Pre-print discussion paper, submitted to Regional Studies on January 2012

Discussion Paper No.111
New Patterns of Investment under Real Estate Securitization: Evidence
from the Tokyo Market
AVELINE-DUBACH Natacha*, AI Hisatoshi**, ASAMI Yasushi***This is a preprint of an article submitted for consideration in the Journal, Regional
Studies©2012 [copyright Taylor & Francis].

March, 2012

* CNRS Professor, French Center for Research on Contemporary China (Hong Kong)** Project Research Associate, Global Center of Excellence for Sustainable Urban
Regeneration, The University of Tokyo*** Professor, Center for Spatial Information Sceince, The University of Tokyo

1

Pre-print discussion paper, submitted to Regional Studies on January 2012

New Patterns of Investment under Real Estate Securitization:
Evidence from the Tokyo Market
AVELINE-DUBACH Natacha, AI Hisatoshi, ASAMI Yasushi

Over the past few decades, financial markets have become increasingly intertwined withproperty markets. The deregulation of the financial industry, which originated in the UnitedStates in the early 1980s and gradually spread to Europe and Asia, was a crucial milestone.
This process was followed by an unprecedented wave of globally synchronised property
cycles characterised by exceptionally strong booms followed by sharp land and real estatebusts (Renaud, 1997). However, none of these speculative mechanisms actually attained themagnitude of Japan’s so-called ‘land bubble’ (1985-1991), the bursting of which left theeconomy damaged for two decades.
The Japanese boom-bust cycle has been extensively researched. Most authors havehighlighted the distortions in the capital supply process caused by the deregulation offinancial markets and the resulting competition within the banking sector in a context ofmonetary ease. The magnitude of this cycle was further exacerbated by taxation andaccounting systems that actively encouraged speculation (Noguchi, 1989, Nishimura andMiwa, 1990; Shigemi, 1991; Mera and Renaud, 2000; Dehesh and Pugh, 2000; Kerr, 2002;
Cockley, 2004). Another equally important factor has been ‘place marketing’, introduced by
the public authorities to draw massive flows of private capital into building production in thelargest metropolitan areas, with measures including compliant urban planning and building
regulations (Machimura, 1992, 2000; Hayakawa and Hirayama 1991; Hasegawa 1995;
Aveline 2003, 2005; Saito and Thornley, 2003).
Following the bust of the ‘bubble’, the Japanese economy found itself at risk from the highexposure of its financial sector on land collaterals. Real estate securitization was therefore
established in an attempt to unfreeze the property markets. This technique involves theconversion of large, illiquid property assets into liquid and affordable shares in listed or
unlisted funds. Having emerged in the United States half a century ago, real estate
securitization took root in Asia in the early 2000s, where it gained considerable success(Whiting, 2007). Yet nowhere did securitization develop as fast as in Japan. Within five years(2003-2008) the market capitalisation of securitized real estate grew from 1.5 to 22.1 trillion
JPY (from US$ 19.5 billion to US$ 288.2), making this sector a driving force in Japan’s
property markets.
Securitization tends to intensify the convergence of finance and real estate, transforming
properties into a ‘quasi-financial assets’ (Cockley, 2004) and exposing them to the growing
cyclicality and volatility of global financial markets (Ball, 1994; Leitner 1994). Despite thesignificant changes brought about by the boom in securitization in Japan, academic interest inJapanese property markets has waned considerably. Tokyo has undergone an ambitious
rescaling process with a dramatic rise in its skyline owing to the massive injection of capitalby listed and unlisted funds. This active building production was even marked by a ‘miniboom’ in land prices during the years 2005-2007. Although some authors have addressed theissue of urban restructuring (Waley, 2007; Hirayama, 2010; Sorensen at al. 2010), discussion2

Pre-print discussion paper, submitted to Regional Studies on January 2012
has focused on urban planning and governance issues without taking the financial aspects into
consideration.
Yet the growing dominance of finance in the property sector has major implications in termsof investment strategies, with risks and returns used as the exclusive criteria to assess theperformance of building portfolios. This paper, which is part of a special issue on 'finance,business property and urban and regional development', examines how the emergence of
securitization has modified the organisation and behaviour of players in Tokyo’s property
sector and how this in turn has affected the geography of building construction and landmarket dynamics.
To this end, the paper draws upon a growing body of research literature that emphasises therole of the development process as a fully-fledged component of economic production.
Healey and Barrett proposed a conceptual framework of ‘development production’ based on
the evolving relationship between structure (how decisions are framed by agents) and agency(the framework within which individual agents make their choices) (Healey and Barrett,1990.) In Japan, where traditionally land investment has been deeply rooted in the economic
and social structure (Calder, 1986; Wood, 1994; Kerr, 2002; Aveline-Dubach, 2008), thegrowing dominance of a real-estate focused approach – with land as a mere component – maysignificantly alter the ‘agency’ of the local real estate development sector.
Institutional research has also provided evidence of distorted investment geographies
produced by the reliance on financial assessment criteria in the real estate sector. Henneberry
and Roberts highlighted the cognitive bias caused by benchmarking techniques that encouragefund managers to over-invest in ‘core locations’ (namely London) and under-invest elsewherein the office sector (Henneberry and Roberts, 2008). Theurillat observed a similar overconcentration of property investment by Swiss pension; their poor spatial diversification was
ascribed to the increasing distance in the relationship between capital holders and property
investors resulting from the centralisation of financial centres (Theurillat at al., 2010.) The
new dynamics of financial capital have also received growing attention recently fromgeographers investigating the spatial patterns that are shaping the financial markets and their
institutions (see Lee at al., 2009, for a review). Institutional research remains underdeveloped,
however, with regard to securitization—especially in the real estate sector, a gap this paper
aims to help fill.
To gain an understanding of the investment strategies implemented by Japanese asset
managers, we decided here to focus on the portfolios of listed J-REIT funds (Japanese Real
Estate Investment Trusts). Although J-REIT funds do not hold a major share in the total asset
capitalisation of securitized real estate, they are prominent players in property markets. Their
portfolios contain the largest number of buildings and as listed public funds they display thehighest degree of integration between finance and real estate. Furthermore, information
concerning these funds is far easier to access. We conducted semi-structured interviews with
12 asset management companies (out of 31) affiliated to office and retail J-REIT funds
operating in the Tokyo National Capital Region. Drawing on these interviews, as well as
secondary research material derived mainly from the ARES (Association for Real Estate
Securitization), we highlighted the strong concentration of investment in Tokyo’s five central
wards.
Such marked geographic polarization of property investment may significantly alter the
dynamics of land markets. The media actually blamed J-REIT funds for driving up land prices3Pre-print discussion paper, submitted to Regional Studies on January 2012
in Tokyo’s central zones. Yabe (2008) conducted a geographically-weighted regression
analysis of land prices and confirmed that land price changes in downtown Tokyo had been
spatially polarized by J-REIT investments. However, the data used by Yabe (2008) only
covers the period 2001-2005. To examine how J-REIT investments have modified landmarket dynamics it is necessary to take into account the speculative mechanism that existed
prior to their launch (the ‘land bubble’ of the 1980s) as well as the ‘mini-boom’ of 2005-2007.
We have therefore conducted a multiple regression analysis focusing on the peak of the twoland booms (1991 and 2007) in order to analyze trends in land prices near J-REIT locations.
This paper is structured as follows. In the first section we describe the context in which realestate securitization emerged and we look at the subsequent standardization of the property
industry. The second section deals with the new commercial real estate investment
geographies and the third section examines their impact on property markets.

1. The emergence of securitized funds in JapanThe development of real estate securitization in Japan took place in a very different context
when compared to the 1980s. It is important to review these changes if we are to better
understand the extraordinary success of securitized funds in the property sector.
The evolving backgroundThe collapse of stock and land markets in Japan in the early 1990s brought about an
unprecedented financial crisis. Japanese banks were heavily exposed to the drop in land prices
because a large portion of their loans was secured by land collateral. They were plagued byaccumulating non-performing loans which prevented them from granting new loans. Yet
cleaning up their balance sheets required an urgent reactivation of the distressed real estate
sector through a new supply of funding.
A similar situation had existed in the United States a few years earlier during the savings andloans crisis. Financial measures such as real estate securitization had been used as analternative source of funding to liquidate non-performing loans in the early 1990s. These
measures contributed to the relatively quick recovery of real estate markets and swiftly putbanks back on a sound financial footing. By 1997 the Japanese banking sector had hit rockbottom and no recovery was in view, despite the policy of ultra-low interest rates. American
investment banks (notably Merrill Lynch and Goldman Sachs) sought to use their knowledgeof securitization techniques to take advantage of Tokyo’s distressed land markets. They werealso looking for fresh opportunities to diversify the portfolios of their American customers in
a context of sluggish domestic property markets (Ide, 1999). In 1997 they launched the first
securitized fund in Japan and in 1998 a legal framework was adopted to open up the realestate sector to a whole new category of investors. By facilitating access to real estate
investment, securitized funds helped to unfreeze Tokyo’s property markets.
Initially, capital originating in the United States took the form of opportunistic funds targeting
short-term investments with high risks and returns. As the markets gradually recovered,domestic investors began to predominate and investment strategies became more stable andless risky. A wide range of securitized funds now exists with various strategies both in termsof risk/return expectations and property development objectives. Amongst domestic funds,

4

Pre-print discussion paper, submitted to Regional Studies on January 2012
those with the highest risk are ‘development funds’ and ‘value-up’ funds, managed
respectively by major property developers and institutional investors, with both types seeking
high returns from redevelopment projects; investments with the lowest risk are long-term
investments, such as the REIT-funds or the private funds managed by Japanese pension funds.
The development of real estate securitization has been stimulated by a major change in thecontext of urban development. The bursting of the ‘land bubble’ put an end to the Post-War
urban paradigm characterized by land scarcity, continuous urban growth, and increasing land
values in big cities. In the early 1990s, all of these components were dramatically reversed.
The scarcity of land in Tokyo’s centre gave way to a surplus of available construction space.
During the ‘bubble’ years, loose monetary policy and accommodating tax/accounting
regulations had encouraged corporate investment in land without any related development
project. Japanese companies had benefited from ‘hidden assets’ (fukumieki) due to thediscrepancy between book values and actual market values. After the plunge in land values
and the subsequent end to the ‘land myth’, these hidden assets threatened to become ‘hidden
losses’ (fukumizon). Corporations were also hit by the impact of the financial crisis on the real
economy, forcing them to radically restructure and refocus on their core business.
Additionally, Japan had decided to comply with International Accounting Standards. This
meant that the book value of landholdings became their fair value (i.e., their actual market
value). This revision, which was enforced in 2005, encouraged corporations to get their assets
off their books. A large proportion of these land assets – up to 71% in the first semester of2006 (Mitsui UFJ Trust Bank, 2008, p.113) – was sold to private funds or REITs. Securitizedfunds were instrumental in recycling the supply of redundant corporate landholdings andsimultaneously transferring the development risk to external investors – either institutional
investors in the case of private funds, or Japanese households in the case of REITs.
The continous urban growth that had characterized the Post-War period was replaced by aconcentration of commercial and residential functions in downtown Tokyo. This move did not
only result from the slump in land values. It was intensified by the new wave of building
deregulation launched in the mid-1990s which went hand in hand with a policy of
encouraging people to live in the downtown area once again. These measures were aimed ataddressing the post-bubble recession in an attempt to regain economic competitiveness byrescaling Tokyo’s center (Sorensen et al, 2010; Hirayama, 2012). The massive construction ofhigh-rise buildings has radically transformed Tokyo’s urban landscape. Of the existing 350
skyscrapers over 100 metres tall, 54% were constructed after 2000, compared to 14% before
1985 and 35% between 1985 and 19951. A significant portion of these buidings was financed
by securitzed funds, including the major Roppongi Hills building complex owned by a private‘development fund’ controlled by the Mori Building group 2.
The current status of securitized funds

1

Emporis database (http://www.emporis.com/en/wm/ci/bu/sk/li/?id=100297&bt=2&ht=2&sro=0) cheched in
September 2011.
2
The Roppongi Hills private securitized fund amounted to 270 billion yen (3.22 billion US$), including 100
billion yen in equity raised by the Mori Building group and a huge non-recourse loan totalling 170 billion yen.

5

Pre-print discussion paper, submitted to Regional Studies on January 2012
There are currently more than 1,500 private equity funds and 34 J-REIT funds. Their asset
capitalization accounts for 15,93 and 8 trillion JPY respectively (figure 1). According to asurvey of 64 real estate management companies carried out by STB Research Institute, private
funds have an average target investment period of 6.4 years — a significant increase over the
past six years (3,8 years in 20054). The vast majority hold only one property in their portfolio
but some may have up to twenty. In order to maximize their financial leverage, private funds
generally maintain a loan-to-value ratio of between 65% and 70%. About half of the value of
their assets is invested in office buildings, 12% in residential units and 23% in retail facilities.
The rest consists of warehouse and hotel holdings as well as a small percentage of mixed-use
properties5.

Figure 1. Comparative growth of private funds and J-REITs
Figure 1. Distribution of J-REITs portfolios in the Kanto region (number of buildings)
Cate
gory

23
wards

Other
Tokyo

Chiba

Kana
gawa

Saita
ma

Ibara
ki

Gun
ma

To
chigi

Total

Office328(188 inthe threecentralwards)
31
586(168 in 3
centralwards)
35
980

9

5

38

8

2

1

3

394

10
28

10
53

16
42

10
17

1
2

78
730

47

10
78

22
118

12
47

3

79
1281

RetailResiden
-tial

Other
Total

2

4

4

Source: compiled by N. Aveline-Dubach using data from the ARES (as of January 2010)

J-REITs are the only listed ‘public’ funds. Unlike private structures dedicated to institutional
investors and property developers, J-REITs provide small individual investors with an easy
way of staking an ownership claim in large properties, usually by raising funds of funds. JREITs purchase property using debt financing and equity financing raised frominvestors (individuals, institutional and overseas investors). They use their rental income to
repay the loans and share dividends with investors. J-REITs are required to distribute 90% of

3

STB Research Institute, News Release, March 2011, p. 2
(http://www.stbri.co.jp/file/pdf/release_eng/20110310_e.pdf). This figure does not include assets in Japan
managed by global funds. According to the estimation of the STB Research Institute, the total market size ofprivate funds is approximaterly 17.5 trillion ¥ (p. 1).
4
STB research institute, ibid., p.
5
ARES “Results of the 5th Survey of Members Regarding Actual Condition of Real Estate Private Equity
Funds”, March 1, 2010, http://www.ares.or.jp/jrem/images/pdf/pr_20100301_en.pdf.). These figures only
concern ARES private fund members which hold approximately two-thirds of the total asset value of private
funds.

6

Pre-print discussion paper, submitted to Regional Studies on January 2012
their profits to investors as dividends. In return, they reap the benefit of a tax exemption thatallows them to avoid corporate income tax thus helping them to pay high yields.
Unlike private funds, J-REITs are not involved in redevelopment projects since their main
purpose is to purchase and manage rental properties on a long-term basis. All of theirfunctions are outsourced, including the management of building portfolios, which is entrusted
to an asset management company that is often affiliated to the financial backer group. JREITs typically finance their investments through bank loans and they maintain a 40% loanto-value ratio; the remaining 60% is raised on the stock market. The leverage effect isminimized in order to limit the risk for investors and most REITs set their potential maximum
loan-to-value ratio at sixty per cent. Regional banks hold a significant proportion of J-REIT
equity as these vehicles do not involve any currency risk. However, other institutional
investors looking for stable long-term investments, such as pension funds, tend to favor
private core funds since they are less volatile6.
The thirty-four J-REITs currently listed hold portfolios of several dozen buildings totaling
1,930 properties nationwide, of which 1,281 are located in the Tokyo Capital Region. These
structures can be classified into two main categories. The first category is dedicated to the
management of a single asset class. Seven funds specialize in office property. Their portfolios
which include fifty to sixty buildings contain a majority of high-end assets in prime locations
in central Tokyo. Their purchase value accounts for one-third of the total value of J-REIT
assets. Prominent real estate companies affiliated to industrial or financial groups – Mitsui,
Mitsubishi, Nomura and Daiwa – are the main backers for four of these funds. There areseven residential real estate J-REITs holding approximately twice the number of buildings
managed by office property J-REITs but their value does not exceed 18% of the total value of
J-REIT assets. Residential J-REITs are backed by real estate companies (including the Mitsui
and Nomura groups), as well as a general trading company (Itochu). A few funds have also
been launched in the retail sector (2), hotels (2), industrial and infrastructure properties (2),backed by consortiums of banks and insurance companies or by prominent conglomerates(Mitsui, Mitsubishi).
The second category of J-REITs invests in multiple classes of real estate assets. Six of thesefunds combine two types of real estate assets: residential and office, office and retail,residential and retail. The other nine funds manage compound portfolios and there are no
limits on the type of investments they engage in. Unlike the first category, funds managing
multiple-asset class properties are backed by a wide range of investors: domestic and foreignbanks, railway developers (Hankyu, Tokyu), and real estate companies that are not affiliatedto prominent industrial or financial groups (Mori Building, Sekisui House). They are also
distinguishable from single-asset class funds by the greater diversity in their portfolios, bothin quality and area distribution: some funds are specialized in regional asset management,such as the MID REIT and Hankyu funds in Osaka, and the Fukuoka fund in Kyushu.
Behavioral changes in the development industry
The expansion of the securitized real estate market has brought about new practices within thedevelopment industry. Three categories of ongoing changes should be mentioned. First, themethod used to value property has changed from the Sales Comparison Method to the
Discounted Cash Flow analysis method (DCF). The former consists in selecting comparable
6

Pension funds also invest in J-REITs, but only as a complementary investment since these funds are considered
too volatile when compared to private core funds.

7

Pre-print discussion paper, submitted to Regional Studies on January 2012
properties with similar characteristics to the property to be appraised, preferably in the same
area or as close as possible; the latter, widely used in investment finance and corporate
management, is based on the future cash flows (rental incomes) that can be derived from anasset. The rationale underlying the two methods differs markedly: while DCF takes into
account the time value of money and builds on a set of expected future parameters (rental
income, annual increase in rent, interest rates, risk premium), the sales comparison method
tends to extrapolate existing property market trends. Although both methods involve
appraisals by an expert that comprise a certain proportion of assumptions and estimates, DCF
is widely considered to be a more accurate and sophisticated technique than sales comparison,
which tends to reinforce cyclicality. The Japanese Government therefore decided to impose
DCF as the primary tool for appraising J-REIT properties. Training courses were organized tohelp certified appraisers become familiar with the new computerized property valuation
methods, however, several older certified appraisers could not keep up and retired from thevaluation business.
When the ‘bubble’ burst and American investment banks appeared on Tokyo’s depressed
property market, they began to purchase properties based on the DCF valuation approach.
Given the low expected earnings, these valuations were significantly lower than those basedon the comparison method. This came as a shock to Japanese property operators (Ide, 1999)
and put an end to the myth of constantly increasing land values. This shock led market
operators to consider the profitability of real estate rather than capital gains on land.
A further outcome of this new approach has been the emergence of the notion of real estate.
The growing influence of real estate securitization, notably in the REIT sector, has been
instrumental in bringing about this change since fund performances are measured by theircapacity to secure profitable earnings from their properties. To keep yields at satisfactory
levels, J-REITs must maintain high levels of technology and service at their properties. Whena building becomes obsolete, the fund will sell it on to a property developer, often belonging
to the same group. The building is then renovated or reconstructed before being transferred toanother member of the group, an external company, or sold back to the J-REIT. Building
renovation has progressed in Japan as a result of growing concerns about ‘urban sustainability’and the impact of wear and tear. Anti-seismic technologies are now sufficiently mature toallow for life cycles of several centuries for new buildings. Obsolescence in terms of IT
technologies or services can be dealt with through renovation.
The growing concerns over real estate are clearly visible in the increasing use of the Japaneseterm ‘fudosan’ (literally ‘non-mobile asset’). This term, originally translated from the French
word ‘immobilier’, had previously been restricted to a narrow field of legal or fiscal items.
Economic or political items were usually referred to as ‘land markets’ or ‘land policies’.
However, under the growing influence of securitization, the term ‘fudosan’ now tends to be
associated with market dynamics. However, one would be mistaken in thinking – as somehave stated – that land has lost it importance. Official land prices, which are widely known to
be manipulated by the government in order to attenuate peaks and troughs, remain abenchmark for land taxation. Furthermore, they continue to play a role in indicating the
economic climate: an increase in land prices is seen as a favorable sign since it indicates areturn to normality in macro-economic trends (Aveline-Dubach, 2008).
Finally, a change has occurred in terms of the increasing transparency in property market
information. J-REITs in particular are now subject to strict disclosure requirements by publicauthorities. Information on their comparative performances can easily be accessed on their8

Pre-print discussion paper, submitted to Regional Studies on January 2012websites. Their professional association ARES (the Association for Real Estate
Securitization) also provides timely and comprehensive data on their portfolios andperformances. Admittedly, this improvement in the supply of information is a noteworthy
advance in a field characterized by its lack of transparency, however private securitized funds
are not subject to similar requirements and therefore remain highly opaque. A plethora of
information concerning real estate markets is readily available but these data do not rely on
actual transaction values. According to the global transparency index compiled by Jones Lang
LaSalle, Japan ranks twenty-sixth out of eighty-one countries, lagging behind Poland andSouth Africa (Jones Lang LaSalle, 2010).

2. Geographical diversification strategies of REIT funds
In this section we will analyze the diversification strategies of J-REIT funds. We have usedthe data compiled by ARES to compile GIS maps of the 551 commercial and retail buildings(out of 1,281) held by J-REIT funds in the Tokyo Capital Region (Tokyo Prefecture and thethree neighboring prefectures of Chiba, Kanagawa and Saitama).
Geographic distribution of office portfolios

Investment in the office sector is the most strategic, not to mention the most prestigious
portfolio activity. It allows J-REIT backer groups to maintain a prestigious stock of officespace in prime locations while transferring the risk to external investors. Furthermore, it
enables close ties to be maintained with major tenant firms by providing a continuous supplyof high-performance buildings. The value of office property portfolios totaled 4,737 billion
yen in December 2011, representing 56% of the total value of assets held in J-REIT funds7.
The 394 office buildings in the J-REIT portfolio for the Tokyo region account for 30% of thetotal number of buildings. More than 80% (328 buildings) are concentrated in the twentythree special wards and almost half (48%) in the three central wards8.
All J-REITs pursue a similar strategy in terms of geographic diversification. They focus on
three main areas consisting of Tokyo’s CBD, other places in greater Tokyo and other cities(figure 2). The purpose of area diversification is to minimize cash flow risk due toearthquakes for example, and vacancy risks. REIT funds typically invest 70% of the total
value of their assets in the Tokyo region and 30% or less in other cities. Tokyo’s CBD (threeor five central wards, depending on the definition of each fund) offers relatively high rents
and low vacancy rates compared to other cities. It also provides a relatively large market scale(both leasing and purchase/sale) with high growth rates and high liquidity at the time of sale.
However, this is offset by low annual yields. In other cities rents are relatively low andvacancy rates relatively high compared to Tokyo's CBD. Furthermore, the market is smallerin scale and growth rates are lower, as is liquidity at the time of sale. This is offset, however,by the relatively high yields on such assets.

Figure 2. Comparative growth of private funds and J-REITs (in trillion JPY)
7

ARES, overview of J-REIT markets (http://jreit-view.ares.or.jp/jreit_e/JRV004.html, checked in February2012).
8
ARES database (as of January 2010).

9Pre-print discussion paper, submitted to Regional Studies on January 2012

18
16

14.7

15.3

16.2

15.9

14
12
10
8
6
4
2

0.7

0.8

0
2003

1.61.32004

3.32.6
2005

5.5
4.5

2006

Private funds

6.76.1

7.4

7.5

7.8

8

2007

2008

2009

2010

2011

J‐REITs

Source: compiled by N. Aveline-Dubach using the data of the AREIT and the STB institute.

After the subprime mortgage crisis, most J-REIT asset managers began to focus increasingly
on the Tokyo region which now receives 85% to 90% of investment. This growing
importance can be explained by the perception of managers that other regions, notably theconurbations of Osaka and Nagoya, involve a higher risk. This is a matter of concern forregional balance because undersupply in regional property markets may significantly affectgrowth in local economies. The decrease in land prices in central Tokyo has undeniably led toa massive relocation of firms from Osaka and Nagoya to Tokyo. A similar shift has also been
witnessed in the Tokyo Metropolitan Area where firms tend to migrate from Yokohama,
Chiba and Saitama to Tokyo’s central wards.
The office portfolios of J-REIT funds tend to specialize in a given category of office building(class S, A, B or C). A broad mix of categories is not appreciated by investors since it does
not provide a clear vision of the management strategy or the subsequent risks involved. The
keiretsu companies and large conglomerates hold the most prestigious portfolios. Their S andA class buildings, located in the three central wards (Ginza/Marunouchi/Otemachi), usuallyattract core investors (funds of funds seeking long-term and stable investments). The solid
reputation of the conglomerates and the prestigious location of their building portfolios make
J-REIT core office investments a good alternative to unattractive postal savings accounts. JREITs are viewed as bonds rather than equities by Japanese individual investors. In this
rapidly ageing society they are seen as acceptable long-term savings vehicles since they do
not involve any currency risk. However, they are not immune to market shocks, as evidenced
by the impact of the subprime mortgage crisis (see next section).
The class S and A building markets (over 200-300 tsubo per floor9) were generally considered
The tsubo is a commonly-used standard in Japan to measure the area of land and real estate. It is equivalent to
two tatami mats or 3,306 square meters
910Pre-print discussion paper, submitted to Regional Studies on January 2012
the least volatile and thus the most secure. However, tenants of class S/A offices are usuallyforeign financial institutions and professional firms such as legal or consulting companies
which tend to be more affected by economic downturns and are more limited in number.
Since the subprime mortgage crisis, class B offices have thus become the least volatile. With aprice range of between three and ten billion yen, they are also easier to sell since a single
lender would be able to purchase them10.
Geographic distribution of retail portfolios
Figure 3 indicates the spatial distribution of office building portfolios held by J-REIT funds in
the Tokyo region. A high concentration of investment can be seen in the inner part of the JR
Yamanote loop line. Office buildings are located along the JR and subway networks, inparticular the Ginza and Hibiya lines (figure 4). Also noteworthy is the concentration of
offices in the Eastern part of Tokyo’s CBD where FAR11 deregulation has been implemented
on a massive scale. Outside the centre, office buildings are located along JR lines in major
suburban cores (in a clockwise direction, from South-East to North-East: YokohamaKawasaki, Hachioji, Saitama and Funabashi).

Unlike office funds, J-REITs specialized in retail hold a limited number of buildings whose
value and number respectively account for 18% and 6% of the total. These recently-launchedfunds seek to benefit from the ongoing restructuring of the retail sector, including theincreasing predominance of large shopping centers. These properties are increasingly enticing
customers away from traditional retail outlets such as small stores in local shopping areas.
Although the City Planning Law and Building Standards Law were amended in 2007 in aneffort to slow large-scale commercial development in suburban areas and promote theefficient use of urban infrastructure, specialized retail funds rely on the attractiveness of thesefacilities in order to grow both in aggregate terms and as a percentage of total retail sales.
The funds specialized in this sector are all backed by major keiretsu-group firms: Mitsubishi
Corp in partnership with USB Realty for the Japan Retail fund (59 properties) and Mitsui Real
Estate for the Frontier Real Estate Investment Corporation. Both funds have greater
geographical diversification than that witnessed in the office sector with forty to fifty per centof their investments located in major cities outside of the Tokyo region. Furthermore, they
rent numerous facilities of various sizes to the prominent Japanese retail group AEON.
Figure 5 shows not only commercial real estate owned by REIT funds, but also buildings thatcombine a commercial activity with other activities in other sectors (e.g., residential property,
retail outlets or offices). In the three central wards, the spatial distribution of retail space issimilar to that of offices (figure 6). However, in the suburbs, retail REITs show a marked
geographic diversification, following JR railroads along the axis constituted by the SaitamaYokohama line, as well as commuting lines operated by private railway companies.
Though not specialized in retail, the Tokyu REIT is worth mentioning here. Its portfolio is
composed of retail and office buildings located for the most part around the railway
company’s major hub, Shibuya station, and along the Tokyu network. Tokyu groupcompanies reinvest cash collected from selling properties in the REIT fund. This reinvestment
has several benefits: it helps boost economic activities in areas located along Tokyu railway
10
11

KPMG “Current Japanese Real Estate Market 2010”.
Floor-area-ratio in building construction.

11Pre-print discussion paper, submitted to Regional Studies on January 2012lines, thus improving the added value of areas targeted for investment by the REIT fund, andboth maintains and improves the value of the properties held. In other words, the REIT fundenables the Tokyu group to tighten its control over its railway networks and major hubs.
Figure 3. Spatial distribution of J-REIT office portfolios in the Tokyo region(as of January 2010, compiled by the authors using ARES data)

Figure 4. Spatial distribution of J-REIT office portfolios in Tokyo’s central zone
(as of January 2010)

Source: compiled by the authors using ARES data.
Figure 5. Spatial distribution of J-REIT retail portfolios in the Tokyo region(as of January 2010)12

Pre-print discussion paper, submitted to Regional Studies on January 2012

Source: compiled by the authors using ARES data
Figure 6. Spatial distribution of J-REIT retail portfolios in Tokyo’s centre(as of January 2010, source ARES)

Source: compiled by the authors using ARES data

13

Pre-print discussion paper, submitted to Regional Studies on January 2012

3. The impact of J-REIT investment on land prices

We examine here how securitization has altered land market dynamics in Tokyo, especiallyover the period 2005-2007. The major issue addressed here is the role played by J-REIT funds
in the surge in commercial land prices during this period. We will first relate the context inwhich the ‘mini-land boom’ took place and then perform multiple regression analysis toassess the changing impact of J-REITs over time, taking into account the ‘land bubble’ of the
1980s.
The ‘mini land boom’ (2005-2007) and the role of securitized funds

Unlike private funds, J-REITs were initially dominated by domestic investors as their primary
goal was to funnel the savings of Japanese households into the real estate sector. However,foreign funds became very active in these markets between 2005 and 2007. From April 2004
onwards they purchased an increasing volume of shares and invested heavily in J-REITs from
December 2006 to June 2007. Investment peaked at over 140 billion yen in February 2007
(Mitusbishi UFJ, 2010, p.37). Meanwhile, foreign investors also launched private funds toacquire major properties held by Japanese funds, notably in downtown Tokyo12. These crossborder capital inflows were driven by three factors: favorable macro-economic prospects andtheir positive implications for the office real estate market (low vacancy rates and increasing
rents); the considerable development potential of the J-REITs; and the maximization of
returns based on low Japanese interest rates.
Boosted by this massive inflow of foreign capital, prices on Tokyo’s property markets began
to soar once again. In search of new properties to purchase in the central wards, J-REITs
faced strong competition from private funds for the same sites. They tried to keep pace withthe markets until their yields threatened to drop below three per cent. Meanwhile, private
funds continued to invest in Tokyo properties as they faced no such constraints regarding
yields and were strongly committed to investing the funds gathered from equity holders. The
surge in property values soon gave rise to a ‘mini-boom’ in commercial land prices, although
this was limited to the five central wards. Unlike the land bubble, this mini-boom spreadneither to other wards nor to neighboring prefectures (figure 7).
To counteract deteriorating yields, new REIT funds involving specific know-how were
established to manage ‘operational assets’ such as hotel or retail facilities. Yet foreign funds
continued to pour money into J-REITs until the outbreak of the subprime mortgage crisis
which saw them retreat from Japanese securitized markets. The crisis severely impacted JREITs, causing their asset capitalization value to plunge by 70% (from 6.8 to 2.1 trillion yen)despite the buoyant performances of Tokyo’s office real estate markets. This shock isevidence of the greater volatility of REIT markets relative to other components of the
12

Loan Star bought the three towers of the Kokusai Akasaka Bldg in 2004; Morgan Stanley, the Shinagawa
Grand Central Tower, the Daikyo Bldg and a chain of 13 ANA Hotels in 2006-2007; Da Vinci Advisers acquired
the Pacific Century Marunouchi Bldg, the Toranomon Pastoral Hotel and the Shiba Park Bldg in 2007. However,
the most conspicuous transaction was the purchase of the Tiffany Building in Ginza by Goldman Sachs in
August 2007. This property was sold at auction for more than double the price paid four years earlier by the‘Tiffany and Company Japan Inc.’ fund (i.e., 37 billion yen, compared to 16.5 billion).

14

Pre-print discussion paper, submitted to Regional Studies on January 2012
property sector. The slightest movement spreading between segments of the stock market canhave a disproportionate impact on this segment. The resulting drying-up of capital inflows
impacted the entire real estate industry as J-REITs were no longer able to purchase buildings
commissioned by private developers.
It is worth noting that the surge in land prices in the 2000s was caused by foreign capital
inflows whereas in the case of the previous speculative ‘land bubble’, capital fled from Japanto foreign countries where it triggered boom-bust cycles. There is no doubt that securitization
has significantly facilitated inflows of foreign investment into the seemingly inaccessible
Japanese property markets.

Figure 7. Change in commercial land prices in the Tokyo Region (as of July 2011)

20000000
18000000
16000000
14000000

Yen / sqm

Downtown 5
wards
Other 18
wards
Tokyo
Suburbs
Saitama

12000000
10000000
8000000
6000000

Chiba

4000000
2000000
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

0

Source: compiled by H. Ai using koji chika.
Note: The five downtown wards are Chiyoda, Minato, Chuo, Shinjuku and Shibuya.

The role of J-REITs in land market dynamics in Tokyo: from the ‘bubble’ to the ‘mini-boom’In order to examine the role of J-REITs in Tokyo land market dynamics we have conducted amultiple regression analysis on land markets in 1991 and 2008 (the peak years of the land
boom periods), with particular attention to the spatial distribution of the securitization market.
As mentioned below, the data set we used in the analysis tends to reflect the land markets
with a short time lag: the data sets for 1991 and 2008 correspond to the peaks in land prices in1989 for the ‘bubble’ and in 2007 for the ‘mini-boom’, respectively.
In terms of land price data, koji-chika (official land prices) have been used as the dependent
variable. Koji-chika are appraised prices based on the ‘normal’ land price for fixed sites as of
1 January each year and do not correspond to actual transactions1). ‘Normal’ here refers to15

Pre-print discussion paper, submitted to Regional Studies on January 2012
prices free from any distortion, such as that due to hasty purchasing and selling, or
excessively speculative behavior. Under this evaluation method, the appraised value tends totrack actual land prices but with a time lag. The peak in land prices during the first ‘bubble’ isthought to have occurred in 1989; however, the peak in koji-chika can be seen in 1991. Afterthe first bubble burst there was a perception that koji-chika were incapable of reflecting theactual land market situation and an amendment was made to the appraisal process. Although
this may have enabled koji-chika to reflect market prices more closely, a short lag in trends
remains. The peak of the ’mini land boom’ can be seen in 2008.
Since koji-chika are not real transaction data, ideally we should use transaction price data in
our analysis to discuss land price dynamics during and after the bubble. However, a sufficientquantity of actual land transaction data is seldom available because these data include
personal information such as addresses, land plot area and detailed information regarding thebuildings located on the plot.
Multiple regression analyses are designed to establish whether or not land pricing factors havechanged over time and to discuss the relationship between J-REIT resource allocation andland prices.
We selected the logarithm of koji-chika as the dependent variable after checking somefunctional forms. The following independent variables are used in our analysis. Variable
LnFAR is the natural logarithm of the maximum FAR permitted in the district in which theplot of land is located. FAR is expressed as a percentage and calculated by dividing the total
floor area of the building by the area of the plot. The designated FAR will be a minimum of
50% and a maximum of 1,300%. Variables J0250, J0500, J0750 and J1000 are dummy
variables indicating, respectively, whether the plot is located 0-250m, 250-500m, 500-750m
or 750-1000m from J-REIT sites. Although J-REITs were established in 2001, long after 1991,
we have still included variables J0250, J0500, J0750 and J1000 in the 1991 model. This
allows us to analyze whether or not J-REIT investment allocations are linked to areas of highland prices. Variables S0250, S0500, S0750 and S1000 are dummy variables indicating,respectively, whether the plot is located 0-250m, 250-500m, 500-750m or 750-1000m fromthe nearest railway station. When determining the nearest stations for the 1991 dataset, we
excluded railway stations that were not yet open at the time. Variables Chiyoda, Chuo,
Minato, Shinjuku and Shibuya, named after Tokyo’s five downtown wards, are dummy
variables with a value of 1 if the land plot is located in the ward, and 0 if it is not. Variable
LnTokyoSta is the natural logarithm of the time distance from the nearest station to Tokyo
Station. The time distance is given in minutes by comparing the arrival time at Tokyo Stationand the departure time from the nearest station to the land plot. We used the Yahoo! Rosen
Joho website2) which provides a railway route planner. The arrival time at Tokyo Station was
set at 8:30am which falls during the morning rush hour. Railway stations and lines that
opened after 1992 were excluded from the time distance calculation in the 1991 dataset.
Figure 8 shows the basic statistics for the variables. These results are in line with lower
investment by REIT funds in Tokyo’s downtown property markets in the years 2005-2007. JREITs were hit by a drop in yields that resulted from increasing real estate values andprevented them from expanding their portfolios at the same rate as previously. This situation
may have altered the impact of REIT properties on commercial land values.

Figure 8. Basic Statistics of the Variables
16Pre-print discussion paper, submitted to Regional Studies on January 2012
1991
Variables
Price
LnPrice
FAR
LnFAR
J0250
J0500
J0750
J1000
S0250
S0500
S0750
S1000
ChiyodaChuo
MinatoShinjuku
ShibuyaTokyoSta
LnTokyoSta

Unit

N

Mean

Yen

281

ln (Yen)

281

%

281

529.5374ln (%)

281

6.220981

dummy

281

0.505338

dummy

281

dummy

281

2008

Min.

Max.

N

Mean

Min.

Max.

8,606,840

687,000

38,500,000

740

15.50779

13.44009

17.46617

740

2,600,566

247,000

39,000,000

14.12121

12.41714

17.47907

300

1000

740

519.1892

200

1300

5.703782

6.907755

740

6.194249

5.298317

7.17012

0

1

740

0.05

0

1

0.213523

0

1

740

0.083784

010.099644

0

1

740

0.208108

0

1

dummy

281

0.064057

0

1

740

0.547297

0

1

dummy

281

0.597865

0

1

740

0.581081

0

1

dummy

281

0.238434

0

1

740

0.298649

0

1

dummy

281

0.099644

0

1

740

0.078378

0

1

dummy

281

0.035587

0

1

740

0.020270

0

1

dummy

281

0.071174

0

1

740

0.089189

0

1

dummy

281

0.071174

0

1

740

0.074324

0

1

dummy

281

0.060498

0

1

740

0.078378

0

1

dummy

281

0.067616

0

1

740

0.075676

0

1

dummy

281

0.042705

0

1

740

0.04864901Minutes281

19.71886

2

43

740

19.46622045

ln (Minutes)

281

2.826642

0.693147

3.7612740

2.79825803.806662

Figure 9. Regression model for ln (koji-chika) in 1991
Variables
LnFAR
J0250
J0500
J0750
J1000
S0250
S0500
S0750
S1000
ChiyodaChuo

PartialReg.
Coeff.
1.52010.32410.18890.07150.08750.31290.15450.0574-0.2200
0.62590.6630

MinatoShinjuku
Shibuya
LnTokyoSta
Constant term

0.83090.70070.9258-0.1529
5.8161βSEF-valuet-valuep-valueSL.

0.10280.08930.09060.10140.11560.14650.15170.16050.18950.11570.11800.50500.16570.07920.02190.02190.15690.06730.0176-0.04170.16460.1744218.5954
13.1588
4.34650.49780.57234.55941.03670.1281
1.348429.2797
31.5729

14.7850
3.62752.08480.70550.75652.13531.01820.3579-1.16125.41115.61900.00000.00030.03800.48110.45000.03370.30950.72070.24660.00000.0000*****0.10990.10030.12300.06640.72390.20260.17990.1915-0.0968

57.149948.7882
56.66945.303464.55657.55986.98497.5279-2.30298.03470.00000.00000.00000.02210.0000

**
**
**
*
**

*

**
**

N=281, R2=0.9165

Figure 10. Regression model for ln (koji-chika) in 200817

Pre-print discussion paper, submitted to Regional Studies on January 2012

Variables
LnFAR
J0250
J0500
J0750
J1000
S0250
S0500
S0750
S1000
ChiyodaChuo
MinatoShinjuku
Shibuya
LnTokyoSta
Constant term

PartialReg.
Coeff.
1.42350.18050.0876
0.16530.16150.47010.20170.28070.16260.5746
0.51600.90700.56661.1904-0.1092
4.8498βSE
0.08020.10600.0906
0.07690.07560.13890.14090.15150.19200.09150.09060.08290.0793
0.09660.04930.5784F-value
0.49570.04010.02470.06830.08190.2362
0.09400.07680.02330.16680.13780.24830.15260.2608-0.0740314.7232
2.89740.93644.62274.566911.46032.05093.43090.716939.4634
32.3994119.7967
51.0758
151.8803
4.901970.2996t-value
17.7404
1.70220.96772.15012.13703.38531.4321
1.85230.84676.28205.692010.9452
7.146712.3240-2.2140
8.3845p-value
0.00000.08920.33350.03190.03290.00070.1526
0.06440.39750.00000.00000.00000.00000.00000.02710.0000

SL.
**

*
*
**

**
**
**
**
**
*
**

n=740, R2=0.8396

Tables 3 and 4 show the results of the multiple regression analyses conducted for 1991 and2008. Railway stations were found to have been an important factor in pushing up land prices.
S0250 in particular had a significant positive impact on land prices in both the 1991 and 2008
models. As expected, LnTokyoSta shows a negative impact on land price; i.e., land prices
drop if the nearest station to the plot is far from Tokyo Station, the main station in the CBD.
These results confirm the general trend of higher land prices when the plot is closer to arailway station and downtown Tokyo. Variables LnFAR, Chiyoda, Chuo, Minato,
Shinjuku and Shibuya have a major positive impact on land prices in both models. Thissuggests that in both 2008 and 1991, land prices tend to be higher if the plot is located in ahigh FAR district or in the five downtown wards. In 1991, all of the five wards can be seen tohave a significant impact on land price, whereas in 2008, the regression coefficient β of
Minato and Shibuya rose, while that of the three remaining wards declined. This difference
suggests greater intensity in these two wards around 2008. Presumably, redevelopment
projects such as Tokyo Midtown, Shinagawa Intercity, Shinagawa Grand Commons andShiodome Sio-site in Minato Ward, and Shibuya Mark City, Cerulean Tower andOmotesando Hills in Shibuya Ward may have significantly boosted land prices. The majorityof these projects transformed large plots of residential, industrial, railway and military landnear railway stations into retail and office complexes.
In 1991, J-REIT sites displayed a significant positive correlation with land prices for J0250.
This was the most significant positive factor among J-REIT distance dummy variables,
followed by J0500. However, J0750 and J1000 were significant positive factors in 2008,
meaning that land prices in 2008 were higher if the plot was located between 500m and1000m from J-REIT sites. These results suggest that J-REIT investments have mainly targetedareas where land prices increased during the first bubble or those where land prices remained
relatively high after the bubble burst. This is in line with Yabe’s (2008) assertion that theareas which benefitted from J-REIT investment are limited to business districts, most ofwhich are located in the five downtown wards. However, as previously mentioned, certain18

Pre-print discussion paper, submitted to Regional Studies on January 2012
redevelopment projects in downtown Tokyo have recently transformed non-commercial land
into retail and office complexes. This trend may be not visible in Yabe (2008) because thedataset used in his paper predates 2005. Our 2008 model suggests that the aforementioned
projects have developed new commercial hubs and that land price increases in these areas
seem to have weakened the correlation between land prices and location of J-REIT sites.
Conclusion
We have given an account in this paper of the significant role played by real estate
securitization in the recovery of property markets and the subsequent cleansing of bad debts.
By providing alternative funding resources for urban development, real estate securitization
helped to unfreeze property markets and to prevent further deterioration in the collateralvalues that underpin the entire banking system. Securitization also provided a timely solutionthat enabled the corporate sector to get large idle landholdings off their balance sheets.
Offloading cumbersome land assets enabled corporations to focus on their core businesses
and recover more rapidly.
Securitization also strongly impacted the methods and behavior of real estate players. It
introduced new appraisal standards and methods based on Anglo-Saxon approaches. The oldcomparison method was replaced by the more sophisticated DCF technique. New players
have emerged and financial criteria now predominate in the decision-making processes ofproperty investors. Furthermore, full information disclosure regarding the portfolios andperformances of J-REIT funds enables small investors to gather sufficient knowledge for theirinvestments. By focusing on profitability rather than capital gains, securitized core funds haveconferred a new status on real estate to the extent that land is no longer viewed as a property’s
sole component of value.
Although financial methods and analysis techniques may have become standard in Japaneseproperty markets, this is not to say that Anglo-Saxon approaches have gained full acceptancein Japan. J-REIT funds, which embody the highest form of convergence between finance andreal estate, are far from being merely financial vehicles. Dominated by the major domestic
industrial and financial conglomerates, these funds are used as a means of maintaining control
over the most prestigious sites in Central Tokyo. In this sense they serve the rent-seeking
strategies of the big groups, just as in the pre-bubble days (when the ‘land myth’ still heldsway). The prestigious J-REIT office portfolios managed by conglomerates are also
instrumental in satisfying the evolving needs of the big firms – their major clients – andproviding them with a continuous supply of state-of-the-art buildings equipped with cuttingedge IT systems. Moreover, although J-REIT markets are undoubtedly well served by up-todate and comprehensive data, this is not the case for private funds, which are greater innumber than the J-REITs and with a cumulative asset value that is more than twice as high.
Not to mention the other segments of the real estate market for which information disclosure
has not improved.
Nevertheless, the use of financial techniques has had a significant impact on the strategies ofasset managers in terms of the spatial distribution of J-REIT portfolios. Strong emphasis isplaced on the Tokyo region and this trend has intensified in the wake of the subprime
mortgage crisis. Although other large Japanese cities have a sizable regional GDP – Osaka’s
equals that of a European country like Portugal –, the Tokyo Metropolitan Region would
appear to be the only promising place for an investment. Within this region, J-REIT office and19Pre-print discussion paper, submitted to Regional Studies on January 2012
retail real estate investments are mostly concentrated within the Yamanote loop line.
Has real estate securitization altered the dynamics of land markets? Looking at the changes incommercial land values in the Tokyo region over the past three decades, we have highlighted
a difference between the two land booms: the 1980s bubble spread from Tokyo’s CBD (fivecentral wards) into peripheral areas and neighboring prefectures, whereas the 2005-2007 land
boom was confined to the five central wards. The results of our multi-regression analysis
indicate that while J-REITs may have influenced land values in the early 2000s, their impact
weakened subsequently. This is consistent with the fact that J-REIT funds reduced theirinvestment levels during the ‘mini land boom’ in order to prevent an excessive drop in yields.
However, real estate securitization may have played a determining role in the surge in land
values between 2005 and 2007 given the primary role of securitized private funds as vehicles
for foreign investment over this period.
Aknowlegments: We thank professor Chihiro SHIMIZU at Reitaku University for providing
Koji Chika land price data which has made an important contribution to our quantitative
analysis. Our gratitude also go to the asset managers of the interviewed J-REIT funds, whokindly devoted time to cooperate with us.

20Pre-print discussion paper, submitted to Regional Studies on January 2012

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