn / about USD$12.5m in equity, and
  • Withhold 20% from distributions as tax, and
  • Not develop properties (ITL), and
  • Not have subsidiaries nor own over 50% of another company (ITL & STML), and
  • Not borrow money from anyone other than a “Qualified” institutional investor (which has allowed J-REITs to match bids in the property market from Japanese and foreign private equity funds).

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 (compared to the normal 42%).

A parent (sponsor) company and asset manager, establish an investment corporation which acts as a fund (securitization) vehicle for the J-REIT. The Asset Management Companies perform the management & marketing, administration, although there is often a close link with the sponsor.

J-REITs can own any type of commercial property; sell bonds to raise finance; and (since 2008) are able to invest outside Japan. 

There is no statutory gearing limit applicable to J-REITs. However, in practice a J-REITs Articles of Association usually contain a gearing limit of 55%-60%.

Japanese law also allows for SPIVs to be established that deal in securitization.




"Regulatory Structure: Legal Form According to the Act on Investment Trusts and Investment Corporations (ITL), a J-REIT must be formed as a trust type or a corporation type. They are further sub-divided to open-ended or closed-ended funds depending on the possibility of cancellation or redemption of shares. Up to 2011, all of the current J-REITs were corporate type since the legal process for the trust type was more burdensome and expensive (EPRA 2011). The corporate governance rules for the corporate type were also considered to be more favourable for investors. Minimum Initial Capital J-REITs are subject to the minimum investment capital of ¥100 million (US$1.26 million). Sponsorship The REIT market in Japan has a unique sponsorship system. Under this system, a J-REIT is required to have a sponsor or a parent company. The sponsor will establish a REIT manager and acquire a “Building Lots and Building Transactions Agent Licence” and a “Discretionary Transaction Agent Licence” from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). After these licences are obtained, the manager may apply for registration as an investment manager with the Financial Services Agency (FSA). Typically, J-REITs are sponsored by major property companies in Japan. For example, the first two J-REITs Japan Real Estate Investment and Nippon Building Fund, are sponsored by two major property players in Japan; the Mitsui Fudosan and the Mitsubishi Estate respectively. The REIT sponsor has an important role because it wholly owns the REIT management company and often have a large holding in the REIT (CFA Institute 2011)."


"Management Structure: J-REITs have an external management structure, whereby the trust or investment corporation has no employees and must use a registered asset management company. The investment manager is required to have a minimum paid-in-capital or net assets of ¥50 million (US$0.63 million) and sufficient experienced personnel."


Source: Prof. Alex Anh Khoi Pham - University of Western Sydney: The Development of REIT Markets in Asia (1/1/2014) - Link.


Last Updated on Sunday, 23 February 2014 05:05