(1) The Future Direction of Securitisation The market for real property securitisation in Japan is expected to expand due to the development of better systems for securitisation, such as the further development of legal structures based on the needs of originators and investors, and through product diversification resulting from increased experience with securitisation. As a result, it is expected that a wider group of investors will penetrate the market, investment in real property will be promoted, the real property market will be reinvigorated and better land use will be accomplished. Under these circumstances, as the securitisation of prime properties increases and by making use of funds from the above securitisation, it is anticipated that more active cases of securitisation will increase, such as the supply of residential properties, urban development and securitisation of projects under development. As a result, it is anticipated that utilisation of land and property use will be promoted. Under the current "Asset Liquidation Scheme", the investment opportunities for individuals were limited because few public offerings were undertaken. But as real property securitisation begins under the "Asset Investment Scheme" securities with a unit size of JPY 500,0007 are planned. It is expected that investment opportunities for individuals will increase, as public offerings are promoted in order to raise funds more broadly but in smaller increments. 7 US$ = JPY (Japanese Yen) 118 (as of 20 September 2001). JPY 500,000 = US$ 4,200 (2) The Promotion of Real Property Securitisation Based on the future direction of securitisation outlined above, the following issues need to be resolved for the effective promotion of real property securitisation. 1) Offers of Attractive Securitised Products (Improvement of Products) In order for real-property-securitised products to be accepted by wider groups of investors, including individuals, it is necessary that a variety of attractive products reflecting different investor requirements be provided. The offering of well-designed, lower risk products should help attract the funds of individual investors away from savings and deposits. Currently, more than half of the financial assets held by individuals are low risk deposits and savings. Moreover, in order to make real-property-securitised products more attractive, it is necessary for securities to be tradable, allowing them to be high liquidity, "freely" purchased and sold by investors. A market for the Real Estate Investment Fund was established at the Tokyo Stock Exchange in March 2001, and the future trend should be watched carefully. During the formative stages of the new market sector, government guidance and control will be necessary so that real-property-securitised products will be attractive for portfolio management. (Explaining and Understanding the Characteristics of Real-Property-Securitised Products) In order to continuously promote effective real property securitisation, the investor's understanding of the characteristics of securitised products is essential. If only the higher return is emphasized and investment is made without full understanding of the risk factors, the investment in real-property-securitised products will not be repeated by investors when risks materialise and losses are experienced. To prevent such problems, written offers to invest in real-property-securitised products and oral presentations to potential investors must be well prepared and fully explain the products' characteristics, as well as the transaction prices of the subject properties and return-related information (e.g. tenant information, and other appropriate disclosures) based on the Securities and Exchange Law. 2) Establishment of Better Environment for Promotion of Securitisation (Rationalising the Rental Agreement) With regards the rental and leasing of properties in Japan, the "normal rental system" used for residential properties is also used in the case of office and commercial properties (under the "normal rental system" the rights of landlords are to some degree regulated in order to protect the rights of residential tenants deemed to be in a relatively weak position). When landlords advise tenants of non-renewal or cancellation of rental agreements the so-called "Due Cause" System limits the landlords' right to terminate them, even when such cancellation is stipulated in the agreement with three to six months notice. Landlords must show "reasonable cause" for refusing to renew or cancel rental agreements: for example, the landlord may require the subject property for his/her own use. Supplementary lease provisions are also common. Usually it may be agreed that the tenant can terminate the rental agreement with one to six months prior notice. Under these conditions, the termination period of the rental agreement is unpredictable, and it is pointed out that the revenue streams from securitised property, which are essential to successful real property securitisation, are also unpredictable. From the viewpoint of promoting the supply of attractive properties for securitisation, the diffusion of rental agreements under which stabilized and planned revenues are predictable, such as under fixed term rental system (Note5) and net-leases (Note6), is anticipated.
(Establishment of Property Investment Indices) In addition to the disclosure of transaction prices of subject properties and accurate information relating to revenue, such as tenant information, a system for providing comparable sale and lease documentation and analysis is necessary. Establishing and presenting property investment indices is important, because they are useful for making investment decisions and evaluating past management results by allowing comparisons to be made between individual results and the overall trend of the indices. (Property Evaluations Based On Income Stream) In order to precisely reflect the risk/return potential of a subject property, it is important that during the process of implementing securitisation due diligence is conducted with respect to the physical attributes of the property including structure, building equipment and deferred maintenance; the legal matters such as the contents of rental agreements and the rights and interests of parties with respect to the subject property; and economic factors such as the rent-paying abilities of tenants and the prospects for development in surrounding areas. Also, it is important that property evaluations are based on income factors (Note7).
(Advancement of Related Service Industries such as Property Investment Advisors) The development of securitisation in real property will cause the separation of parties who invest in properties from those who manage and operate them. If real property securitisation is to enable a wider group of investors to enjoy and benefit from the high-quality services provided by the real property service industry, including adequate management services which fully utilize the potential income stream of the subject property, it is necessary for related industries to be supported, such as property investment advisors who are discretionarily entrusted with decision making and conducting investment, and property managers who conduct management of the real property. With respect to the above, a registration system for property investment advisors was established in September 2000, and as of the end of March 2001, seven composite property investment advisors and 157 general property investment advisors were registered. Further, regarding the investment trust management corporation, who will be entrusted from the Real Estate Investment Corporations to manage the investment, two corporations were authorised (as of end of March 2001). With respect to property investment advisors, it is necessary to hold seminars and other educational opportunities in order to enhance their advisory abilities, to introduce fee standards and to discuss means of standardizing their advisory agreements. 3) Miscellaneous (Securing Prime Properties for Securitisation) In order to establish and offer attractive securitised products in which a wider group of investors are likely to become interested, it is necessary that many properties which have the high returns that investors require be secured for purchase at prices reflecting their risk/return profile. In relation to securitised products currently under development, it is noted that the number of properties that satisfy conditions regarding rental incomes and occupancy ratios is limited. In order to improve returns and reduce risk factors, it is necessary to increase the supply of prime properties by positively promoting the remodelling and reconstruction of existing properties. As real property securitisation takes off, new properties can be built specifically for this purpose. (Considerations for Utilization of Securitisation in Development Projects) In relation to so-called development type securitisation, in which funds are raised by scrutinizing projects under development, it is observed that cases involving the construction of condominium apartments and commercial properties are based on the SPC Act. From the viewpoint of realizing prime development projects and restructuring urban areas, the use of such securitisation needs to be enhanced. Problems related to the securitisation of projects under development are as follows:
In relation to the above, it is noted that:
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