As stock market woes and asset deflation continue to cast a cloud over Japan’s economic recovery, a new type of investment trust will be introduced this month in a bid to solve these problems in one fell swoop.
Real estate companies, banks and other financial institutions have been gearing up to launch real estate investment trusts — popular financial vehicles in the United States known as REITs — as a new form of investment for individuals.
REITs are mutual funds that obtain yields through property-related sources such as office building rents, hotel room fees and sales at shopping malls.
Essentially, there are two frameworks for REITs.
The corporate variety involves realtors and other firms setting up a REIT fund, a legal entity that invests in real estate.
Certificates entitling holders to property management yields can be traded on the market. This type of REIT is expected to become popular in Japan, mirroring its success in the U.S.
The other framework, known as the trust variety, involves trust banks channeling investors’ money into real estate and paying back yields from property management.
Although investors dabbling in REITs risk losing their principal, it is expected that these funds could provide annual returns of around 4.5 percent — much higher than banks can offer in the current environment, given the downward pressure on deposit rates resulting from the Bank of Japan’s return to a “zero-interest-rate” policy.
Since they emerged in the 1990s, REIT transactions have rapidly expanded in the U.S. to a market worth well over 10 trillion yen. If REITs become established investment vehicles for individual Japanese, analysts estimate that some 4 trillion yen to 5 trillion yen may flow into REIT transactions here, pumping new life into the depressed stock and real estate markets.
A Japanese government ban on REITs was lifted in November when the revised Securities Investment Trust Law came into force, a move aimed at providing individual investors with diversified portfolios of real estate.
In line with this legislative change, the Tokyo Stock Exchange launched a market for REITs in March.
Thus far, however, no REIT funds have been listed on the TSE, according to Ko Hirose of the TSE’s listing division.
Major real estate companies are currently accelerating preparations to introduce REITs. Forerunners include Mitsubishi Estate Co. and Mitsui Fudosan Co.
In March, the two major developers gained approval from the Financial Services Agency for their subsidiaries to manage properties to be funded by REITs. Both firms are finalizing the details of their REITs, officials of the two firms said.
“We are preparing to list a REIT fund worth 100 billion yen on the TSE,” said Mitsubishi Estate spokesman Tomonari Nishijima. “That could take place as early as later this month, although we want to be fully prepared to make our first REIT issuance a success.”
Mitsubishi Estate will soon set up this fund, along with Tokio Marine & Fire Insurance Co. and Dai-ichi Mutual Life Insurance Co., to invest in around 20 office buildings owned by the three firms, Nishijima said.
Setting the minimum investment lot at less than 1 million yen, they will initially raise 100 billion yen before expanding this to 300 billion yen in three years, he said.
Mitsui Fudosan is also working on plans to launch a REIT worth 200 billion yen in July, in cooperation with Nomura Securities Co. and Sumitomo Life Insurance Co., according to company spokesman Kazuyuki Suizu.
The fund’s portfolio is expected to include the headquarters of NKK Corp. in Tokyo’s Chiyoda Ward. NKK, the nation’s second-largest steelmaker, has announced it will integrate operations with the No. 3 firm, Kawasaki Steel Corp., in October 2002.
Certificates for the fund will likely be sold for 500,000 yen per lot, with the annual dividend expected to be around 5 percent.
Tokyo Tatemono Co., another real estate developer, is also joining the REIT bandwagon. It announced in March that it will set up a fund worth 50 billion yen in August together with Tokyo-based general contractor Taisei Corp., Asahi Mutual Life Insurance Co. and Yasuda Mutual Life Insurance Co.
The fund will invest mainly in office buildings owned by Tokyo Tatemono in the Tokyo metropolitan area, company officials said.
In the banking industry, the United Financial of Japan group — which comprises Sanwa Bank, Tokai Bank and Toyo Trust & Banking Co. — has been “steadily preparing” for the launch of a REIT fund in the coming months, a UFJ spokesman said.
Although specifics of the plan have yet to be worked out, UFJ’s REIT fund is expected to be of the trust type, enabling the group to use Toyo Trust’s expertise in this field.
Other major banking groups, each of which has its trust banking wings and affiliates, are expected to follow suit.
“If REITs can become the driving force of the securitization of real estate, that would help promote urban redevelopment and hopefully put an end to the continuing fall in land prices,” said Yasuo Goto, a Mitsubishi Research Institute analyst.
“Under the most optimistic scenario, land prices might rise again in the long run.”
According to recent government statistics, land prices declined by an average of 4.9 percent in 2000, marking the 10th consecutive year of decrease.
Preventing a further land value slide is exactly what the government aims to achieve through its economic stimulus package, compiled in April. The package calls for the securitization of real estate as an effective means of enhancing liquidity in the real estate market.
Increased liquidity in real estate transactions would also help improve banks’ balance sheets by raising the value of their collateral, which is primarily borrowers’ real estate, Goto said.
The stagnant real estate market is considered a major factor preventing banks from carrying out the final disposal of their bad loans — the main pillar of the government’s economic package.
The package gives the nation’s 15 major banks a two-year time limit to dispose of their existing loans to failed firms and those likely to go under. These banks should also complete writeoffs of newly emerging problem loans within three years.
Banks’ final disposal of problem loans constitutes the complete removal of the loans from their balance sheets. This could involve banks selling off collateral, such as land, or giving up their claims on loans to take actual losses.
According to the Financial Services Agency, Japanese banks held nearly 32 trillion yen in problem loans as of the end of 2000. Yoshinobu Yamada, analyst at Merrill Lynch Japan Inc., said he estimates that some 10 trillion yen was secured by real estate collateral.
Goto, however, expressed concern that unless the real estate market becomes buoyant by the end of this year, it might fail to absorb the huge amount of real estate collateral that might be sold by banks, further dampening land prices.
According to Goto, banks will likely take a partial debt-waiver approach at the beginning of the two-year period, giving up part of their claims while continuing to extend loans sufficiently to keep troubled borrowers afloat.
As the deadline approaches, however, they may have to resort to harsher measures, cutting off loans and auctioning collateral, he said.
Goto said the shift of loan disposal measures could take place as early as the coming winter, adding that the real estate market should be fully prepared for a possible market storm by that time.
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