Japan’s property market could become more transparent if the Financial Services Agency decides to monitor private property funds in addition to listed Reits as expected, analysts said yesterday.

The country’s property market has drawn gobs of money, prompting regulators to seek more disclosure and closer monitoring of private funds in the sector.

Japan is set to introduce a financial products exchange law in September, bringing private funds under scrutiny to see if the prices they pay in real estate transactions and their assessments of future rental income are appropriate.

Funds with 50 or more investors will also be required to register with the agency, while those with less than 50 will have to file reports to it. Some other steps were outlined in a report released by the FSA last month.

‘The FSA’s reasoning is to eliminate erring entities, and that should be good. There will also be little impact on those already in the market,’ said Go Saito, analyst at JP Morgan.

Investment vehicles such as special purpose companies and private funds are frequently used by property investors to keep their balance sheets from expanding and to ease their tax burden.

The market for private property funds expanded to 6.1 trillion yen (S$77 billion) as of the end of December, up 38 per cent from a year earlier, according to STB Research Institute Co Ltd. During the same time, the Japan Reit market expanded to 5.4 trillion yen, up 59 per cent.

‘It seems that the market has turned a bit overheated. Still, there are investors who think the Japanese property market has upside potential and money keeps coming in,’ said Yasuo Ide, independent analyst at Ide Financial Real Estate Research.

Mr Ide said some players who cannot afford to have qualified staff and set up a system to meet all the new requirements will likely withdraw from the market. ‘Those that have not much financial backing and lack know-how will be eliminated,’ he added.

The steps could also force some smaller players to exit the market, which may help a little in keeping returns on property investments from falling further, said Machio Honda, analyst at Deutsche Securities Inc.

‘This could mean that some property assets would come up for grabs and that should help Reit funds that have had a hard time buying properties in the competitive market,’ he said.

On the other hand, Japan also needs some more deregulation steps to make the Reit market more attractive, Mr Ide said. ‘It’s only Japan where the government does such screening of property entities. Some people would question the move.’

Source: The Business Times, 18 May 2007