Section 3  Establishment of a Land Market that Revitalizes Real Property Investment

In order to revitalize real property investment and improve land liquidity, it is necessary to improve the way the land market operates.

1.  Improvements in the Development and Presentation of Land Information

(1)  In the current land market, unlike before, it is essential that decisions about real property investment are made only after analyzing cash flow projections and risk-return profiles with the utmost level of precision. Accordingly, it is necessary to upgrade the presentation of information that is required for determining profitability, such as transaction prices and rent levels.

(2)  Here are some examples of the presentation of transaction prices in Europe and the United States.

a.  Examples where transaction prices are disclosed in land registration documents and other records.

-  In France and Britain, transaction prices are listed in the land register and are open to the public.
-  In thirty-six states in the USA, transaction prices are described in the land-transfer certificates submitted for registration and tax purposes, and are open to the public.

b.  Example in which price information is calculated and presented from transaction prices

-  In Germany, transaction prices are not open to the public, but valuations based on transaction prices are conducted by a district committee of appraisers (established by local government). These valuations are shown on a map and disclosed to the public.

However, in France and Britain and some other countries where transaction prices are also disclosed, the situation is as follows:

-  Transactional land area and measurements and qualitative information about real property, such as grade of property, are not recorded in the land register;
-  When multiple real properties are sold at once, it is difficult to obtain from the land register an accurate idea of the transaction price for each property;
-  In an investment situation where it is not in fact a real property transaction, but rather the sale or purchase of a company which owns real property, such transactions are not registered because the owner of the real property remains the same.

There are also differences between the disposal of land without buildings and liens, and the sale of real property (including land and buildings). Special circumstances also apply with each transaction. Therefore, in France and Britain and some other countries, as mentioned above, disclosed prices are not used as they are. Instead, the information is assembled by private companies, and used in conjunction with property investment indices.

(3)  Based on case studies in Europe and the United States, it is considered important to establish property investment indices, which help in determining profitability - which, in turn, is essential in decision making for investment purposes. In order to establish a property investment index, index providers need to fully utilize transactional information and make it available, including transaction prices and rent information.

In Japan, the private sector has already tried to prepare such property investment indices, but has experienced problems in the formulation process. The Central Government is currently studying the establishment of guidelines for the formulation of such indices.

In order to establish a high quality property investment index, it is important that information on actual transaction prices, etc is widely collected, and that the extrapolation of such information is promptly studied in line with case examples in Europe and the United States.

2.  Real Property Valuation Methods that Attach Importance to Profitability

Traditionally, in Japan real property valuations have been based on vacant land without buildings and liens, but these days it has become obvious that demand is increasing for valuation methods which include land and buildings as units of real property, and accurately reflect the cash flow potential of the property. In order to implement advanced and diversified valuation methods, it is planned to revise the Real Estate Appraisal Standard as follows:

<Major Policy Aspects Affecting Revision of the Real Estate Appraisal Standard>

a) Improvement of Real Estate Appraisal Methods (income approach)
In order to calculate accurately the effect of cash flow derived from multi-use real properties on the value of the properties concerned, a Discount Cash Flow method (in which projections regarding risk and return are evaluated) will be introduced, in addition to the Income Capitalization approach.

b) The Importance of Wider Market Analysis
These days, the utilization of land and buildings has become more varied, and there is a tendency for price formation to be influenced by wider market trends. This underlines the need to analyze supply and demand trends for similar real properties in a wider context that considers substitution relationships and competitive relationships vis-a-vis the subject property.

c) Upgrading of Precision Research
In order to analyze and understand profitability more precisely through the research of subject properties, such research will be upgraded to include items related to building structure, specifications, environment (including soil contamination) and underground encumbrances. It will also identify instances where specialists in different areas should be utilised.

d) Adjustment of Price Estimates
In relation to price estimates calculated by the three different methods (income approach, comparison approach and cost approach), the existing approach (in which all three estimates should be equally weighted) will change. Instead, it will be made clear that future valuations are to be determined after deciding which of the price estimates is the most appropriate, based on the character of the subject real property.

e) Improvements in the Explanation of Appraisals
To assist clients and general investors in understanding the contents of appraisals, the results of research and analysis, and the processes used to evaluate prices, will be described more clearly in appraisal reports.

3. Diffusion of Real Property Securitization

(1) Current Status of Real Property Securitization

In fiscal 2001 (April 2001 to March 2002), the securitization of real property was still active, particularly in relation to real property investment funds. In March 2001, the Tokyo Stock Exchange opened up market for the real property investment funds. By the end of March 2002, three funds had been listed. (Around 490,000 units in total, with a market value at the end of March 2002 of around JPY 260 billion).

The current status of real property securitization in Japan is as follows:

a)  In fiscal 2001, the amount of real property subject to real property securitization was valued at around JPY 3,000 billion, an increase of 59% over fiscal 2000. The accumulated asset value up until fiscal 2001 was JPY 6,400 billion.

Chart 1-3-1  Trends in the Achievement of Real Property Securitization

Source:"Survey of Actual Conditions in Real Property Securitization" by Ministry of Land, Infrastructure and Transport
Note:"Real Property Investment Corporation (Fudosan Toshi Hojin)" was counted as an investment corporation

b)  The major functional uses of securitized real property (based on the total asset value of such properties) were as follows: offices at 65.1% were the highest, commercial properties accounted for 11.4% and residential properties 6.2%. These three uses represent around 80% of the total.

The reason that offices represent the highest proportion is that investment in offices was mainly conducted by property investment funds, and also because many corporations liquidated their offices in order to improve their financial positions.

c)  The so called development-type securitization, under which real property under development is securitized and liquidated, with the funds raised being used for the actual development of the property, has reached a total asset value of JPY 180 billion involving 23 cases.

d)  Real properties and trust beneficiary rights acquired by real property investment funds amounted to JPY 600 billion. Based on asset values by use, offices accounted for 85.4%, and commercial properties comprised 9.8% of the total.

Chart 1-3-2  Proportion of Securitized Real Property Assets by Types of Property Use


Source:Survey by Ministry of Land, Infrastructure and Transport
Note 1:"other properties" include:
  ·  uses other than offices, residential properties, commercial properties, factories, warehouses and hotels (such as parking spaces and research centers)
  ·  properties put to multiple uses
  ·  multiple property securitizations where properties are under different uses
Note 2:the securitization of real properties in kind in fiscal 2001, under the SPC Act, was eliminated because the uses of these properties are unexplained

(2)  Future Directions in the Promotion of Real Property Securitization

a)  Regarding real property investment funds, it is necessary that more of these funds be listed and offered, and that real property investment funds compose a variety of investment guidelines (covering the location and use of subject properties).

b)  Measures that promote real property securitization should also be utilized such as the presentation of information concerning real property transaction prices and information affecting the returns available (such as tenant information). Also, property investment indices, which evaluate the past performance of real property investments, need to be developed and presented.

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