The Journal The Authority on Global Business in Japan

Opinion | Real Estate

September 2013

REFORM, REVISE, RESTRUCTURE
Abe must act or the real estate market will stall

By Seth Sulkin

According to a recent report from broker Jones Lang LaSalle (JLL) as covered by Bloomberg, Abenomics “has helped boost property transactions in Japan.” Japanese real estate investment trusts (J-REITs) in particular are expected to account for more than 70 percent of transactions in Japan, the news agency reported.

But a closer look at the data shows a somewhat different story. Acquisitions in the first half of 2013 by two newly listed J-REITs—GLP J-REIT and Nippon Prologis Reit, Inc.—represent about ¥500bn worth of assets. Both these listings had been in the works before Abenomics, so if you exclude their combined acquisitions, the growth rate is not so exciting.

Moreover, contrary to widespread Japanese and international media reports about a flurry of international investments in Japanese property, JLL noted in its report that “99% of all Japanese transactions remain domestic.”

That is not to say that the potentially record amount—projected at ¥900bn according to Deutsche Bank—of capital to be raised by J-REITs in 2013 is insignificant. But the real question is whether they can spend all of that money and, if so, are there enough institutional-grade assets to buy?

Prime Minister Shinzo Abe’s vaunted third arrow of structural reform has not yet left its quiver, so significant measures are sorely needed for long-term growth. To help expand liquidity in the real estate market, here are three changes that Abe should consider.

1. Reform of the inheritance law

Unlike the United States, where one can freely give away all assets to family, friends or charity, Japanese law guarantees spouses and children a share of the deceased’s assets.

While cash and securities can be easily shared, dividing land and buildings among family members is complex. The inheritance law further divides properties into tiny slices, so assembling large development sites becomes increasingly difficult over time. Allowing flexibility in how inherited assets are allocated could relieve this problem.

2. Revision of the Act on Land and Building Leases

Compared with other major global cities, Tokyo remains plagued by dilapidated and pencil buildings.

The main obstacle to redevelopment of old buildings and the consolidation of small buildings into larger development sites is the difficulty in evicting tenants. Building leases created under this law effectively allow the tenant the right to stay in perpetuity.

Although a fixed-term lease law was introduced in 2001 to offer landlords more control over their properties, most landlords of smaller and older buildings continue to use traditional leases. So potential buyers looking to assemble multiple properties for a large redevelopment face great uncertainty regarding the time needed, and the cost of negotiating, to remove tenants.

Creating a legal mechanism allowing landlords to evict tenants by paying fair compensation would open vast chunks of Tokyo to redevelopment.

3. Restructuring or elimination of the Urban Renaissance Agency

Established by the government in 1955 to develop public housing at a time of great shortage, the agency is now a massive, multi-use developer. Not only does it take on projects too large and complicated for the private sector, it also competes with, and often interferes in, the commercial property market.

The agency’s income-producing properties should be sold off at auction. This would add a considerable supply of high-quality residential properties for REITs to gobble up, while lowering government debt.

The agency is also a major lessor of land, especially fixed-term ground leases to regional shopping centers. Selling this land at market prices would revamp assets that are now stuck in limbo because of the agency’s intransigence; resulting in many large-scale, institutional-grade properties.

Without these changes, REITs will not be able to use the money they raise in 2013 without dramatically lowering asset quality. This would cause the overall real estate market to stall from a lack of stock to trade. •

Acknowledgment

With the help of Jim Fink and the outstanding team at Colliers International, the ACCJ recently concluded new agreements for the offices we are leasing in Tokyo and the Kansai region. Collier International’s knowledge of the market, skill in negotiating, and understanding of the needs and future direction of the chamber were all important factors in reaching agreements that should benefit all of us in the chamber. The ACCJ would like to thank Jim and his team.

The opinions expressed in this article belong to the writer and do not necessarily represent those of the ACCJ.

Seth Sulkin - ACCJ Journal

Seth Sulkin is president and CEO of Pacifica Capital K.K.

Creating a legal mechanism allowing landlords to evict tenants by paying fair compensation would open vast chunks of Tokyo to redevelopment.”