3 ASIAN LEGAL BUSINESS – JAPAN E-MAGAZINE WWW.LEGALBUSINESSONLINE.COM “The Japan investment market is benefiting from the reallocation of Asia investment capital away from other markets. As the China market has faced headwinds, global real estate funds and asset managers have been reallocating resources that previously would have gone to China to markets like Japan and Australia, and in the case of more developing markets, to Vietnam,” adds Greenberg Traurig’s Rothstein. Another pivotal factor in this growth story has been the rising demand for a variety of real estate spaces, particularly traditional offices, healthcare amenities, logistics and warehousing facilities, data centres and hotels. “Foreign real estate investors are drawn to hotel property in 2023 since the number of foreign tourists has revived to the pre-covid level,” says Shingo Hattori, founder of Tokyo-based law firm Hattori Law. Top brands like Hilton and Accor are actively increasing their Japan portfolio, among others in the market, Hattori adds. Urban residential projects are still the most attractive real estate asset for global capital, given low-interest rates and promises of increasingly high returns. “Multifamily housing tops the list of targeted asset classes for cross-border investors. In just the last three years, we closed at least 15 large portfolio deals for international real estate funds, family offices and asset managers,” Rothstein says. The demand for office spaces has also risen steeply following the ‘backto-office’ call by most large companies after the pandemic-induced lockdowns. “One surprising area where we see some activity is the office asset class. In Japan, remote work has not taken hold post-COVID in the same way it has in many other markets around the world. People generally still go to the office. A well-located office building with the right tenant mix can still attract international investor interest,” Rothstein says. BEYOND TOKYO While the surge in real estate investments have been traditionally focused in Tokyo and Osaka, the increasing prices in the cities and the rapid urbanization of other regions has led to growing global investment in real estate assets across the country. “Japan’s status as a popular investment destination also means that it is a competitive market with compressing cap rates. As a consequence, investors have expanded their geographic reach beyond the traditional investment hubs of Tokyo and Osaka. Increasingly, we see cross-border investors venturing to places like Nagoya, Fukuoka and Sapporo, where deals might not attract as many competitive bidders. Approximately 30 percent or more of the deals we have executed in the last two to three years have actually been outside of Tokyo and Osaka,” Rothstein says. Usami of White & Case also points out that major cities like Osaka, Nagoya, and Fukuoka are experiencing notable advancements in their office infrastructure, fueling growth in their respective local economies. Hattori adds that some foreign hotel operators are keen to develop their businesses in regions new to foreign investors even though Niseko and Nagano are still gems for the investment. REGULATORY, STRUCTURING CHALLENGES Legal experts agree that the landscape for foreign investment in Japan’s real estate market remain largely stable, navigating these regulations, especially given the language barriers in the country, poses an impediment, if at all, to investors. “Japanese laws provide avenues for foreign investors to capitalize on established investment frameworks such as TMK, facilitating advantageous tax treatment. However, navigating the real estate landscape involves intricate regulatory requirements and constraints, encompassing both national and local regulations,” says Usami. Rothstein adds that most clients are taken aback by the complexities of deal structuring when navigating the country’s laws and availing incentives. “The reaction I usually get when a client undertakes its first deal in Japan, and is presented with a structure chart depicting the recommended ownership and investment structure both onshore and offshore from Japan, is why is this chart so complicated?” explains Rothstein. Rothstein explains that there are three crucial aspects of real-estate dealmaking that are the source of complexity: First, tax planning; second, regulatory licensing requirements; and finally, lender requirements for non-recourse financing. “We always advise cross-border investor clients to fully develop the optimal ownership and investment structure before commencing the transaction. Closing in the wrong investment structure would be a costly mistake. Substantial costs and adverse tax consequences could result if a deal is restructured postclosing,” Rothstein adds. While foreigners face no restrictions in purchasing Japanese real estate, Hattori says that there are certain new laws that have added certain limitations which are important from a compliance perspective before making an investment. “Japan adopted the Act on the Review and Regulations of the Use of Real Estate Surrounding Important Facilities and on Remote Territorial Islands in 2021. This act designates specific areas close to defence facilities, nuclear power plants, etc. as monitored areas and requires specific disclosures to the government. This might impact foreign investors and it’s necessary to take care of the area designation in the due diligence process,” says Hattori. Another large challenge arises from the domestic nature of Japan’s real estate market, making it difficult to purchase land without experts fluent in the Japanese language. “Japan’s real estate market predominantly operates on a local scale, where language barriers could pose significant hurdles. Engaging bilingual profession-