With land prices in key commercial areas finally turning upward after more than a decade in the doldrums, the market for real estate investment trusts has been expanding.

REITs are securities that pool funds from investors to buy commercial and residential properties. They are more liquid and allow investors to buy and sell real estate in small lots more easily than unsecuritized real estate. They first appeared on the Tokyo Stock Exchange in September 2001.

There are now 30 REITs trading on the TSE with the addition of three new trusts in March. In all, the market capitalization of Japan REITs totals some 3 trillion yen, up by roughly a third from just one year ago.

“Although it took about three years for REITs to earn recognition, the type of investor (buying REIT products) has broadened,” said Hidekazu Sano, general manager of the structured finance department at Daiwa Securities SMBC Co. “The growth seen last year is not just a one-time thing, and it’s likely to continue in 2006.”

But REITs got off to a slow start in Japan. One day after the first listing, terrorists brought down the World Trade Center in New York, dealing a blow to financial markets worldwide and highlighting the risk of investing in buildings, REIT industry officials said.

Japanese investors also had looked askance at real estate after being badly burned by the collapse of the asset bubble the early 1990s.

Undaunted, two REITs went public in 2001. Then, from 2002 to 2004, the number of listed REITs on the TSE rose by four per year. Last year, the trusts took off, with 12 new REITs entering the market, nearly doubling the number of REITs from 2004. So far this year, four REITs have listed.

One reason behind the rapid expansion of the REIT market is a change in people’s attitude to real estate investment, Sano said.

“We used to receive many questions about what we would do if prices kept falling” when REITs first appeared in Japan, Sano said.

People were cautious about buying real estate at first, but in the past few years, things have changed for the better, he said.

According to a recent government survey, commercial land prices in the Tokyo, Osaka and Nagoya areas on Jan. 1 rose over previous-year figures for the first time in 15 years, suggesting the country’s stubborn deflation is finally coming to an end.

Although some market watchers worry that soaring land prices in fashionable districts, including Roppongi and Aoyama in Tokyo, presage a new bubble, others say there is a big difference in the way people invest in real estate today compared with the bubble years.

“During the bubble period, there was a so-called land myth, under which people almost blindly believed that land prices would (only) go up,” said Kazuhiro Hirano, senior analyst at Tokai Tokyo Research Center.

Back then, people invested in real estate to make a profit by selling at a higher price than they paid, but real estate investors today look for profits from rents, which provide dividends to REIT holders, Hirano said.

REITs are often thought of as an intermediate financial product between bonds and stocks. Their prices tend to be less volatile than stocks, while their dividend yield tends to be higher than for Japanese government bonds, industry officials said.

Investing in REITs also has a tax advantage: REITs are exempt from corporate tax on revenues distributed to investors if they pay 90 percent or more of those revenues as dividends.

Of course, REITs carry risks — price falls, dividend cuts and the possibility of natural disasters hitting investment properties.

At the moment, higher interest rates are a cause for concern, some REIT industry officials said, referring to the Bank of Japan’s decision to end its ultraloose monetary stance last month.

The central bank has switched back to a conventional interest-rate target policy, lifting its five-year-old “quantitative easing” policy.

The BOJ has pledged to maintain the so-called zero-interest-rate policy for the time being by holding the benchmark short-term rate near zero, but financial markets are waiting to see when the BOJ will start raising short-term rates.

Some are concerned that higher interest rates will cut into REIT dividends, causing them to lose their luster. There are also worries over the weak debuts of some recently listed REIT issues.

But others in the industry argue the recovery of the economy is likely to boost REITs’ popularity by driving rents — and dividends — higher.

Hiromasa Takakura, managing director of the investment banking division at Nikko Citigroup Ltd., said the market is likely to continue to grow due to the trend to monetize real estate assets, while prices will see ups and downs. He noted there is ample room for further growth, as the current REIT market represents less than 1 percent of Japanese real estate assets.

Takakura said that although the image of real estate was hurt after the bursting of the economic bubble, “it appears that the REIT market has finally come to the threshold of normal growth.”

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