Market Outlook Japan September 2012

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2 Japanese Economy The Japanese economy experienced a surprisingly sharp deceleration recently. Industrial production dropped for example by 1.0% in July which was complete ly unexpected. Financial analysts had forecasted an increase of industrial production by 1.7%. Against this background it seems very likely that third quarter GDP will show a negative growth rate which brings the Japanese economy closer to a recession. Moreover, the purchasing manager index fell in August to only 47.7 which is substantially below the expansion threshold of 50. The purchasing manager index was as recently as May with 50.7 still above the critical level of 50. The purchasing manager index clearly signals an ongoing contraction of the Japanese economy and there are currently no signs of a turnaround. The disappointing economic performance of the Japanese economy was very likely caused by the negative effects of the European sovereign debt crisis and the downturn in China. The political pressure on the Bank of Japan to act has certainly risen in this environment and was probably the reason why the Bank of Japan decided to ease monetary policy in September. It seems that the main target of the increase of the security purchase program from JPY 45 trn. to JPY 55 trn. was to weaken the JPY. Only in the fourth quarter will in our view show the Japanese economy the first signs of a turnaround. But, an important precondition for an economic recovery in Japan is an upturn in the Chinese economy. By Edgar Walk, Chief Economist of Metzler Asset Management of Bankhaus Metzler, Frankfurt/Main, Germany Real Estate Market 1. Office Market Tokyo Vacancy Trend The vacancy rate of some areas in the Tokyo CBD 5 Wards was volatile due to the significant amount of scheduled new office supply. However, the strong demands for expansion, efficiency, and good-quality buildings kept the overall occupancy rate of the Tokyo CBD stable. The market has turned the corner on the significant new office supply in 2012 that some observers have shown concerns about. Most of the supply has already come to the market. The research from CBRE shows 80% of the grade A new office supply in 2012 came out by the end of Q2, and the supply projected in Q3 and Q4 will be limited, with new supply in 2013 even expected to remain at around the log term annual average. We expect that the vacancy rate will start to decrease in H2 of

3 Vacancy Rate Tokyo CBD all and by CBD Ward 14 In % /99 12/01 12/03 12/05 12/07 12/09 12/11 2/12 4/12 6/12 CBD 5 Chiyoda Chuo Shinjuku Shibuya Source: Miki Shoji Monthly Rent Tokyo CBD and by CBD Ward 26 In JPY /99 12/01 12/03 12/05 12/07 12/09 12/11 2/12 4/12 6/12 CBD 5 Chiyoda Chuo Shinjuku Shibuya Source: Miki Shoji 3

4 Office Rent Trend Rents in the Tokyo CBD 5 Wards showed signs of bottoming out thanks to the strong demand spurred by the recorded low level of rents for the last decade. Several institutes reported that rents of grade A buildings in Tokyo CBD slightly increased in Q2 of Also CBRE released a report that the slight increase in grade A rents added to the indication that rents had bottomed out, moving the timing of bottoming out a quarter earlier than their original forecast. We also expect that the rents of those buildings will start to increase in H2 of Recent Office Transactions J-REITs and well-funded Japanese corporations kept the position as major buyers of Tokyo large offices following Q1 of Nippon Building Fund REIT sponsored mainly by Mitsui Fudosan purchased Comodo Shiodome at JPY 28.8 billion, which results in 4.9% NOI investment return. This was the biggest deal in the Q2 of Some foreign investors such as Aviva Investors and MGPA began to invest in Tokyo offices. Building name Date Price Cap (in JPY rate bn) (in %) Seller Buyer Age Area New Edobashi Building Kowa No.35 Building Akasaka Park Building Oct Invincible REIT (sponsored by Fortress) Kowa Real Estate Mitsubishi Estate Jowa Real Estate Japan Excellent REIT (sponsored by Kowa RE) Japan RE REIT (sponsored by Mitsubishi Estate) Chuo Urban Net Mita Building 10.3 NTT Urban Development Premier REIT (sponsored by NTT) 24 Ueno Tosei Building 5.9 Orix Premier REIT (sponsored by NTT) 4 Taito Urban Net Azabu Building 5.0 NTT Urban Development Premier REIT (sponsored by NTT) 19 Tokyo Keiki HQ Building Kabutocho Nikko Building Dec Simplex Investment Advisors Mitsubishi Corporation (trading company) AIG Edison Life Insurance Kenedix Realty Investment Corporation (REIT) Ota Chuo Hamarikyu Inter City Dec Kowa Real Estate Japan Excellent REIT (sponsored by Kowa RE) 0 Ginza Chuo Building Recruit Ginza 7 Building Higashi- Gotanda Square Gotanda Nomura Securities Building Ebisu Garden Place Dec-11 Jan-12 Feb-12 Feb Lone Star Group Recruit (information services company) Mitsui Fudosan Morgan Stanley Capital Shape Up House (beauty saloon operator) Hulic (a real estate company in Mizuho Group) NBF REIT (sponsored mainly by Mitsui Fudosan) Sankei Building Sapporo Holdings (beverage company) Chuo Chuo Shinagawa Shinagawa Shibuya Kioicho Building Mori Building Angelo Gordon & Orix Real Estate 22 Chiyoda Kawasaki Tech Centre Rubicon Japan Trust Taisei, Hulic & Development Bank of Japan 23 Kawasaki Kojimachi Business Centre Nagatacho TBR Building Takefuji former HQ Building Shin-Kawasaki Mitsui Building 5.5 Suruga Corporation (general constructor) former Takefuji (financial company) Mitsui Fudosan Arai Shoten (real estate company) Kuraken Corporation (real estate company) Sumitomo Real Estate NBF REIT (sponsored mainly by Mitsui Fudosan) Chiyoda Chiyoda Shinjuku Kawasaki Shinkawa Chuo Building IIF Kamata R&D Centre IIF Shinonome R&D Centre Mitsubishi Corporation (trading company) Top REIT (spons. by Sumitomo TB/Shin Nihon Steel) 24 Chuo IIF REIT (spons. by Mitsubishi Corporation/ UBS) IIF REIT (spons. by Mitsubishi Corporation/ UBS) 23 Ota 22 Koto 4

5 2. Residential Market Apartment Rent Trend Rents in Greater Tokyo have stabilized since the beginning of 2012 after suffering over 3 years. Rents in non-central areas of Tokyo prefecture continued to gradually increase following Q1 of IPD/Recruit Residential Rent Index 120 Indexed (100 = 1/2005) /05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 2/12 3/12 4/12 5/12 6/12 Greater Tokyo Central Tokyo Other Areas in Tokyo prefecture Kanagaw a prefecture Saitama prefecture Chiba prefecture Source: IPD Japan 5

6 3. Investment Market Institutional Investments In June 2012, J-REITs and Private Funds jointly held JPY 27.0 trn in Assets under Management (AuM). The institutional market continuously grew, in total by JPY 900 billion since December 2011, the biggest growth since J-REITs AuM continued to grow by JPY 240 bn in total in Q2 of 2012, increased by 70% from Q1. Total amount of capital increase through public offerings in Q2 of 2012 was recorded at JPY 109 billion. The new capital inflow into J-REITs through public offerings in H1 of 2012 adds up to JPY 204 billion. This is the biggest since Trends of private funds and REITs market size in Japan In JPY bn Dec/ Jun/ 2012 Privately Placed Funds J-REITs Source: STB Research Institute The economic growth strategy for the 2010s approved by the Cabinet this summer set a goal to increase J-REITs AuM by 40% by 2015 and double it in 2020 compared to Offices: Institutional investors started diversifying grades and areas of office investment away from grade A Tokyo offices. MGPA acquired a portfolio of 8 office properties, out of which 3 properties are located outside Tokyo CBD. The total price was reportedly JPY 12 billion. LaSalle Investment Management and Kenedix REIT acquired a property worth JPY 8 billion mainly used on offices in an Osaka suburban area. Several J-REITs restarted investing in local offices in cities like Osaka and Nagoya. 6

7 Residential properties: J-REITs, the key players in residential sector, invested in 25 properties amounting to JPY 37 billion outside greater Tokyo, such as Fukuoka, Osaka, Sendai and Nagoya, in H1 of 2012, allocating almost 40% of total investments to outside of greater Tokyo. This was a notable movement, considering their residential assets outside greater Tokyo currently account for less than 20% of the total assets. Singapore-based Saizen Real Estate Investment REIT continued to invest in residential properties all over Japan. Retail properties: CapitaMalls Asia, the Singapore-listed shopping mall developer, owner and manager in the CapitaLand Group, purchased a large commercial mall in Tokyo metropolitan area at JPY 23 billion, following the purchase of 3 suburban shopping centres in Osaka and Tokyo amounting to JPY 13 billion. Activia REIT sponsored by Tokyu Real Estate made a huge investment, acquiring 10 commercial properties in Tokyo, Osaka and Nagoya amounting to JPY 128 billion. US-based fund Angelo Gordon purchased a landmark retail building in the Aoyama area of Tokyo CBD. Industrial properties: The Blackstone Group, a major U.S. private equity fund management firm, acquired a large logistics facility in Osaka at JPY 6 billion. Industrial & Infrastructure Fund REIT sponsored by Mitsubishi Corporation and UBS acquired 6 industrial properties in greater Tokyo amounting to 37 billion. The largest property, worth JPY 9 billion, is a R&D centre of a Japanese IT service company, located in the bay area of Tokyo Metropolitan. This deal was the first full-scale J-REIT s investments in industrial sector since LaSalle Investment Management and Mitsubishi Estate started construction of a huge logistics facility with gross floor area of 210,000 sqm in greater Tokyo. Hotels: Ascendas Hospitality Trust, a Singapore REIT, purchased a large economy business hotel in Tokyo for JPY 16 billion. US-based fund Fortress Investment Group acquired a business hotel in central Osaka. Assets owned by J-REITs by property type In % 100 % = 8.7 JPY trillion* Other 8.4 Retail Office Residence 18.5 * as of June 2012 Source: ARES The Association for Real Estate Securization 7

8 Kenzo Capital Corporation Dr. Leonard Meyer zu Brickwedde President and CEO Sanno Park Tower 3F Nagata-cho, Chiyoda-ku Tokyo Tokyo Office Mobile Munich Office Mobile leonard.meyerzubrickwedde@ken-zo.de