Japan May Change Property Trust Rules, Minister Says

Japan May Overhaul Property Trust Regulations
Residential buildings in Tokyo. Japan 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, Mabuchi said. Photographer: Tomohiro Ohsumi/Bloomberg

Japan 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, a land minister said.

The government may revise the regulation to allow the trusts, known as J-REITs, to retain more than 10 percent of their earnings to finance operations, said Sumio Mabuchi, vice minister of the Ministry of Land, Infrastructure, Transport and Tourism. 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 in an interview in Tokyo. “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 Japan’s 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. Japan opened the REIT market in September 2001, playing catch-up in developing the securities pioneered by the U.S. in the 1960s.

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

Stable Dividend

The REIT benchmark was little changed, down 0.01 percent at the 3 p.m. local close in Tokyo, trimming an earlier loss of as much as 0.7 percent.

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 requisite after audit to receive tax breaks, said Hirotaka Uruma, the chief financial officer at Daiwa House Morimoto Asset Management Co. in Tokyo.

“There is not much buffer under the current rules,” said Uruma. “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,” said Mabuchi. “That may mean reviewing the actual set up of the Japan REIT market from the very beginning.”

J-REITs represent about 20 percent of Japan’s 45 trillion yen ($535 billion) securitized real estate market, government data show. The market was created as a financial tool that pools assets into tradable securities, making investments easier and creating liquidity in the property market.

The bankruptcy of New City Residence Investment Corp., a residential REIT, in October 2008, prompted the government to introduce a fund that would invest as much as 500 billion yen to help J-REITs refinance their debt last year.

The TSE REIT Index had a record market value of about 6.79 trillion yen in May 2007, compared with about 3 trillion yen today.

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