International Real Estate – Japan – Masahito Saeki

I joined Mori Hamada & Matsumoto (MHM) in 2005 and work in the field of real estate. I am now a Partner leading the REIT team in MHM.

My practice includes various fields of finance – particularly real estate investments, the fluidisation and securitisation of real estate and other assets, REITs and the infrastructure fund business. I am also actively engaged in cross-border transactions, including overseas investments by Japanese companies, as well as Japanese investments using foreign capital.

I advise on a wide range of real estate fund transactions, both for public funds and private funds. Public funds and private funds are considered to be different fields, and few attorneys have expertise in both. I am able to provide legal advice with a high degree of expertise in both areas.

My work includes a particularly large number of matters that are novel in nature. For example, I advised a Japanese sponsor in the listings of their first listed infrastructure fund, a Singapore business trust, as well as a Singapore REIT.

I have provided legal advice to investors from all over the world, including Asia, the US and Europe. Among them, I have worked on many cases involving Japanese real estate investments of investors from Asia, particularly Singapore, Hong Kong and China. I was once seconded to a Singapore law firm for a year, during which time I was involved in many investment deals by Japanese investors. In particular, I was involved in the IPO of a Singapore REIT, where I gained knowledge and experience with respect to Singapore REITs. I was involved in many IPOs of Singapore business trusts and REITs, as well as investments in Japanese real estate by such business trusts and REITs. No one else in Japan has provided legal advice on Singapore business trusts and REITs to the extent that I have.

The hotel sector faced a difficult situation during the COVID-19 pandemic. In Japan, hotel investments are often made under a leasing scheme, wherein the hotel owner leases the hotel to the operator of the hotel. Under this scheme, the lessee is usually required to pay a certain amount of rent, regardless of the conditions under which the hotel is operating. This led to intense negotiations between hotel owners and lessees on rent reductions and exemptions, and I advocated for parties on either side of these discussions.

In contrast, after COVID-19, there was a remarkable recovery in the hotel sector and an increase in hotel investment projects, including investments by Japanese REITs and foreign investors. The number of hotel construction and operation projects of foreign hotel brands also grew significantly, and we provided legal advice on several hotel management and franchise agreements.

In addition, there have been many data centre development projects in recent years. Many overseas players are involved in the development and operation of data centres in Japan, and we have adapted overseas practices to Japanese laws and regulations.

Recently, security token offerings (STOs) have been used for highly novel real estate investment projects in Japan. In this jurisdiction, investments have traditionally been premised on physical assets, such as real estate and securities with real estate as the underlying asset. However, with the advancement of digital technology, STOs are now being conducted to invest in digital rights representing real estate and securities. I am currently involved in a deal to set up an STO fund, as well as advising on transactions that can be realised through digital technology.

As of 2024, many real estate STO deals have already taken place. Trust schemes are mainly utilised for real estate STO deals in Japan. Since certain procedures are required by law to transfer real estate and securities rights and fulfil perfection requirements, and these require physical registration or stamping of documents, an alternative scheme where the transfer and perfection procedures can be completed digitally was necessary. Since, under a trust scheme, these procedures can be performed through book entries in the register of beneficiaries, the trust scheme has been widely adopted in practice as a scheme that fits well with digitalisation.

ESG has become an integral part of real estate investment as well. For example, sustainable financing is widely used in real estate funds, and green lease rental agreements are sometimes entered into. In addition, many investment properties have recently received official certifications to ensure that they are ESG-qualified.

There are many types of sustainable financing, but the most common are green bonds and green loans. Those are carried out to finance the acquisition of green certified real estate or to refinance existing green financing. In order to provide such financing, a green framework based on global green bond principles or green loan principles and Japanese guidelines developed by the Japanese government should be first established, and then the financing is carried out in accordance with such framework. In practice, the framework is then certified by a third-party organisation as being based on the above principles and guidelines. Third-party certification plays an important role in practice to avoid greenwashing.

More recently, a similar framework has been used for equity financing, also known as green equity. Although there are no official principles or guidelines on which equity financing is based, a framework referring to the principles and guidelines for bonds and loans has been used.

As mentioned above, the development of data centres is being promoted in Japan. One topic that has attracted a lot of attention in recent years is whether Japanese REITs can acquire data centres. Data centre REITs are common around the world, especially in the US. In Singapore, REITs investing in data centres have also been formed. In order to promote more development of data centres in Japan, it is important to have Japanese REITs as a way of exit. However, there is an issue unique to Japanese law, which is that the main investment target of a Japanese REIT must be real estate.

The equipment and facilities inside a data centre are more valuable than the land and building, and it is not clear whether the equipment and facilities are real property or personal property. If these are considered personal property, the data centre cannot be the primary investment of a Japanese REIT.

We are committed to resolving such issues from a legal perspective.

As mentioned above, with the development of digital technology, STO transactions have been considered to be feasible from a technical perspective, but the legal status of digital rights was originally unclear. However, amendments to the Financial Instruments & Exchange Law, which came into effect in 2020, clarified the legal treatment of security tokens, which are digital rights, and STOs are now conducted in compliance with the law. Since real estate STO transactions in Japan began to take place after the amendment, the amendment had a significant impact on the Japanese real estate market and players.

As mentioned above, STOs were said to be somewhat inflexible in terms of schemes due to practical restrictions on the perfection requirements for the transfer of digitalised rights. However, the law has been improved, and exceptional measures for digitalised rights are now allowed. The number of projects and the diversity of schemes are likely to increase, and it is expected to become a more common investment product in the future.

With offices across Asia and New York and a network that spans the world, MHM has developed from a Japanese firm to a global one, providing international legal services across all fields of real estate-related transactions, to clients all over the world.

Real estate investments are now usually cross-border, and our lawyers in Tokyo and other global offices are well versed in the real estate laws and regulations of each country, providing first-rate legal advice on real estate investments in all countries. Our advice not only covers the legal aspects of the transaction, but also extends to practical insights and provides realistic solutions to complex issues that often arise in cross-border transactions.

I have a large number of overseas clients, particularly in Asia, and over the years I have advised many of these clients on their Japanese real estate investments. As a result, I am able to provide information not only on the legal issues, but also on Japanese real estate investment practices, as well as practical problem-solving proposals. In addition, when faced with unprecedented problems, we can draw on the firm’s extensive resources to present solutions based on similar cases.

Stricter supervision of asset management companies of real estate funds followed after administrative actions were taken in 2022 against a certain J-REIT asset management company. A business suspension order and a business improvement order were issued to the J-REIT asset management company by the Financial Services Agency of Japan after it was established that the following violations of its duty of loyalty to the J-REIT were committed:

• Undermining the independence of the real estate appraiser, where the appraised value of real estate acquired from the parent company was inflated;
• Tampering with the real estate appraiser selection process, where several appraisers were asked to provide estimates, and the appraiser who tendered the highest estimated value was requested to quote the lowest fee.

Based on the administrative actions taken, the FSA is said to have enhanced its supervision of the conflict-of-interest management systems of asset management companies and revised its guidelines to require them to establish proper due diligence procedures. This trend may enhance good governance and transparency in the market and make the market more attractive for investors.

MHM has experience with a variety of real estate properties, located in Japan or overseas, including office buildings, residential and commercial developments, in addition to properties used in the logistics, hotel and healthcare sectors.

Our real estate investment and financing practice provides leadership and support in a variety of real estate transactions, leveraging the knowledge and experience of lawyers from diverse areas of practice. Our team, consisting of lawyers with experience in real estate, structured finance, banking and compliance, is led by a core group of our senior lawyers who are recognised leaders in their respective fields, including myself.

Moreover, we have the support of lawyers in our firm’s overseas offices and affiliated law firms to deliver timely and tailored advice for our clients regarding their properties around the world.