Real-Estate Funds: Making Prominent Inroads into the Providing of Physical Distribution Facilities

The Backdrop: Systemic and Environmental Change

Lying behind the development of real-estate funds' providing of facilities are four factors of systemic and environmental change: (1) the promotion of development for the real-estate securitization system, (2) the progression of low interest rates worldwide enhanced by the collapse of the IT bubble, (3) obligatory application of asset-impairment accounting, and (4) shifting needs in regard to physical distribution facilities.

Developments regarding the real-estate securitization system have been made throughout the latter half of the 1990s via the 1995 “Real-Estate Syndication Act” (aimed at protecting investors), the 1998 “Special Purpose Company (SPC) Law” (regarding the liquidity of specific assets), and others. Additionally, with the 2000 revision and enforcement of the “Investment Trust Law” (concerning investment trust and investment corporations), the choice of assets invested in by investment funds, which had been primarily limited to securities, expanded into real estate and other assets. Furthermore, with the establishment of the system in the Tokyo Stock Exchange's JREIT (Japanese Real-Estate Investment Trust)-limited trading market in 2001, the participation of individuals in real-estate investment became possible within the structure of securities investments of petty cash funds.

Fundraising for the acquisition and construction of physical distribution facilities by real-estate funds has been conducted primarily through private-style real-estate funds (nonpublic funds) and others. However, in June 2005, Mitsui & Co. business group's Japan Logistics Fund Investment Corporation-the first specialized physical distribution asset-style JREIT corporation-became listed on the Tokyo Stock Exchange.

With the drop in interest rates since 1991, coupled with 1999-2000 “Zero Interest-Rate Policy” and the succeeding policy for quantitatively easing interest rates, Japan's historically low rates are continuing. Furthermore, following the plummeting interest rates in 2001 brought about by the bursting of the IT bubble, low interest rates have continued in Europe and the U.S. as well. Within these circumstances, high returns can now be expected from Japan's real-estate investments that are entangled with declining land prices, as compared with other methods of operation. Additionally, the lease for physical distribution facilities is generally a long-term contract. For example, for the construction of development-style facilities that take into account tenant needs, the contract can be longer than 10 years. By holding fixed-period, long-term rental contracts, it is possible to eliminate rent reductions and thus there is a high level of safety on returns.

For listed companies and certain others (companies that fall under the Securities Trading Law (i.e. that submit biannual securities reports), and large companies that fall under the Law for Special Provisions for the Commercial Code Concerning Audits, Etc.), the early handling of impairment loss on fixed assets (in situations where losses are posted as a result of dissipated expectations in the recoupment of stakes due to falling profitability) began in March 2004, and starting from the fiscal period beginning on April 1, 2005, the application of these handling processes became obligatory. In order to reduce the risk of profit fluctuation from this change in the system, there is a trend toward moving physical distribution assets to off-balance-sheet assets.

The specific needs for physical distribution facilities are shifting from storage warehouses as stock space to temporary sorting and load-assortment space (e.g. distribution centers). Furthermore, demands are also increasing for highly sophisticated facilities that are temperature controlled, have constant humidity, and are earthquake proof.

As the structure of conventional storage warehouses is completely different from distribution centers, it is difficult to respond to changes in these kinds of physical distribution facility needs. In FY 2004 Mitsui Warehouse Co.'s capital investment was 6.2 billion yen, and planned capital investment for FY 2005 will reach 10 billion yen; this is representative of a movement among warehouse operators toward rebuilding warehouses to suit the individual tenants' needs. However, reducing mismatching caused by rebuilding existing warehouses is no easy task.

Merits to Users such as Avoiding the Worsening of Capital Efficiency

Compared to a company owning its own facility, if physical distribution facilities are leased, the equivalent margin of rent is relatively high. However, as previously mentioned, risks related to asset-impairment accounting can be avoided; the possible worsening of capital efficiency can also be avoided via funds that are fixed for a long term. Additionally, the need to own real estate that can be mortgaged will also decrease as a result of diversifying fundraising methods.

Since foreign-affiliated real-estate funds make it possible for global fundraising at an extremely low interest rate, these kinds of funds possess cost superiority, and as a result, it is easier to respond to tenant companies' desires.

Through these conditions, cargo owners who are aiming to improve efficiency and those conducting integration and reevaluation for their physical distribution centers will have a greater choice in facilities as a result of the facilities provided by real-estate funds. Moreover, these choices will also grow for 3PL and other contracted distribution companies.