Chapter 3 New Developments in Real Estate Investment Market and Future Direction
Section 1 Developments in Real Estate Investment Market
 (Trend in Real Estate Investment Market)

　　　The market for real estate investment utilizing the "real estate securitization*1quot; scheme has been expanding recently.
　　　This has led to active real estate acquisitions, which are cited as a factor behind the spreading recovery in land prices.
Chart: Changes in Real Estate Securitization Deals
　　　*1 Under a real estate securitization scheme, a TMK (Tokutei Mokuteki Kaisha) special purpose company is founded for the sole purpose of issuing securities for purchase by investors, investing proceeds from securities sales in real estate assets and allocating returns (including rental income) on investment to investors. Attention is paid to profitability of investment target assets.
　　　Deals in which J-REITs*2 or SPCs purchase real estate assets have expanded their share of real estate transactions involving public traded companies. On a trading value basis, J-REITs and SPCs accounted for some 60% of real estate purchases in FY 2007.
Chart: Breakdown of Publicly Traded Companies' Real Estate Transactions by Buyer
(J-REIT trends)
　　　The prices of investment securities of J-REITs (investment corporations) rose sharply between the end of 2006 and the first half of 2007 and have been declining since June 2007. Compared with around the end of May 2007, the prices were down more than 40% at the end of March 2008.

　　　Although the prices rose due to an influx of abundant investment funds amid expectations of a rise in real estate prices, they fell after hopes for a further price increase faded. In particular, the J-REIT market is believed to have been significantly affected by an outflow of foreign funds and the deterioration of the fund-raising condition due to the financial market turmoil triggered by the subprime mortgage crisis. Therefore, it is important to keep watching how the subprime mortgage crisis will affect the Japanese economy and real estate market.
　　　*2A J-REIT is an investment corporation formed under the Law Concerning Investment Trusts and Investment Corporations. At the end of March, 2008, 42 J-REITs were listed.

Chart: Trend in J-REIT Index and Market Capitalization

　　　Recently, the pace of increase in real estate acquisitions by J-REITs has slowed due to a shortage of excellent real estate assets suitable as investment targets, a price rise in central Tokyo, and a decline in the number of new J-REIT listings. However, the total size of J-REIT-owned assets is continuing to expand.

Chart: Changes in J-REIT-Owned Assets (By region /Cumulative Acquisition Prices)

(Utilization of securitization schemes in non-metropolitan regions)
　　　An expansion of the real estate investment market is important as it attracts new buyers, leads to the establishment of excellent urban infrastructure through the diversification of risks, and enhances market transparency through increased information disclosure. The securitization of real estate assets contributes to increasing the value of real estate, by separating the real estate ownership and management and consigning the management to highly motivated and competent managers. Thus it may play a major role in local community building and regional revitalization efforts.

[Case] Local securitization scheme (Hamamatsu City, Shizuoka Prefecture)


　　　Maruhachi Fudosan Co., Ltd., a real estate company based in HamamatsuCity, has established the first fund that invests in condominiums in the city through a securitization scheme, the participants of which (investors, lawyers, certified public accountants and financial institutions) were selected mostly from among local experts.

(Ongoing globalization of the real estate market)
　　　Amid the expansion of international real estate investment, interest in Asia has grown and investment in the Japanese real estate market, which is the world’s second largest after the U.S. market, has increased.

Chart: Size of Real Estate Markets Around the World

Chart: Amount of Investment in Commercial Real Estate (By Region)

　　　In 2007, the amount of foreign investment in Japanese real estate has expanded sharply.

Chart: Trend in Amount of Cross-Border Investment in Asia

　　　A comparison of the returns on real estate investment in major countries shows that investment in Japanese real estate is favorable for investors due to the relatively large gap between long-term interest rates and the income return in Japan.

Chart: Yield Gap in Major Countries
(Office income return minus the yield on the 10-year government bond)

　　　In line with the ongoing globalization of the real estate market, the activities of foreign investors have come to have a large impact on the Japanese real estate market.
　　　Foreign investors account for a large portion of the trading volume in the J-REIT market. Reflecting the significant influence of foreign investors, the prices of J-REIT investment securities continued to rise when foreign investors registered a large amount of net purchases, and have been on a downtrend since they began to register net sales.

Chart: J-REIT Investment Lots and Shares for Foreign Corporations and Individuals


Section 2 Sentiment of Participants in Real Estate Investment Market
(Domestic investors)
　　　In response to a questionnaire survey about the basic stance on real estate investment, domestic investors, including corporate pension funds, financial institutions and J-REIT asset managers, generally indicated a positive stance in the medium to long term although there were some differences of stance between investor types.

Chart: Future Stance on Real Estate Investment and Financing
(Upper Row: After one year. Lower Row: Medium to long term)

　　　Asked about how the environment for real estate investment should be improved in order to promote further market growth in the long term, a large proportion of the surveyed domestic investors pointed to the need for improvement regarding “compliance and information disclosure” and “real estate investment information infrastructure development.”

Chart: Policy Challenges and Need for Measures for Future Real Estate Investment Market

(Foreign investors)
A questionnaire survey of foreign investors about their outlook on the condition of the real estate market in each region over the next one year indicated their hopes for the economic growth of the Asian region, which offers a contrast with the slowdown of the U.S. and European economies.

Chart: Country-by-Country (Region-by-Region) Outlook on
Future Real Estate Market Condition (In About One Year)

　　　Foreign investors’answers to questions concerning the importance of various investment decision factors and their assessment of Japan regarding these factors, showed that Japan was given the highest assessment with regard to “economic size,” while it received a low assessment with regard to “growth potential of the economy” and “growth potential of the real estate market.” In addition, Japan generally received a low assessment on items related to the improvement of the infrastructure for real estate investment, such as information transparency, multilingualism and investment indexes.

Chart: Foreign Investors’ Assessment of Japan’s Real Estate Market

　　　Volatile price fluctuations due to a rapid inflow or outflow of funds cause disruptions to land utilization, thereby producing a large impact on the people’s lives.
　　　In order to establish a stable cycle of funds that contributes to the sound maintenance and development of the Japanese real estate market, it is important to make the market more transparent and attractive by improving the provision of information and enhancing real estate appraisal services, to ensure a sustained and stable inflow of long-term domestic and foreign funds.

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