40 ASIAN LEGAL BUSINESS – DECEMBER 2023 WWW.LEGALBUSINESSONLINE.COM REAL ESTATE at White & Case’s Tokyo office and cohead of the firm’s corporate practice in the country. “The Japan investment market is benefiting from the reallocation of Asia investment capital away from other markets. As the China market has faced headwinds, global real estate funds and asset managers have been reallocating resources that previously would have gone to China to markets like Japan and Australia, and in the case of more developing markets, to Vietnam,” adds Greenberg Traurig’s Rothstein. Another pivotal factor in this growth story has been the rising demand for a variety of real estate spaces, particularly traditional offices, healthcare amenities, logistics and warehousing facilities, data centres and hotels. “Foreign real estate investors are drawn to hotel property in 2023 since the number of foreign tourists has revived to the pre-COVID level,” says Shingo Hattori, founder of Tokyo-based law firm Hattori Law. Top brands like Hilton and Accor are actively increasing their Japan portfolio, among others in the market, Hattori adds. Urban residential projects are still the most attractive real estate asset for global capital, given low-interest rates and promises of increasingly high returns. “Multifamily housing tops the list of targeted asset classes for cross-border investors. In just the last three years, we closed at least 15 large portfolio deals for international real estate funds, family offices and asset managers,” Rothstein says. The demand for office spaces has also risen steeply following the ‘backto-office’ call by most large companies after the pandemic-induced lockdowns. “One surprising area where we see some activity is the office asset class. In Japan, remote work has not taken hold post-COVID in the same way it has in many other markets around the world. People generally still go to the office. A well-located office building with the right tenant mix can still attract international investor interest,” Rothstein says. BEYOND TOKYO While the surge in real estate investments has been traditionally focused in Tokyo and Osaka, the increasing prices in the cities and the rapid urbanisation of other regions have led to growing global investment in real estate assets across the country. “Japan’s status as a popular investment destination also means that it is a competitive market with compressing cap rates. As a consequence, investors have expanded their geographic reach beyond the traditional investment hubs of Tokyo and Osaka. Increasingly, we see cross-border investors venturing to places like Nagoya, Fukuoka and Sapporo, where deals might not attract as many competitive bidders. Approximately 30 percent or more of the deals we have executed in the last two to three years have actually been outside of Tokyo and Osaka,” Rothstein says. Usami of White & Case also points out that major cities like Osaka, Nagoya, and Fukuoka are experiencing notable advancements in their office infrastructure, fueling growth in their respective local economies. Hattori adds that Niseko and Nagano are also gems, and some foreign hotel operators are keen to develop their businesses in other regions of Japan. REGULATORY, STRUCTURING CHALLENGES Legal experts agree that the landscape for foreign investment in Japan’s real estate market remains largely stable. Navigating these regulations, especially given the language barriers in the country, poses an impediment, if at all, to investors. “Japanese laws provide avenues for foreign investors to capitalise on established investment frameworks such as TMK, facilitating advantageous tax treatment. However, navigating the real estate landscape involves intricate regulatory requirements and constraints, encompassing both national and local regulations,” says Usami. Fujii at Wither agrees, explaining the structuring of foreign real estate investment in Japan. “There are two well-established structures used by sophisticated real investors in Japan, the TMK structure and the TK-GK structure. The TMK structure (named for the type of entity that holds the asset, the tokutei mokuteki kaisha) is a highly regulated and complex structure that is popular because of its favourable tax treatment (it is taxed like a REIT). The TK-GK structure (named for the entity that holds the asset, a godo kaisha, and a silent partnership arrangement (a tokumei kumiai), which is used to capitalise the GK) is popular because it is easy to set up and manage and can also be tax efficient with proper structuring advice,” says Fujii. “A recent development that investors should be aware of is that the Japanese tax authorities are taking a closer “A recent development that investors should be aware of is that the Japanese tax authorities are taking a closer look at TMK structures (named for the type of entity that holds the asset, the tokutei mokuteki kaisha) from certain jurisdictions that take advantage of reduced tax rates applicable under tax treaties between Japan and such jurisdictions.” — Gerald Fujii, Withers
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