Japan's J-REIT market was launched in 2001 amid a lot of doubt among foreign investors that the market would ever take off, but take off it did, particularly from 2003, when Japan's decade-long "Heisei Malaise" ostensibly ended, and the Nikkei 225 bottomed at around 7,600 in April of that year.

Thereafter, over 40 J-REITs were listed, and the Tokyo J-REIT index soared from 1,000.00 at its inauguration in March 31, 2003, to a May 2007 high of 2,592.16, representing a nice 2.6-fold gain over a four year period. But Japan's J-REIT market has since fallen on hard times, very hard times. Since the global financial crisis erupted following the failure of Lehman Brothers in September 2008, J-REITs have been struggling to hold on to purchased properties, let along acquire new ones. The rapid-fire failures of many newly emerged real estate developers who were J-REIT sponsors and the first bankruptcy of J-REITs themselves caused serious balance sheet and liquidity concerns. Consequently, the Tokyo Stock Exchange's J-REIT index plunged from the May 2007 high to a February 2009 low of 720.96, or 72.2% lower than the historical peak just two years earlier.

As J-REIT stock prices crashed, they did begin to attract foreign investor attention, especially as a J-REIT takeover, would ostensibly present a back-door means of acquiring a portfolio of attractive Japanese properties. In early 2008, it was hoped that the creation of a Northern Trust Global Investments NETs J-REIT ETF to list on the NYSE Arca to track the Topix J-REIT index might stimulate the market, but the J-REIT index was in a structural bear market even before the global financial crisis delivered a virtual coup-de-grace, and the NETs ETFs were liquidated in February 2009.

Only 5 of the listed J-REITs saw unrealized gains on property holdings between August 2008 and March 2009. J-REITs remain under pressure because banks will renew existing loans but not provide new loans, and as J-REIT sponsors themselves fail, this seriously hinders the J-REITs ability to get refinancing and rollover maturing bond issues as property appraisers have sharply lowered appraised values particularly on residential properties due to falling residential property prices. Fund raising alternatives, such as issuing preferred shares, are not an option for J-REITs. As a result, there were only 92 property acquisitions by J-REITs in FY08 versus 501 in FY07, and the market for J-REITs and private real estate funds declined by 1% in second-half 2008 to around $217 billion.

While talking about it since March, the Japanese government (specifically, the Financial Services Agency and the Land Ministry) appears to be in the final stages of pumping over $10 billion into the J-REIT market and removing impediments to consolidation in the industry. The market-weighted average yield has recently been as high as 7%, but investors remained leery because of balance sheet and liquidity risk.

The government has decided to intervene in the market as J-REITs are seen as the key to reviving Japan's sputtering urban center property market, because J-REITs were the major factor in the "mini-boom" in urban center property coming out of the Heisei Malaise. The 40-plus J-REITs still own more than $74 billion of prime commercial and residential real estate, and dumping by cash-strapped J-REITs is dragging down property prices.

Since the government has no intention of saving all of the 40-plus J-REITs, the survivors could boil down to those J-REITs with financially strong sponsors, and with property portfolios that were acquired between Q3 2001 and Q2 2004, or before the "mini-boom" in Japanese property. For US and European private equity investors wishing to get their hands on deeply discounted J-REITs selling at significant discounts to the value of property held, they must be prepared to pony up enough funds to clear maturing bond issues and refinance debt of the target J-REIT.

The J-REIT survivors will probably include, a) Japan Real Estate (8952.T), b) Global One Real Estate (8958.T), c) Mori Trust Sogo REIT (8961.T), d) Orix Jreit (8954.T) and e) Fukuoka Reit (8968.T)