JAPAN: An Introduction to Real Estate
Recent Trends in the Market
Overview – active real estate market supported by asset-light trend
The real estate market in Japan remained active in 2024. As of the end of March 2024, Japanese real estate investment trusts (J-REITs) had a market capitalisation of about USD100 billion, making Japan the second largest listed REIT market in the world after the USA (according to the Real Estate Securitization Handbook 2024 by ARES). In Japan, 60.4% of domestic investors and 39.7% of offshore investors expressed a strong willingness (36.3% of domestic investors and 36.5% of offshore investors responded that they were neutral) to invest in Japanese real estate (Mitsubishi UFJ Trust Bank’s investor research in July 2024). The real estate market in Japan is generally fair and transparent, ranking 11th among Asian countries in JLL’s Global Real Estate Transparency Index.
The Tokyo Stock Exchange (TSE) has requested all listed companies to realise management that takes into account capital costs and stock prices. The TSE disclosed listed companies’ responses to the request on 15 January 2024 and continues to update such responses monthly. Many activist fund shareholders have put pressure on Japanese listed companies to raise their low price-to-book ratio (PBR). Against this background, Japanese listed companies tend to consider selling or utilising their real estate properties (“asset-light trend”), which presents a tremendous opportunity for real estate investors to acquire crown jewel properties that Japanese listed companies have never considered selling before.
One of the typical structures for asset-light transactions is a sale-and-leaseback transaction, in which a company sells its real estate to a purchaser and leases back the same from the purchaser on a long-term basis. Subject to the satisfaction of accounting and legal terms and conditions, the seller company is currently allowed to record the real estate sale as an off-balance sheet transaction, resulting in asset-light effects for the seller company. However, a new Japanese accounting principle, which is to take effect from 2027, will require Japanese companies to book leased real property assets and liabilities on their balance sheets upon conducting a sale-and-leaseback transaction. This new accounting principle will likely affect the terms and conditions of sale-and-leaseback transactions and other asset-light transactions.
Typical structure for investment in Japanese real estate
While investment in the Japanese real estate market by overseas investors can take many forms, two of the most common investment structures are "GK-TK" and "TMK".
The GK-TK structure uses a godo kaisha (GK) as an SPV to hold real estate trust beneficiary interest (TBI) in the target property. Tokumei kumiai (TK) is the name of the contractual partnership between the GK and its investors (the “TK investors”), pursuant to which the profits and losses of the partnership business (the “TK business”) receive pass-through tax treatment. The TK business is operated by the GK and does not involve the TK investors. The GK as TK operator owns all the properties of the TK business and bears unlimited liability for all obligations of the TK business. The liability of the TK investors, however, is limited to their investment. The solicitation of TK interests and the management of funds raised through TK arrangements are regulated under the Financial Instruments and Exchange Act. However, where certain conditions are met, an exemption will be applied.
A tokutei mokuteki kaisha (TMK) is also an SPV and provides limited liability to its equity holders. Distinguishing the TMK from the GK-TK structure, the equity holders of the TMK, which are the equivalent of shareholders of a joint stock company, have the ability to participate in governance and decision-making. Furthermore, unlike the GK-TK structure, a TMK may acquire not only TBIs but also real estate in hard assets. A TMK can constitute a tax pass-through entity (although only with respect to profits), if it satisfies certain criteria. Offshore investors generally prefer the TMK arrangement to the GK-TK structure, as it is believed that Japan’s tax authorities are less likely to challenge the legitimacy of a TMK’s pass-through tax treatment.
Hospitality properties
The number of tourists who visited Japan in 2024 is expected to be higher than the number in 2019. The hospitality sector in Japan has rapidly recovered from the COVID-19 situation and there are a number of new hotel development projects in both urban and resort areas. Notably, local cities have become favourite destinations for foreign tourists, and international hotel operators plan to open hotels in such local cities to meet the increasing demand. Furthermore, the Japanese government announced in 2024 that it would invite luxury resort hotels into national parks in Japan. As such, the hospitality sector has become one of the most active real estate sectors again.
A recent trend in the hospitality sector is the emerging market for branded residences and condo hotels. Due to some notable precedents, branded residences and condo hotels have rapidly become a popular option to be considered in the development of hotels or mixed-use projects in both urban and resort areas. There are various types of branded residences and condo hotels – those with a rental programme, whether this is mandatory or optional, those where a lease to a third party is permitted, whether this is standalone or associated with an adjacent hotel – and the applicable legal framework will vary depending on the type and structure.
Data centres
Development projects for data centres have emerged as a prominent investment area in recent real estate transactions in Japan, driven by the growth of cloud computing and the adoption of AI. This trend has attracted significant interest from both domestic and international investors. Recognising their importance, the Japanese government’s “Grand Design and Action Plan for a New Form of Capitalism 2024 Revised Version”, approved by the Cabinet in June 2024, identifies data centres as a strategic sector and actively promotes their development.
Japanese data centres are increasingly shifting towards large-scale facilities. By the end of 2023, hyperscale data centres surpassed retail-type data centres in rack capacity, with further rapid growth anticipated. Recently, there has been a pronounced trend for data centres concentrated in the Greater Tokyo and Osaka areas, causing significant strain on the power infrastructure in regions with high data centre density. Rising construction costs, driven by escalating material and labour prices, present additional challenges. The government’s “Expert Group Meetings on the Development of Digital Infrastructure” are addressing the future of data centres, focusing on regional diversification and sustainable growth. Given their high energy consumption, enhancing energy efficiency and establishing green data centres have become critical priorities.
Investment and financing structures for data centres are still evolving, with many aspects of practical implementation yet to be established. While traditional frameworks such as GK-TK and TMK serve as foundations, data centres require distinct analyses due to the high value of internal equipment (movable assets) compared to the core and shell (real property). Tax efficiency also remains a key consideration in structuring strategies. Another distinctive feature of data centre transactions is the need to evaluate the applicability of various permits and approvals, including those under the Telecommunications Business Act, the Construction Business Act, and the Real Estate Brokerage Act, among others.