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The government will consider relaxing tax requirements as part of changes to rules for real estate investment trusts after the market shrank by more than half in the past three years, according to vice land minister Sumio Mabuchi.

The regulation to allow the trusts, known as J-REITs, may be eased to retain more than 10 percent of their earnings to finance operations, Mabuchi said.

Currently, J-REITs must pay out more than 90 percent of their profit to investors as dividends to receive tax breaks.

“The REIT market has shrunk too much,” Mabuchi said. “We must consider ways for REITs to retain some of their earnings without losing tax breaks, because currently they are forced to keep seeking financing as they tend to pay out nearly all their earnings.”

The changes being considered are the second effort by the government in a year to revive the J-REIT market after the 37-member TSE REIT Index lost 65 percent from its peak in May 2007 as the global credit crisis made it harder to refinance loans and raise capital to buy properties.

The domestic REIT market opened in September 2001, playing catchup in developing the securities pioneered by the U.S. in the 1960s.

A bill may be prepared for debate in the next year’s Diet session, which usually starts in January, Mabuchi said. He declined to elaborate, saying it will depend on discussions within a committee that was formed to promote real estate investments.

Under the current regulation, J-REITs typically pay out almost 100 percent of their earnings to investors, partly because they want to make sure they achieve the above 90 percent requirement after audits to receive tax breaks, said Hirotaka Uruma, chief financial officer at Daiwa House Morimoto Asset Management Co.

“There is not much buffer under the current rules,” Uruma said. “A revision to lower that requirement would help REITs’ operations and stabilize dividend payouts.”

The government may also consider granting J-REITs the ability to issue convertible bonds to help them boost finances, Mabuchi said. The trusts can currently only raise funds by selling new shares, bonds and properties, and taking out loans.

“We probably need to look at the issue from its root,” Mabuchi said. “That may mean reviewing the actual setup of the Japan REIT market from the very beginning.”

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