The Real Estate Companies Association of Japan

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REAL ESTATE in Japan

REAL ESTATE SECURITIZATION

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  • History and Progress of Real Estate Securitization

Real estate securitization is a technique to obtain liquidity in real estate transactions, which are typically high-priced and illiquid, by dividing ownership into investment units or securitizing the right to receive cashflow from real estate.

Real estate securitization goes back to the mortgage securities system founded in 1931, but the beginning of securitization in the current sense is thought to have emerged in real estate small lot products in 1987. Laws around real estate securitization continued to be developed with the 1995 enactment of the Act on Specified Joint Real Estate Ventures and the 2000 revision of the Law on Securitization of Specified Assets by Special Purpose Companies (former SPC Law) to the Act on Securitization of Assets (SPC Law), simplifying the procedures for asset monetization-type real estate securitization. Moreover, the revision to the Act on Investment Trusts and Investment Corporations that same year made real estate a possible management asset of investment trusts and this led to the launch of Japanese Real Estate Investment Trusts (J-REITs) in 2001. Now, management assets are diversifying with the emergence of J-REITs specializing in hotels, logistics facilities, healthcare facilities, etc.

The backdrop to this progress in real estate securitization includes the change in thinking about risk regarding real estate, precipitated by the drop in land prices after 1990 and the increase in corporate need to separate real estate ownership and management. It was also helped by the major shift in financial and capital markets from indirect finance to direct finance, turning investment real estate into a financial product.

  • Specific Securitization Methods

(1) Real estate investment trust
Real estate investment trusts are a collective investment scheme in which funds are gathered from investors and managed mainly in real estate, whose earnings are then distributed to the investors.

Investment trusts are a financial vehicle in which funds are gathered from many investors and managed by investment professionals and earnings are distributed to investors. Traditionally, the primary vehicle managed in this structure was limited to investment securities. However, based on a partial amendment of the Act on Investment Trusts and Investment Corporations in 2000, real estate was recognized as an investment vehicle for trusts, and in September 2001, the first two real estate investment trusts (J-REITs) were listed on the Tokyo Stock Exchange.

(2) Asset Monetization Securitization
Asset monetization securitization is a type of real estate securitization in which companies with real estate transfer it to a vehicle* such as an SPC, which issues securities to investors to raise capital. It aims to securitize specific properties, so these cannot be interchanged.

(3) Securitization by Real Estate Syndication
Real estate syndication, based on the Real Estate Specified Joint Enterprise Act enacted in 1995, is when multiple investors jointly invest in real estate to own and manage the real estate and obtain earnings from it. In order to protect investors, licensed companies that meet the criteria with respect to capital and personnel qualifications may raise funds from investors.

The act was revised in 2013 to separate companies’ risk of bankruptcy and in 2017 to make implementation possible through notification alone in cases where only qualified special investors such as institutional investors are targeted. This revision also established a small-scale real estate special joint business system. Other regulation easing includes recognizing contracts granted online, regardless of project scale.

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