ARES is working to facilitate the healthy development of the real estate securitization market.

  Some people trace the start of present day real estate securitization back to mortgage securities that appeared in 1931 or the housing loan debt trusts of 1973, but generally securitization, in its present form, started in 1987 with the formation of small lot real estate trust beneficiary interests and the real estate conversion loans of JNR Settlement Corporation in 1990.

  Either way, the history of real estate securitization follows the first attempts to transform real estate from being an expensive real asset that with fixed location into small assets that can be easily traded on the securitization markets as they exist today.

  The small lot real estate investment products that appeared in 1987 were basically real estate divided into small ownership units and sold in units small enough for retail investors to purchase. The small units were developed because the generally large investment size required for real estate and its low liquidity made it difficult for retail investors to invest. These investments differed from traditional, direct real estate investment because the operator controlled the equity of each investor so that it was effectively a collective investment structure for real estate. However, it lacked any measures to protect the interests of the investors and so many investors suffered large losses after the collapse of the bubble. As a result of these losses there were calls for a legal system to be established to protect investors, and the “Real Estate Syndication Act” was enacted in April 1995 with this aim in mind. This was the foundation for real estate syndication products and led to the further development of asset monetization.

  Parallel to the development of small lot real estate products studies were proceeding on asset monetization and securitization as part of the reforms to the Japanese financial system. The first changes came in June 1993 with enactment of the “Law Concerning Regulations for Businesses Involving Specific Credit Obligations” which is commonly known as the Specific Debt Law). The Specific Debt Law established restrictions on liquidity limited to specific debts such as lease debts and credit debts, and the subsequent revision of Specific Debt Law in April 1996 made it possible to issue asset-backed securities (ABS) in Japan.

  In 1998, the Financial System Reform Laws were enacted as part of the financial big bang. One of the laws enacted, with great anticipation for its impact on the disposal of non-performing loans, was the “Law on Securitization of Specific Assets by TMKs” (commonly known as the former SPC Law). This law was the first law enacted to provide for comprehensive asset securitization in Japan and real estate specifically identified in the law as an asset that could be securitized (the law limited assets that may be securitized to those specifically listed).

  The fact that a legal framework had been established for securitizing assets was very important, but the procedures the law imposed were complex and reporting and other obligations under the law were onerous for the participants to meet. To rectify this complexity and promote securitization, the law was revised and the new law was called the “Law on Asset Monetization” (commonly known as the Asset Monetization Law). This law was enacted in November 2000 and remains in force today.

  The Securities Investment Trust Law was revised in 1998 to provide for “company” trusts (described later) and was named the “Law Concerning Securities Investment Trusts and Securities Investment Corporations.” After a further revision of the law in November 2000 it was named as the “Investment Trusts and Investment Corporations Law” and is commonly referred to as the Investment Trust Law. This law regulates the direct management of real estate as an investment product.

  Thus, basic laws for asset monetization and asset management were firmly established by 2000 and the legal framework was in place for creation and regulation of the securitization conduits (vehicles) for real estate securitization -TMKs, investment corporations and investment trusts.

  a. Asset management schemes where the investment funds are gathered from multiple parties, pooled and managed by investing in various assets, and

  b. Asset monetization schemes where cash flows generated by qualified assets are structured into a single or multiple investment products and sold to multiple investors.

1. Thoroughly Implement Rules to Protect Users and Improvement of Convenience

• It is necessary for gaps that are not filled by present rules to protect users to be filled by preparing a framework for comprehensively and laterally protecting users with regard to broad financial products. It is also necessary to review the present vertical business law and to apply identical rules to financial products with the same financial functions.
• It is appropriate to achieve a balance with the necessity to protect users by constructing a flexible regulatory structure such as deregulating regulations made with the ordinary investor in mind in situations where specific investors (professionals) are the customers.

2. Securing Market Functions to Prepare for the Shift “From Savings to Investment”

• There is an indispensable need for continuous measures to secure constant development of overall financial and capital market rules and to secure effectiveness so that market functions can be secured that are built around a fair and smooth price formation in preparation for the shift from savings to investment.

3. Appropriate Measures for the Internationalization of Financial and Capital Markets

• There is an urgent need to establish the infrastructure for further heightening the appeal of the Japanese market as an international market within the ever progressing globalization of financial and capital markets.

4. Need for the Investment Services Law (tentative name)

• The appropriate step is to rearrange the Securities and Exchange Law and establish the Investment Services Law with the objective of building a fair, efficient, transparent and energetic financial system that can adequately demonstrate market functions based on the axis of fair and smooth price formation through appropriate protection of users and prevention of unfair transactions in the marketplace.

5. Basic Framework of the Investment Services Law

• There is a need to review the present vertical business law and to strive for a legal system for broad financial products.
• It is appropriate to position the Investment Services Law as a law with general characteristics governing the sale of financial products and the management of assets and its enforcement rules should be applied to financial products with the same economic functions regardless of the business type.
• Laws with identical characteristics should be integrated as much as possible into the Investment Services Law including the Law on Foreign Securities Firms, Law on Regulations, Etc. of the Investment Advisory Business Related to Securities and the Financial Futures Trading Law.
• It is also advisable to review the content of the Law on Sale of Financial Products and integrate it into the Investment Services Law.

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