Kazuyuki Wakasa
Special Counsel

Kazuyuki Wakasa has advised on a broad range of financial transactions for clients including banks, insurance companies, securities firms and asset management firms, with a recent focus on real estate investment and investment funds. He has extensive experience in drafting documentation in both Japanese and English, and in proposing contractual provisions that reconcile the parties’ competing interests while protecting his clients’ legitimate interests.

Japan Real Estate Investment and Finance: Emerging Trends and Legal Considerations

1. Introduction

After years of low interest rate, the Japanese real estate market has developed into an attractive investment destination for many domestic and foreign investors. The depreciation of the Japanese Yen in recent years has further encouraged foreign investors to be more active in their forays into the Japanese real estate market.

Apart from the temporary slowdown in transaction volume during the COVID years, real estate transactions in Japan have seen a gradual rise, driven by the normalization of economic activity and the recovery of inbound demand. Various prominent Japanese companies have led the charge in real estate sales as a part of CRE strategies aimed at improving capital efficiency.

The diversity of asset classes involved in recent real estate transactions is also remarkable. Besides traditional office, residential and commercial properties, investors have also focused on acquiring (a) logistics facilities in keeping with the growing prevalence of e-commerce, (b) data centers, as a result of advances in digitalization and (c) hospitality properties, to take advantage of growing inbound tourism. The emergence of new finance schemes such as digital securitization of real estate using blockchain technology (so-called security token offering (STO)) has also driven demand for real estate.

This article provides an overview of the legal structure of major real estate investment schemes in Japan and outlines recent market trends.

2. Common structure

2.1. Key factors in structuring

When structuring real estate finance and investment in Japan, there are several key factors to consider including bankruptcy remoteness, compliance with local regulation and tax efficiency.

In Japan, to ensure bankruptcy remoteness of the asset-holding vehicle, it is common to utilize a special purpose vehicle (SPV) whose sole purpose is to acquire real property-related assets.

In Japanese real estate transactions, an SPV often acquires trust beneficial interest (“TBI”) in a real property, rather than the real property itself. A primary reason behind this practice is certain tax benefit (i.e., transfer of TBI is free from real estate acquisition tax and qualifies for the reduction of real estate registration tax). TBI in real property constitutes a contractual right created upon entrustment of the real property by the initial owner to a trustee, whereby the initial owner becomes the initial beneficiary. From a Japanese regulatory perspective, TBI constitutes a security (Type II security) subject to the regulatory regime under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended, the “FIEA”). Because the asset-holding vehicle is an SPV, an external asset manager must be engaged to provide services such as budgeting, instructing the property trustee and developing investment strategies. If the SPV acquires TBI, the asset manager must be a registered investment advisor or registered investment manager, depending on whether it has been granted discretionary investment management authority.

It is also common in Japan to structure real estate investment schemes so as to avoid double taxation in the form of income taxation on both of (x) the profits of asset-holding vehicles, and (y) distributions to investors in the vehicles.

Owing to these factors, the real estate investment schemes in Japan have developed in the manner described below.

2.2 GK-TK structure

2.2.1 Overview

The GK-TK structure refers to a real estate investment scheme in which a godo kaisha (GK) acquires real estate-related assets such as TBI in real property using (i) loans from financial institutions and (ii) contributions from investors pursuant to tokumei kumiai (TK) agreements entered into with investors.

A godo kaisha (GK) is a corporate form under the Companies Act of Japan (Act No. 86 of 2005, as amended). GKs are often used as asset-holding vehicles in structured finance transactions because of the simplicity of their corporate structures and flexible governance. A TK agreement is bilateral contract between a proprietor and an investor (TK investor) under the Commercial Code of Japan (Act No. 48 of 1899, as amended), pursuant to which the TK investor contributes assets to the proprietor for the conduct of a specified business.

Under the GK-TK structure, profits distributed to the TK investor are regarded as deductible expenses in the calculation of the proprietor’s taxable income. This enables avoidance of double-taxation on both the proprietor’s profits and distributions to the TK investor.

2.2.2 Regulatory Aspect

Besides tax benefits available for acquisition of TBI, there is another reason why it is standard practice for an asset-holding vehicle under GK-TK structure to acquire TBI in real property. If a GK acquires real property instead of TBI in the real property using contributions from a TK investor, it will be subject to the Real Estate Specified Joint Enterprise Act (Act No. 77 of 1994, as amended; the “RESJEA”), which imposes licensing requirements on business operators who conduct real estate transactions with investor contributions and distribute the resulting profits to the investor. On the other hand, a GK will not be subject to the RESJEA if it acquires TBI in real estate. Accordingly, asset-holding vehicles under GK-TK structure typically acquire TBI in real property to avoid the onerous requirements of the RESJEA.

Additionally, the interest of a TK investor under a TK agreement (TK interest) constitutes a security (Type II security) under the FIEA, which triggers application of the regulatory regime thereunder. As a result, a GK (i.e., a proprietor in GK-TK structure) that solicits investors for acquisition of TK interests is generally required to undergo registration as the Type II financial instruments business operator under the FIEA. Furthermore, a GK that primarily invests in securities with TK investor contributions under a GK-TK structure is required to undergo registration as an investment manager under the FIEA. As TBI constitutes a security under the FIEA, a GK that acquires TBI with TK investor contributions is similarly required to undergo registration as an investment manager. In practice, exemptions from these registration requirements are commonly utilized so that the GK, as an SPV, need not undergo the aforementioned registrations (for example, by engaging registered financial instruments business operators).

2.3 TMK structure

2.3.1 Overview

Another common structure in Japanese real estate finance and investment is the TMK structure, in which a tokutei mokuteki kaisha (TMK), formed as an unlisted asset-holding vehicle, acquires real property or TBI in real property, using (i) proceeds of specified bonds (tokutei shasai) issued by the TMK and (ii) equity contributions obtained through the issuance of preferred shares (yusen shusshi).

The TMK was introduced as a vehicle for asset securitization pursuant to the Act on the Securitization of Assets (Act No. 105 of 1998, as amended, the “Securitization Act”), a legislation enacted to promote asset securitization. Under the Securitization Act, a TMK must file with the Japanese regulator (i) a business commencement notice and (ii) an asset liquidation plan setting forth, amongst other things, an overview of the TMK’s business, the assets to be acquired, and the terms of the specified bonds and preferred shares. To amend its asset liquidation plan, a TMK must generally (i) obtain the consent of interested parties and (ii) file such amendment with the regulator, except in limited circumstances (such as immaterial changes to the documents). The Securitization Act also prohibits a TMK from conducting business beyond the scope of its asset liquidation plan.

Whilst regulation under the Securitization Act may be onerous, a tax benefit is available under the Act on Special Measures Concerning Taxation of Japan (Act No. 26 of 1957, as amended, the “Tax Special Measures Act”), whereby profits distributed to preferred shareholders are treated deductible expenses in the calculation of a TMK’s taxable income, subject to fulfilment of certain requirements.

2.3.2 Regulatory Aspect

Unlike the GK-TK structure, the TMK structure is not subject to the RESJEA. This allows a TMK to acquire both TBI and real property. In practice, the TMK structure is often utilized for real estate investments involving development of new buildings. However, the target assets must be specified in the asset liquidation plan from the outset, and certain restrictions apply to the acquisition of additional assets, particularly outright real property.

Under the FIEA, both specified bonds and preferred shares issued by TMK constitute securities (Type I securities). It is therefore common practice to engage a Type I financial instruments business operator for solicitation of investors to acquire these securities.

2.4 REITs

The real estate investment trust (REIT) is another major real estate investment scheme in Japan. The legal form of a REIT in Japan is an investment corporation organized under the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951, as amended). REITs are prohibited from engaging in any business activities other than asset management and from having employees. REITs are also required to engage external service providers for their operations, including asset management. Dividends paid by a REIT are deductible from the taxable income of the REIT if it satisfies the requirements of the Tax Special Measures Act. REITs can be classified into two types: public REITs that are listed on the stock exchange and generally closed-end, and private REITs that are generally open-end. In contrast to a TMK, a REIT is an investment vehicle expected to use its proceeds to acquire additional properties on an on-going basis.

2.5 Retail Real Estate Investment Products

In addition to the primary real estate investment schemes described above, various fractional real estate investment products have emerged, in which investment interests are divided into small units for retail investors. Some of these products, however, have limited liquidity.

3. Recent Development and Trend

Several notable recent developments in Japanese real estate investment in Japan are outlined below.

3.1 Real Estate Security Token Offering (STO)

The amendment to the FIEA that came into force in May 2020 established new rules regarding securities and rights that can be electronically issued and transferred using blockchain technology. This amendment has prompted the issuance of security tokens (digital securities) backed by underlying real estate (real estate STO).

A typical real estate STO involves a beneficiary certificate-issuing trust under the Trust Act of Japan (Act No. 108 of 2006, as amended) in which (i) the trustee acquires real estate-related assets upon entrustment from the asset holding vehicle (an SPV) and (ii) proceeds from the issuance of beneficial interests are utilized for acquisition of the underlying real estate-related assets. In a beneficiary certificate-issuing trust, transfers of beneficial interests must be recorded or entered in the beneficiary registry to perfect such transfers. Maintaining the registry on a blockchain platform makes it possible to issue and transfer beneficial interests electronically as security tokens.

In addition, since December 2023, Osaka Digital Exchange Co., Ltd has operated a PTS (private trading system) for real estate STOs, providing a platform for secondary transactions.

In contrast to public REITs, which invest in diversified portfolios of real properties, real estate STO typically targets a specified and limited number of real properties for investment, although both are accessible by retail investors.

3.2 Data Center

Rapid advances in artificial intelligence (AI) technology have driven demand for computing infrastructure capable of processing massive amounts of data. As a result, data centers have emerged as a major asset class in real estate investment.

Unlike traditional asset classes such as office and residential properties, data centers are considered operational assets and require substantial electricity to operate, making stable electricity supply essential. In addition, the value of ancillary facilities is relatively high compared with the land and buildings that comprise the data center.

Under the Act on Investment Trusts and Investment Corporations, investment corporations must invest more than half their assets in specified assets listed thereunder. Whilst real property is included among such specified assets, movable property is not. This has prompted discussion as to whether data centers can serve as the primary investment target of investment corporations. In June 2025, the Financial Services Agency of Japan issued guidelines on the criteria for data center-related facilities to be counted as real property.

Data centers also attract attention from the standpoint of economic security, and further regulatory and policy developments in this area are expected.