Hiromichi Iwasa on Japanese REITs and real estate

By Erin Corcoran

Hiromichi Iwasa is the chairman for the Association of Real Estate Securitization (ARES) and president, Mitsui Fudosan Co., Ltd. He joined Mitsui Fudosan in April 1967, became a director in June 1995 and has served as president since 1998.

What is the current state of the Japanese REIT industry?
The J-REIT market launched in 2001 with a total market value of approximately 260 billion yen ($2.3 billion). The market did not grow rapidly at first due to the lack of investors’ J-REIT knowledge and pessimistic views on the real estate market itself.

However, the market size grew with greater recognition of J-REITs. J-REITs appealed to investors because they offered portfolio diversification and strong returns as well as lower taxes for J-REIT investors. Additionally, the J-REIT market took off because the government allowed funds to invest in REITs.

J-REITs have fulfilled the role of a proactive buyer of real estate in the property market, which has heightened the liquidity of Japan’s commercial real estate. J-REITs also led to the conversion of real estate into a financial product. The expansion of real estate securitization created more specialized operations and new business forms specializing in certain areas like asset management.

Japanese land prices rose in 2006 for the second straight year. Are there concerns that J-REITs could contribute to the development of a real estate bubble similar to the 1990s?
The development of the securitized real estate market has created a pricing mechanism based on the profitability of real estate in the Japanese real estate market.

Additionally, J-REITs now disclose a wealth of real estate information that enables investors to make more appropriate investment decisions on the basis of such market information. Thus, J-REITs more likely are helping to prevent the development of a bubble.

How would J-REITs be affected if Japanese interest rates should rise appreciably?
The fundamentals of the Japanese economy are strong, and interest rates continue at a relatively low level while steady economic growth continues.

However, J-REITs have taken steps to prepare for rising interest rates, including adjusting their loan-to-values (LTVs) and converting loans into long-term fixed interest loans. There are few concerns regarding rising interest rates in the short-to-medium term.

Currently, unlike their U.S. counterparts, J-REITs are externally managed. Will there be legislation allowing J-REITs to be internally managed?
Problems regarding the external management method have not occurred in the J-REIT market and, currently, there is no debate about changing to the internal management method.

Has progress been made on legislation to allow Japanese REITs to acquire real estate in other countries?
The Japanese government has indicated that foreign real estate investment by J-REITs will strengthen the international competitiveness of the Japanese financial capital market. Currently, the Association of Real Estate Securitization (ARES) is working on a proposal to address a change in the system.

How would the market change by allowing ownership of foreign property?
If J-REITs are allowed to have overseas investment, it will open doors that enable investors to utilize J-REITs to greater diversify their investments.