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cHaPter 2: Overview Of real estate securitizatiOn
The solutions that securitization offers can be divided securitization vehicles primarily to acquire real estate
into two patterns: 1) Using securitization vehicles exposure.
primarily to dispose of real estate, and 2) Using
Ⅴ History of real estate securitization
The following is an overview of the history of real estate [ 2 ] Small Lot Real Estate Investment
securitization in Japan. Products
The small lot real estate investment products that
[ 1 ] The Budding of Real Estate appeared in 1987 were basically real estate divided into
Securitization small ownership units and sold in units small enough
for retail investors to purchase. The small units were
Some people trace the start of present day real estate
developed because the generally large investment size
securitization back to mortgage securities that appeared in
required for real estate and its low liquidity made it difficult
1931 or the housing loan debt trusts of 1973, but generally
for retail investors to invest. These investments differed
securitization, in its present form, started in 1987 with the
from traditional, direct real estate investment because the
formation of small lot real estate beneficiary interest in trust
operator controlled the equity of each investor so that it was
and the real estate conversion loans of JNR Settlement
effectively a collective investment structure for real estate.
Corporation in 1990. However, it lacked any measures to protect the interests
Either way, the history of real estate securitization of the investors and so many investors suffered large losses
follows the first attempts to transform real estate from after the collapse of the bubble. As a result of these losses
being an expensive real asset with a fixed location into there were calls for a legal system to be established to
small assets that can be easily traded on the securitization protect investors, and the “Real Estate Syndication Act”
markets as they exist today. (see Chapter 4 I.) was enacted in April 1995 with this aim
Figure 2-11 applicatiOn needS and SOlutiOnS FOr real eState SecuritizatiOn
Real estate Development of
risk measures fee business Solutions
Transferring Arrangement fee
real estate Management fee
ownership risk Securing of
Outsourcing of brokering fee, etc. Disposing type Acquiring type
real estate
management
Withdrawal from Realize continual use Acquire the asset off
real estate business simultaneous to moving it balance sheet and use it
and reorganization off balance sheet yourself
Sale and leaseback Buy and lease type
type (The vehicle buys the
(Sell the asset to the asset and then leases
Application needs vehicle and then lease it)
Accounting and it from the vehicle)
Fund procurement settlement measures Expand business
Securitize to separate opportunities without
Execution of asset Off-balance sheet ownership and increasing assets
financing (streamlining management type Fee business type (The
Application of balance sheet) Fee Business type vehicle buys the asset
non-recourse loan Realization of latent (Sell the asset to the and outsources
Application of profits/losses vehicle and contract services)
leverage Handling of for services with it)
impairment Acquire asset or develop
accounting (2006) Securitize to make the with a smaller investment
property easier to sell Asset procurement
Asset procurement type
type
Prepared by ARES
Real Estate Securitization Handbook 2008-2009 31
Figure 2-12 chrOnOlOgy OF the develOpMent OF real eState SecuritizatiOn
Laws, Markets and Rules Cases and Business Entry
March 1987 Supplying of small investment trust real estate products began
April 1989 Supplying of NK small lot real estate products began
September 1990 Council of Real Estate Syndication (CRES) founded February 1990 Supplying of JNR Settlement Corporation small lot real estate products
began
December 1990 Real estate conversion loan of the JNR Settlement Corporation
June 1993 Enactment of the Law Concerning Regulations for Businesses Involving
Specific Credit Obligations (Specific Credit Obligations Law)
April 1995 Real Estate Syndication Act enforced (hereafter, Syndication Act) May 1995 First "lease" product under real estate syndication
December 1995 First TK product under real estate syndication
December 1996 First NK product under real estate syndication
May 1997 Syndication Act revised
Minimum investment unit lowered from 100 million yen to 10 million yen
Deregulation of businesses targeting professional investors April 1998 Securitization of Daiwa Seimei Building and Daikyo rental condominiums
September 1998 Law concerning Securitization of Specific Assets by TMK enforced November 1998 First product under the SPC Law, "Takanawa Apartment TMK"
December 1998 Company investment trusts (securities investment trusts) become March 1999 Launched the supply of the Invest Fund series, a product under the
available through revision of the Securities Investment Trust Law Syndication Act
February 1999 Revision of the Syndication Act April 1999 Launched the supply of the SURF series, a product under the
Minimum investment unit lowered from 10 million yen to 5 million yen Syndication Act
Transfers to third parties now allowed
February 1999 Special Measures Law on Credit Obligation Management and Recovery November 1999 Securitization of the NEC head office building and the Shinjuku Sumitomo
Business (Servicer Law) enforced Building
September 1999 Real Estate Syndication Act revised
Addition of contracts in which the subject real estate can be changed
(replaced)
July 2000 5% was introduced by the Japanese Institute of Certified Public Accountants' October 2000 First registered real estate investment consultant
"5% Rule"
Statement of sale treatment criteria for transferring parties, etc. in real
estate monetization utilizing the TMK method
September 2000 Introduction of the Real Estate Investment Advisor Registration March 2001 First issuance of securitization product backed by housing loan bond of
Regulations the Housing Loan Corporation
November 2000 Revised and enforced the Investment Trusts and Investment Corporations March 2001 Certification of investment trust managers began
Law (hereafter, ITIL) July 2001 Securitization by Leopalace 21 and issuance of preferred investment
Lifting of prohibition on real estate funds (investment corporation and securities for retail investors
investment trust types) September 2001 First two J-REITs launched on the Tokyo Stock Exchange: Nippon
November 2000 Revised and enforced the Asset Monetization Law Building Fund and Japan Real Estate
Simplification of procedures for establishing TMKs, etc. September 2001 Securitization of the Landic Otemachi Building by the Resolution
March 2001 Opened the J-REIT market on the Tokyo Stock Exchange Collection Corporation
July 2001 Elimination of the restriction on minimum investment units under the September 2001 Securitization of the KDDI head office building and three other buildings:
Syndication Act the 190 billion yen securitization was the largest at the time
June 2002 QUICK REIT Index developed February 2002 First issuer rating of J-REIT obtained (Japan Real Estate, S&P)
August 2002 Announcement of "Impairment Accounting Standards for Fixed Assets" September 2002 Launched sale of open monthly distribution type foreign investment trust
by Business Accounting Council with Japanese real estate as its income source (Joint Corporation Group)
December 2002 Association of Real Estate Securitization (ARES) established October 2002 Product with an investment principal of 2 million yen launched under the
December 2002 General draft of tax revisions announced (REIT transfer tax and dividend Real Estate Syndication Act
tax set at 10%)
April 2003 TSE REIT Index launched June 2003 Urban Redevelopment Fund Investment Corporation began operation
July 2003 Opening of market to REIT fund of funds through change in Investment September 2003 First urban redevelopment fund established by Development Bank of Japan
Trusts Association Rules December 2003 Listed J-REITs surpass 10
December 2003 Osaka Securities Exchange launched J-REIT market March 2004 First housing-specific REIT, Nippon Residential Investment Corporation
August 2004 Fukuoka Stock Exchange launched J-REIT market listed
December 2004 Securities and Exchange Law revised and TK investments are designated May 2004 First Osaka Securities Exchange REIT, TGR Investment Inc. listed
to be "deemed negotiable securities"
December 2004 JASDAQ becomes a securities exchange and J-REIT market is launched March 2005 Crescendo Investment Corporation listed as independent REIT on the
December 2004 Trust Business Law is revised and the system for registering beneficiary Tokyo Stock Exchange
interest in trust sellers started May 2005 First logistics-specific REIT, Japan Logistics Fund, Inc. listed
April 2005 Compulsory application of impairment accounting for fixed assets is launched June 2005 Listing of Fukuoka REIT Corporation, the first REIT on the Fukuoka Stock
June 2005 Establishment of Company Law (implemented from May 1, 2006) Exchange
Integration of KK and YK systems July 2005 Listed J-REITs surpass 20
Establishment of limited liability partnership system, etc. November 2005 Listing of Starts Proceed Investment Corporation, the first REIT on
August 2005 Implementation of the Limited Liability Partnership Law (LLP Law) JASDAQ
September 2005 Japanese Institute of Certified Public Accountants issues the Q&A on
Auditing Precautions for Transactions Using SPCs, etc. February 2006 Listing of Japan Hotel and Resort Inc,, the first hotel-specific REIT
April 2006 Revision to the enforcement rules for the Building Lots and Buildings March 2006 Listed J-REITs surpass 30
Transaction Law
Added asbestos investigations and anti-earthquake diagnosis to the
important matters to be explained
May 2006 Implementation of the Company Law
June 2006 Ratification of the Financial Instruments and Exchange Law November 2006 Listed J-REITs surpass 40
December 2006 Revision of the Trust Law October 2007 Industrial & Infrastructure Fund Investment Corporation, the first REIT
September 2007 Implementation of Financial Instruments and Exchange Law (FIEL) specializing in industrial and infrastructure real estate, lists
Implementation of Trust Law
Prepared by ARES
32 Real Estate Securitization Handbook 2008-2009
cHaPter 2: Overview Of real estate securitizatiOn
in mind. This was the foundation for real estate syndication [ 4 ] Development of Securitization and the
products and led to the further development of asset Financial System
monetization.
Here we will switch our view to the financial system and
look at the development securitization has gone through.
[ 3 ] Asset Securitization
Parallel to the development of small lot real estate A. Round Table and Position Paper on Disputed Issues
products, studies were proceeding on asset monetization regarding the Flow of New Financing
and securitization as part of the reforms to the Japanese With the opportunity that was presented by the failure
financial system. The first changes came in June 1993 of the traditional indirect financial intermediary system
with enactment of the “Law Concerning Regulations for which was principally focused on banks, a debate
Businesses Involving Specific Credit Obligations” which is emerged on how to rebuild the Japanese financial
commonly known as the Specific Credit Obligations Law). system. The Round Table on the New Financial Flows
The Specific Credit Obligations Law established restrictions was established by the Financial System Research
on liquidity limited to specific debts such as lease debts and Council after the financial big bang report. This Round
credit debts, and the subsequent revision of the Specific Table published a Position Paper on Disputed Issues in
Credit Obligations Law in April 1996 made it possible to June 1998 and this document was the result of studying
issue asset-backed securities (ABS) in Japan. frameworks for the new financing legal system and
In 1998, the financial system reform laws were enacted accompanying rules; the document indicated that it was
as part of the financial big bang. One of the laws enacted, desirable to move from an indirect financing to a market
with great anticipation for its impact on the disposal of based financing model.
non-performing loans, was the “Law on Securitization of
Specific Assets by TMKs” (commonly known as the former Market financing is a new form of system for channeling
SPC Law). This law was the first law enacted to provide for money from the providers of capital to the users of
comprehensive asset securitization in Japan and real estate capital. In this system the providers of capital, in many
was specifically identified in the law as an asset that could cases household savings, are introduced into the capital
be securitized (the law limited assets that may be securitized market via financial products and financial service
to those specifically listed). companies that transfer the capital to the securitization
The fact that a legal framework had been established vehicles and companies in need of capital.
for securitizing assets was very important, but the
procedures the law imposed were complex and reporting B. Preceding Developments to the Enactment of the
and other obligations under the law were onerous for Financial Instruments and Exchange Law
the participants to meet. To rectify this complexity and The Financial Services Agency (FSA) announced the
promote securitization, the law was revised and the new law “Financial Reform Program – The Challenge to become
was called the “Act on Securitization of Assets” (commonly a Leading Financial Services Country” in December
known as the Asset Monetization Law). This law was 2004. This program stipulated the recognition that
enacted in November 2000 and remains in force today. Japan has entered a new phase “Where execution
The Securities Investment Trust Law was revised in of the ‘Financial Revitalization Program’ and other
1998 to provide for “company” trusts (described later) and measures helped the market overcome emergency
was named the “Law Concerning Securities Investment measures to handle non-performing loan issues and
Trusts and Securities Investment Corporations.” After a enter a phase focused on the future where the aim is to
further revision of the law in November 2000 it was named build a financial system that is desirable for the future.”
as the “Investment Trusts and Investment Corporation In other words, “We are in the midst of shifting from
Law” and is commonly referred to as the Investment Trust financial policy that emphasizes stability of the financial
Law. This law regulates the direct management of real system to financial policy that emphasizes the vitality of
estate as an investment product. the financial system.”
Thus, basic laws for asset monetization and asset
management were firmly established by 2000 and the legal The program lists “Expansion and enrichment of capital
framework was in place for creation and regulation of the raising methods that are not overly dependent on real
system and structure of securitization conduits (vehicles) for estate collateral and guarantees” as one of the “system
real estate securitization – TMKs, investment corporations designs for providing diverse, strong financial products
and investment trusts. and services.” This statement indirectly speaks to the
great expectations for even further expansion of real
estate securitization methods.
Real Estate Securitization Handbook 2008-2009 33
The First Subcommittee of the Financial System Council appropriate protection of users and prevention of
continued to debate the “establishment of an investment unfair transactions in the marketplace.
service law (provisional name)” that was indicated in the
sections on “preparing and thoroughly implementing 5. Basic Framework of the Investment Services Law
rules to protect users in line with financial conditions” and • There is a need to review the present vertical business
“enhancing market functions and improving market trust.” law and to strive for a legal system for broad financial
products.
The First Subcommittee of the Financial System Council • It is appropriate to position the Investment Services
announced the framework of the Investment Services Law as a law with general characteristics governing
Law on December 22, 2005 as “In Preparation for the the sale of financial products and the management of
Investment Services Law (provisional name).” The assets and its enforcement rules should be applied to
report outlined the aim and objective of the Investment financial products with the same economic functions
Services Law in the following manner. regardless of the business type.
• Laws with identical characteristics should be
1. Dedicated Rules to Protect Users and Improvement integrated as much as possible into the Investment
of Use Convenience Services Law including laws governing foreign
• It is necessary for gaps that are not filled by present securities companies, laws on regulations of
rules to protect users to be filled by preparing investment advisors related to negotiable securities
a framework for comprehensively and laterally and the Financial Futures Trading Law.
protecting users with regard to broad financial • It is also advisable to review the content of the Law
products. It is also necessary to review the present on Sales of Financial Products and integrate it into
vertical business law and to apply identical rules to the Investment Services Law.
financial products with the same financial functions.
• It is necessary to achieve a balance with the necessity C. Overview of the Financial Instruments and Exchange
to protect users by constructing a flexible regulatory Law
structure such as deregulating regulations made with Later, the provisionally named Investment Services
the ordinary investor in mind in situations where Law was formally named the Financial Instruments
specific investors (professionals) are the customers. and Exchange Law (FIEL). The “Act on the Partial
Revision of the Securities and Exchange Act” and the
2. Securing Market Functions to Prepare for the Shift “Law on Various Legal Steps Related to Enforcement
“From Savings to Investment” of the Act on the Partial Revision of the Securities and
• There is an indispensable need for continuous Exchange Act” were ratified during the 164th ordinary
measures to secure constant overall financial and session of the Diet on June 7, 2006 and had the name
capital market rules and to secure the ability to changed to FIEL when promulgated on June 14. The
implement these so that market functions can be law was enforced at on September 30, 2007.
secured that are built around a fair and smooth price
formation in preparation for the shift from savings to The FIEL newly regulates the fund investment manage-
investment. ment business among the managers of collective
investment schemes. As a result, SPEs, which accept
3. Appropriate Measures for the Internationalization of funds from investors and manage them and to date
Financial and Capital Markets were almost entirely unregulated, are now the subject
• There is an urgent need to establish the infrastructure of regulations. However, business requirements
for further heightening the appeal of the Japanese and activity regulations for managers of products
market as an international market within the ever for professionals were deregulated and regulations
progressing globalization of financial and capital for exceptional businesses which operate funds from
markets. qualified institutional investors were established. These
businesses can manage funds just by reporting such
4. Need for the Investment Services Law (provisional activities rather than registering with the government.
name) In this way, the FIEL has also taken steps to prevent
• The appropriate step is to rearrange the Securities itself from blocking financial innovation. The FIEL
and Exchange Law and establish the Investment also newly stipulates general beneficiary interests in
Services Law with the objective of building a fair, trust as “deemed securities.” As a result, the advice and
efficient, transparent and rich financial system that such given by the asset manager to an SPE in a single
can adequately demonstrate market functions based layer structured fund like the LLP (YK) – TK structure
on the axis of fair and smooth price formation through for the purchase or sale of real estate that had been
34 Real Estate Securitization Handbook 2008-2009
cHaPter 2: Overview Of real estate securitizatiOn
transformed into beneficiary interests in trust is now investment corporation and such structures have been
subject to regulations. left under the governance of the Investment Trusts Law.
Further, the beneficiary interest in trust dealers under
In addition, the registered investment advisors and the Trust Business Law has been transferred to the
certified (discretionary) investment advisors who were FIEL and classified as a type 2 financial products dealer.
traditionally under the “Act on Regulation, etc. on
Investment Advisory Business Pertaining to Securities” Initially many voiced the opinion that the Real Estate
(hereafter, Investment Advisors Act) are now covered Syndication Act should be folded into the FIEL, but
by investment advisors and investment managers it was decided to leave it as an extraordinary law as
regulations in the FIEL as the Investment Advisors Act it contains many investor protection regulations that
has been abolished. In the same manner, the investment consider the uniqueness of real estate. However, in
trust consignment managers governed by the Investment order to ensure it maintains consistency with the FIEL,
Trusts Law are now covered under investment regulations were added that comply with the rules on
consignment managers within the FIEL. However, the prohibiting the covering of losses and the principle of
business requirements and activity regulations placed conformity.
on the investment trust consignment managers and asset
managers, which were classified as asset managers under Chapter 3 Financial Instruments and Exchange Law and
the Investment Trusts Law, are now regulated under the Real Estate Securitization provides details on the FIEL.
FIEL as investment consignment managers but other
Ⅵ Overview of Market size
Figure 2-13 and Figure 2-14 present the results of the Transport that has been conducted annually since 1997.
Fact-Finding Study on Real Estate Securitization issued They are graphical presentations of the results published
annually by the Ministry of Land, Infrastructure and in the “Annual Report on Land Trends” (the “Land White
Figure 2-13 hiStOry OF real eState SecuritizatiOn By aSSet and Quantity
Asset Value (billion yen) Cases
9,000 1,800
8,272.7 8,439.5
1,582
8,000 1,642 1,600
1,524
Re nance or resale of non-J-REIT assets 6,930.1 1,910
7,000 1,400
Non-J-REIT 2,470
1,170
6,000 5,335.0 1,200
J-REIT 1,119
5,000 Cases
1,000
1,110 4,330
3,983.7
4,000 800
420 3,990 4,290
3,000 2,777.7 600
2,540.9 620
3,330
2,170
2,000 1,867.0 343 400
269
1,167.0 2,890
161 2,030
1,000 2,240 1,770 1,680 200
74
315.5 900
61.6 9 610 680
26 300 0
0
FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
Note 1: This figure covers not only those for which securities were issued (narrow definition of securitization) but also those for which funds were procured through
borrowing, etc. (broad definition of securitization) from the viewpoint of grasping the overall volume of real estate securitization.
Note 2: “Refinance or resale of non-J-REIT assets” refers to the asset value of properties reported to be refinanced or resale of those beneficiary trust interests that
were securitized in non-J-REIT vehicles. Therefore, the actual value may be larger than presented here. Further, this category has not been researched in
fiscal 2002 or earlier.
Note 3: As for J-REITs, an investment corporation is treated as one case.
Note 4: The breakdowns have been rounded and so their sum total does not match the grand total.
Note 5: The values for Fiscal 2007 are unofficial figures.
Source: Fact-finding Study of Real Estate Securitizations by the Ministry of Land, Infrastructure and Transport
Real Estate Securitization Handbook 2008-2009 35
