Japan Real Estate First Quarter 2018

Transcription

1 Marketing Material Research Report Japan Real Estate First Quarter 2018 January 2018 Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. Certain Deutsche Asset Management investment strategies may not be available in every region or country for legal or other reasons, and information about these strategies is not directed to those investors residing or located in any such region or country. For Professional Clients (MiFID Directive 2014/65/EC Annex II) only. For Qualified Investors (Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA)). For Qualified Clients (Israeli Regulation of Investment Advice, Investment Marketing and Portfolio Management Law ). For APAC Institutional investors only. In the United States and Canada, for institutional client and registered representative use only. Not for retail distribution. Further distribution of this material is strictly prohibited.

2 Table of Contents 1 Executive Summary 3 2 Macro Economy 4 3 Capital and Investment Market Lending Pricing Transactions Performance J-REITs 10 4 Market Fundamentals Office Retail Residential Industrial Hotel 18 Past Topics of This Report 19 Important Information 20 Research & Strategy Alternatives 22 The opinions and forecasts expressed are those of Japan Real Estate Research Report and not necessarily those of Deutsche Asset Management. All opinions and claims are based upon data at the time of publication of this article and may not come to pass. This information is subject to change at any time, based upon economic, market and other conditions and should not be construed as a recommendation. 2 Japan Real Estate First Quarter 2018 January 2018

3 1 Executive Summary Macro Economy: Japan s real GDP growth was estimated to be around the mid one percent range in 2017 with a strong corporate sector and recovering consumer spending contributing to growth 1. The Nikkei 225 index marked 23,350 for the first time in 26 years, while the Diffusion Index (DI) of the Tankan Survey conducted by the Bank of Japan, rose to its highest reading since Capital and Investment Market: The J-REIT index softened by 10.4% in 2017 amid gradual long term interest rate rises and also continuous capital outflows from J-REIT mutual funds. Five transactions out of the top six largest deals in 2017 were purchased by cross border investors including joint-ventures, reflecting weakened J-REIT investment activities in the year. Foreign capital accounted for about 29% of all the transactions in Tokyo in 2017, a significant jump from 14% in the 12 month period ended June Real Estate Market Fundamentals: Leasing markets and real estate fundamentals remained healthy. Office vacancy rates posted a further recovery in Tokyo, Osaka and other major cities as average rent continued to post moderate growth. The number of foreign visitors increased and hotels continued to perform strongly both in Tokyo and Osaka. Retail sales also picked up in high street and department store categories accordingly. Condominium unit prices saw a seasonal adjustment near the year end, while residential rents strengthened in Tokyo. Due to a recent supply surge, some submarkets in the logistics sector experienced a short term demand-supply imbalance. Past performance is not indicative of future results. The comments, opinions and estimates contained herein are for informational purposes only and set forth our views as of this date. The underlying assumptions and these views are subject to change without notice. 1 Source: Deutsche Bank Japan Economics Weekly. As of Dec Source: The Bank of Japan s Tankan Survey. As of Dec Japan Real Estate First Quarter 2018 January

4 F F 2019F 2020F 2021F 2 Macro Economy Japan s real GDP growth was estimated at around the mid one percent range in 2017, with similar growth expected to continue in Both exports and private consumption made positive contributions to growth, while a possible slowdown in housing investment could moderate the growth rate in the latter half of The unemployment rate declined further to 2.7% in November 2017, the lowest level in 24 years. Labour shortage has become a serious issue in some sectors, including retail, construction, logistics and lodging. Concerns remain over the intensified geopolitical risks in the Korean peninsula and the possible appreciation of the Japanese yen. Exhibit 1: Japan s GDP Growth Outlook and Nikkei 6% 4% 2% Forecast % -2-4% -6% dot-com bubble burst VAT Hike % VAT Hike Asian Financial Crisis Global Financial Crisis Q1 Q2 Q3 Q4 Nikkei 225 YoY (RHS) Sources: Deutsche Bank Japan Economics Weekly. As of Jan Notes: E = preliminary estimate, F = forecast, there is no guarantee forecast growth will materialise. Please refer to Important Notes (see end of report). Past growth is not a reliable indicator of future growth. Japan s corporate sector remained in a healthy recovery. The latest results of the Diffusion Index (DI) of the Tankan Survey conducted by the Bank of Japan (BoJ) further rose to a reading of 25 points in December 2017 from 14 points a year ago. The highest reading in 25 years, it reflected a record in corporate earnings history. Exhibit 2: Diffusion Index of Business Conditions (2010=100) 126 Diffusion Index of Business Conditions: ('favourable' minus 'unfavourable,' % points) Outlook Consumption Tax Hike Dot.com Bubble burst Global Financial Crisis Business Condition Leading Index (LHS) Diffusion Index of Tankan Survey (RHS) Sources: Bank of Japan, Japan s Cabinet Office, Deutsche Asset Management. As of Jan Past performance is not a reliable indicator of future performance. The Nikkei 225 index recovered temporarily to the JPY 23,350 mark in January, the highest reading over the last 26 years. Since the end of September 2017, the stock price rose by 16.8% while the Japanese yen strengthened by 0.5% against the US dollar in the same period. 4 Japan Real Estate First Quarter 2018 January 2018

5 F 2018F 2019F 2020F 2021F Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Exhibit 3: Stock (Nikkei) and Forex 25, , , ,000 5, Global Financial Crisis JPY peaked at 75 "Abenomics" Nikkei 225 (LHS) USD/JPY (RHS) Sources: The Bank of Japan, Japan s Cabinet Office, Deutsche Bank. As of Jan Past performance is not a reliable indicator of future performance. Ten-year Japanese government bonds have been trading at around 0.1%. Core CPI made a gradual increase since the beginning of 2017 and was 0.7% in November 2017, up from 0.4% in April 2017, reflecting the improved recent consumer demand. Exhibit 4: Forecast of Interest Rate and CPI 3 2 (%) Forecast Overnight Call Rate 10Y JGB CPI CPI (VAT effect) Sources: The Bank of Japan, Japan s Cabinet Office, Deutsche Bank. As of Jan Past performance is not a reliable indicator of future performance. Notes: F = forecast, there is no guarantee rates forecasted will materialise. JGB = Japanese Government Bond. CPI = Consumer Price Index. Please refer to Important Notes (see end of report). Japan Real Estate First Quarter 2018 January

6 E F Capital and Investment Market 3.1 Lending The BoJ s Diffusion Index for lending attitudes of banks to the real estate industry (orange line in Exhibit 5) was an index value of 26 as of December 2017, a recovery from 21 in September Credit conditions still remain accommodative for stabilized, income-producing assets, but lenders remain cautious over elevated valuations. Lending volumes for new projects dropped by 10.9% in the year ended September 2017, demonstrating two consecutive quarter drops. Exhibit 5: Real Estate Lending by Japanese Banks Diffusion Index (DI) growth of lending to new projects (yoy, LHS) lending attitude DI to all industries (RHS) lending attitude DI to real estate industries (RHS) Sources: The Bank of Japan, Japan s Cabinet Office, Deutsche Asset Management. As of Jan Past performance is not a reliable indicator of future performance. The preliminary volume of commercial real estate transactions in Japan in the rolling 12 months to December 2017 was JPY 3.8 trillion. The final figure is expected to be similar to the previous period amount at around JPY 4.0 trillion. Deal flow is tight in Central Tokyo due to elevated priced valuations, while the market continues to see a number of large sized transactions, including portfolio deals, both by domestic and international investors in the surrounding areas. Exhibit 6: Real Estate Transaction Volume and Lending Attitude DI 6 5 (JPY tn) Diffusion Index (DI) 0-36 Transaction volume (12 months, LHS) Lending attitude DI (6 months prior, RHS) Sources: Urban Research Institute, Bank of Japan, Real Capital Analytics, Deutsche Asset Management. As of Jan Past performance is not a reliable indicator of future performance. There is no guarantee the estimates shown will materialize. Notes: E = preliminary estimate, F=forecast. Please refer to Important Notes (see end of report). 6 Japan Real Estate First Quarter 2018 January 2018

7 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Pricing Office appraisal cap rates in Tokyo continued to compress to a preliminary 3.6% in the third quarter of 2017, a marginal decline from the previous quarter. Cap rates for existing income producing assets are under extreme pressure, with similar compressions seen in other cities and other sectors. The office yield spread the difference between the cap rates and ten year bond yields were broadly flat at 2.8% in Tokyo in the fourth quarter of 2017, providing relatively attractive spreads among select global cities, compared to 2.6% in London or around 2% in New York City and Sydney. Exhibit 7: Cap Rate and Yield Spread 6.5% % % % 3. Appraisal Prime Cap Rate 5% 4% 3% 2% 1% -1% Office Yield Spread (RCA Average Transacted) Tokyo Office Tokyo Residential TMAX Economic Osaka Office Osaka Residential Tokyo New York London Hong Kong Singapore Sydney Sources: Association for Real Estate Securitization, TMAX, Real Capital Analytics, Bloomberg, Deutsche Asset Management. As of Jan Past performance is not a reliable indicator of future performance. The capital value for grade-a office in Central Tokyo stood at JPY 8.36 million per tsubo 3 in September 2017, still 27% lower than the previous peak recorded in 2008 before the Global Financial Crisis, but an increase from JPY 8.1 million per tsubo recorded in March The listed J-REIT index the leading indicator of the office capital value in Tokyo has remained almost flat since June 2017, and is not expected to make a significant move going forward. Exhibit 8: Real Estate Capital Value in Japan 2,400 2,000 Sep 08 Global Financial Crisis (JPY m/tsubo) , , J-REIT Index (LHS) Office unit price (Grade-A, RHS) Sources: Daiwa Real Estate Appraisal, Bloomberg, Deutsche Asset Management. As of Jan Tsubo is a Japanese unit of area. It is equivalent to 3.3 square metres (35.6 square feet) Japan Real Estate First Quarter 2018 January

8 3.3 Transactions Exhibit 9 shows the largest real estate transactions announced in 2017 in the country. The largest deal in 2017 was the acquisition of Blackstone s 221 residential property portfolio by China s Anbang Insurance for an estimated JPY 260 billion. This was followed by Veloqx s retail portfolio purchased by Norges Bank and Tokyu Land for JPY 133 billion, Sharaton Grande Tokyo Bay Hotel in Tokyo Disney Resort by GIC and Invincible Investment Corp for JPY 98 billion, and Minatomirai Center Building by Gaw Capital for JPY 80 billion. Five transactions out of top six were purchased by cross border investors including joint-ventures, reflecting the weakened J-REIT investment activities in Yokohama hosted four office transactions out of the top six office deals in the year, attracting strong interest from both domestic and international investors. The top four residential portfolio transactions were all acquired by cross border investors. Exhibit 9: Major Transactions in the First Quarter 2017 # Type Asset 1 Residential 2 Retail 3 Hotel 4 Office Blackstone Portfolio (221 Props) Veloqx Portfolio (5 Props) Sheraton Grande Tokyo Bay (Disney Resort) Minatomirai Center Building Price (JPY bn) Unit price (JPYm /GFA sqm) Cap rate Location Month Acquired by est /unit - Chuo etc. Mar Shibuya etc Dec /Rm 4.9% Chiba Sep-17 Anbang Insurance Group Norges Bank Real Estate Management, Tokyu Land GIC, Invincible Investment Corp. Investor Origin China Norway / Japan Singapore / J-REIT Yokohama Mar-17 Gaw Capital Hong Kong 5 Office TOC Minatomirai Yokohama Mar-17 Hulic, Fuyo Lease Japan 6 Office MHI Yokohama Bldg Yokohama Oct-17 7 Office 43% of Shinjuku Mainz Tower Kenedix (fund, private REIT, office J-REIT) Japan / J-REIT % Shinjuku Dec-17 GIC Singapore 8 Office Tokyo Takeda Building Chuo Dec-17 Takashimaya Japan 9 Office 75% of Concurred Yokohama % Yokohama May-17 Daiwa Securities Office REIT J-REIT 10 Logistics Prologis Park Ibaraki % Ibaraki Jul-17 Nippon Prologis REIT J-REIT 11 Office 12 Residential 13 Residential Shinsaibashi Plaza Bldgs (4 Props) JEED West Japan Portfolio (626 props) KW Residence Portfolio (39 Props) Osaka May-17 Hulic Japan Nagoya etc. Feb-17 Fortress Investment U.S /unit - Chiyoda etc. May-17 CBRE Global Investors U.S. 14 Office Yokohama Blue Avenue % Yokohama Feb-17 Capital Land Singapore 15 Office 16 Hotel 17 Logistics Shinagawa Seaside TS Tower Sunroute Plaza Tokyo (Disney Resort) Yokohama Tamachi IC Logistics Center Shinagawa May-17 NH Securities Korea 27 39/Rm 5.9% Chiba Jan-17 ORIX JREIT J-REIT % Machida Sep-17 Japan Logistics Fund J-REIT 18 Office J Tower % Fuchu Sep-17 PGIM Real Estate U.S. 19 Residential 20 Office JEED Residence Portfolio (523 props) Shinagawa Seaside West Tower Shinagawa etc. Jun Shinagawa Mar-17 Fortress Investment Group Meiji Yasuda Life, Global One REIT U.S. J-REIT Source: Real Capital Analytics, Nikkei Real Estate Market, Deutsche Asset Management. As of Jan Notes: Acquisitions by foreign managers are highlighted in grey and by J-REITs in yellow. This table is prepared solely for information purposes and not intended to recommend or endorse any specific company's shares or other products. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. 8 Japan Real Estate First Quarter 2018 January 2018

9 Tokyo s volume of commercial real estate transactions for the rolling 12-month period ended December 2017 (preliminary) was US $12.9 billion, a marginal increase from US $12.6 billion for the period ended in September It ranked second in the Asia Pacific region after Hong Kong. According to our own estimates about 39% of transactions in Tokyo were purchased by listed J-REITs while 29% were acquired by foreign capital in the period, a significant jump from 14% in the period ended June Owing to a series of high profile office transactions the volume rose to $4.8 billion in Yokohama, ranking eighth in the region, ahead of Brisbane and Osaka. Exhibit 10: Real Estate Transaction Volume by City (12 months rolling ended Dec. 2017) Office Retail Apartment Industrial Hotel (of which cross border %) Hong Kong 9% Tokyo Shanghai Seoul Singapore Sydney Melbourne Yokohama Brisbane Osaka Beijing J-REIT Domestic Overseas 18% 43% 41% 45% 43% 4 36% 31% 29% Nanjing 35% ($ bn) Sources: Real Capital Analytics, Deutsche Asset Management. As of Jan Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions. There is no guarantee forecast growth will materialise. Past performance is not indicative of future results. Japan Real Estate First Quarter 2018 January

10 Performance The average annual total return for unlevered direct real estate investment in Japan marginally increased from 6.9% in May 2017 to 7.1% in August 2017 (the latest period available). This was due to a marginal cap rate compression, together with a slow but stable net operating income growth. Among property sectors, returns continued to be highest at 8.8% in the industrial sector in the period whilst hovering at the 6-7% range in the hotel, office, residential and retail sectors respectively. Exhibit 11: Real Estate Total Returns in Japan (unlevered) Total Return by Component Total Return by Sector Preliminary Preliminary 15% % 5% 1 5% -5% -1-5% -15% -1 Sources: MSCI Real Estate - IPD, Deutsche Asset Management. As of Jan 2018 Notes: There is a time lag because of raw data being collected through semi-annual reports. Past performance is not indicative of future results. 3.5 J-REITs Total Return Income Return Capital Growth Office Retail Residential Industrial Hotel The J-REIT index strengthened by 4. in the period from September 2017 to mid-january It was much more moderate compared to the 16.8% increase in the broader Nikkei 225 index in the same period. With the J- REIT price still adversely affected by continuous capital outflows from REIT mutual funds among retail investors, J-REIT stock prices declined by 10.4% in the entire year of 2017 while the US-REIT rose by 4.8% in the same period. Exhibit 12: J-REIT Index and Long-Term Global Comparison J-REIT Index and Nikkei 225 (5-year) Global REIT Comparison (10-year) 2,400 24, ,000 20, ,600 16, , ,000 8, (Mar-09 = 100) J-REIT Index (LHS) Nikkei 225 Index (RHS) J-REIT A-REIT (Australia) US-REIT S-REIT (Singapore) Sources: Bloomberg, Deutsche Asset Management. As of Jan Notes: Past performance is not indicative of future results. Tokyo Stock Exchange REIT Index (J-REIT), FTSE NAREIT All Equity REITS Index (US-REIT), S&P/ASX 200 A-REIT Index (A-REIT), FTSE ST REIT Index (S-REIT). 10 Japan Real Estate First Quarter 2018 January 2018

11 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 On average, the J-REIT dividend yield was 4.1% overall and 3.6% for office REITs in November 2017, flat from the previous period ended August The spread over the ten-year government bond yield remained at an attractive level of 411 basis points in Japan in November 2017, compared to 138 basis points for US REITs and around 222 basis points for UK REITs 4. Exhibit 13: J-REIT Expected Dividend Yield 8% 6% 4% 2% Spread -2% J-REIT Office REIT 10Y JGB Sources: Bloomberg, Deutsche Asset Management. As of Jan Notes: Past performance is no guarantee of future results. JGB = Japanese Government Bond. The amount of capital raised by J-REITs was JPY 211 billion in the trailing six months ended December 2017 (preliminary), a 51% drop from the trailing six months to March There was one initial public offering (IPO) in the last six months, Mitsubishi Estate Logistics REIT in September 2017, and two IPOs in Due to recent underperformance in the J-REIT stock market, the amount of public offerings by listed REITs continued to be slow, totaling to JPY157 billion in the trailing six months ended December 2017, recording a 52% drop from the period ended March Exhibit 14: Capital Raising and Transactions by REITs in Japan (6 months rolling) JPY (tn) IPO Public Offering 3rd Party Allotment Bond Net acquisition by J-REITs Public Offerings Month JPY bn Hoshino Resort REIT Oct Hulic REIT Oct Activia Properties Nov Tosei REIT Oct Other POs Jul-Dec 94 Total 157 Initial Public Offerings Month JPY bn 0.0 Mitsubishi Estate Logistics REIT Sep Total 54 Planned : CRE (logistics), ITOCHU (logistics) Sources: ARES, Nikkei, Deutsche Asset Management. As of Jan Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions. This table is prepared solely for information purposes and not intended to recommend or endorse any specific company's shares or other products. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. 4 There is also an argument that the wider spread could be a reflection of lower growth potential and or weaker governance at J-REITs. Japan Real Estate First Quarter 2018 January

12 E The preliminary volume of commercial real estate transactions in Japan in the rolling six months to December 2017 was JPY 2.1 trillion, a 27% decline from the six month period ended in March J-REIT investment activity was JPY 633 billion in the period, also a 27% drop from March 2017 period. Asset dispositions by J-REITs soared from JPY 117 billion to JPY 331 billion in the same period, almost a threefold increase - a record volume disposed in any six month period in J-REIT history. To note, the disposition volume was more than double the amount raised by public offerings in the same period, revealing J-REITs reliance on dispositions as a source of capital for new acquisitions. Exhibit 15: Real Estate Transactions in Japan and J-REIT Share (rolling 6 months) (JPY tn) % % % Disposition by J-REITs Acquisition by J-REITs Acquisition by others J-REIT share (%) of all transactions (RHS) Sources: ARES, Urban Research Institute, Real Capital Analytics, Deutsche Asset Management. As of Jan There is no guarantee forecast growth will materialize. Past performance is not indicative of future results. Notes: E = preliminary estimate. Commercial real estate transactions exclude non-income producing assets, such as development site transactions. 12 Japan Real Estate First Quarter 2018 January 2018

13 Vacancy rate for all buildings 4 Market Fundamentals 4.1 Office The average office vacancy rates in Tokyo s central five wards remained tight at 3. in November 2017, marking the lowest level in the current cycle following the Global Financial Crisis. The vacancy rate at newly-developed buildings (average of 28 new completions in the last 12 months) moderated from 29.4% in May 2017 to 11.2% in November The average vacancy rate is expected to remain tight for the coming quarters while it is forecast to gradually widen in the latter half of the year with a number of new supply expected to complete in the summer of Exhibit 16: Office Vacancy Rate and Supply in Central Tokyo (5 wards) 13 % 11 % 9 % 7 % 5 % 3 % 1 % All Buildings (LHS) 64 % 32 % 16 % Supply Pipeline in Tokyo Building Date Floors GFA (sqm) GINZA SIX Jan ,000 Otemachi Park Bldg Jan ,710 Hibiya Park Front May ,500 Akasaka InterCity AIR Aug ,200 Meguro Central Square Nov ,223 Taiyo Life Insurance Nihonbashi Jan ,084 Tokyo Midtown Hibiya Mar ,500 msb Tamachi S Jun ,300 Sumitomo RE Osaki Project Jun ,762 Nihonbashi 2 chome C Jul ,372 Shibuya Stream Aug ,200 Nissay Hamamatsucho Crea Twr. Aug ,900 Marunouchi 3-2 Project Oct ,100 Muromachi 3 chome A Mar ,000 Shibuya Nanpeidai Project Mar ,954 Seibu Railway Ikebukuro Bldg. Mar ,661 Okura Redevelopment Office Twr. Jun ,400 Shibuya Sta. Dogenzaka Oct ,900 Toranomon Business Tower Dec ,000 Shibuya Scramble Square East ,000 Kyobashi 1 chome Tower A ,100 Yotsuya Sta. Redevelopment ,900 Sources: Mori Building, Miki Shoji, Deutsche Asset Management. As of Jan Notes: GFA = gross floor area. sqm = square metres. There is no guarantee the supply pipeline will materialize. 8 % 4 % 2 % 1 % New Buildings (log scale, RHS) The average rent free period offered to tenants stood at 2.4 months in September 2017, a healthy recovery from 2.7 months in June It is in line with the recovering trend in vacancy rates, while some landlords still remain cautious about the supply increase expected in the latter half of 2018, and have tended to provide generous incentives to secure tenants before completion. Exhibit 17: Office Vacancy Rate and Rent Free Period in Tokyo Vacancy for new buildings (log sclae) 15% (month) % 4 2-5% 0 free rent period (RHS) Floor Plate : 165 sqm - 330sqm Floor Plate : 330 sqm sqm Floor Plate > 660 sqm Tokyo CBD Average Sources: Sanko Estate, Xymax Real Estate Institute, Deutsche Asset Management. As of Jan Notes: sqm = square metres. Japan Real Estate First Quarter 2018 January

14 F F On the back of the tight market, the average asking rent (all classes) grew by 3.2% in November 2017 (year-onyear) in Central Tokyo, recording continuous growth for three and a half years since the second quarter of Asking rents at prime buildings in the CBD continued to hover above JPY 40,000 per tsubo*, while the average rents at newly built buildings continued to experience a continuous correction of 3.5% over the same period. Exhibit 18: Office Asking Rent in Central Tokyo by Building Floor Plate (JPY/tsubo*/month) 50,000 (USD/sqf/year) Forecast , , , ,000 All classes Newly built (all classes) Grade A Prime Buildings in CBD floor plate > 660 sqm Sources: Miki Shoji, Sanko Estate, Deutsche Asset Management. As of Jan Notes: F = forecast, there is no guarantee forecast rents will materialise. Please refer to Important Notes (see end of report). *Tsubo is a Japanese unit of area. It is equivalent to 3.3 square metres (35.6 square feet). Vacancy rates continued to tighten in most major regional cities in Japan in the period ended November It recovered to 2.4% in Sapporo, 3.1% in Fukuoka, 3.7% in Osaka and 5. in Nagoya, and continued to mark their lowest levels in the last two decades in their respective market. The vacancy rate was 5.4% in Yokohama in the same period, recovering from 5.8% in August 2017 while still above 5. marked at the end of Large sized supply is limited to only one building per respective city over the next two years, with the tight leasing environment expected to persist at least until 2019 in those regional markets. Exhibit 19: Office Vacancy Rates in Major Cities in Japan (all grades) (%) Sapporo Fukuoka Nagoya Osaka Tokyo Yokohama Sources: Miki Shoji, Sanko, Deutsche Asset Management. As of Jan Supply Pipeline in Regional Cities Building Date Floors GFA (sqm) JRJP Hakata Bldg (Fukuoka) Apr ,000 Symphony Toyota Bldg (Nagoya) Jun ,444 Yokohama Nomura Bldg Feb ,556 JR Gate Tower (Nagoya) Mar ,750 Nakanoshima Fes Twr W (Osaka) Apr ,030 Global Gate West (Nagoya) Apr Global Gate East (Nagoya) Jun Ocean Gate MM 1 (Yokohama) 15 Jun-17 Ocean Gate MM 2 (Yokohama) 6 ttl 40,692 ttl 55,578 Nishiki 2 chome Project (Nagoya) Feb ,586 Kamiyo Hakata Chuo Bldg, (Fukuoka) Apr ,820 Namba Sky-o (Osaka) Sep ,818 Sapporo Sosei Square (Sapporo) ,112 OBIC Midosuji Bldg (Osaka) ,000 Nishiki 2-7 Redev (Nagoya) ,840 Tenjin Business Center (Fukuoka) ,250 MM21-54 Project (Yokohama) ,056 Sources: Miki Shoji, Sanko Estate, Deutsche Asset Management. As of Jan Notes: GFA = gross floor area. Sqm = square metres. There is no guarantee the supply pipeline will materialize. 14 Japan Real Estate First Quarter 2018 January 2018

15 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Retail Tourist consumption posted a strong increase of 26.6% in the third quarter of 2017 on a year-on-year basis. High street retail rents in major submarkets recorded healthy recoveries accordingly in the same period both on the year-on-year and quarter-on-quarter basis. The average high street rental growth on the latest quarter to September 2017 was 10.2% in Omotesando, 6.9% in Shinjuku, 4.5% in Ginza, 2.6% in Shibuya and very marginally 0.1% in Ikebukuro respectively. Exhibit 20: High Street Average Rents in Tokyo and Osaka (JPY/tb/m) 36,000 (JPY tn) , , Tourist spending (RHS) Ginza Omotesando Shinjuku Shibuya Ikebukuro Shinsaibashi Sources: Style Act, Miki Shoji, Deutsche Asset Management. As of Oct Past growth is not a reliable indicator of future growth. Fueled by the increase in inbound tourist consumption, department store sales grew strongly by 4.7% in the October to November period in 2017, while growth at shopping centers was softer by 1. in the same period. Convenience stores saw a marginal decline at existing stores due to a shortage of sales staff and a recent increase of new openings. Exhibit 21: Retail Sales Growth by Store Category (year on year) 15% 1 (for existing stores for all categories) 5% -5% -1 VAT hike -15% Shopping Center (13 cities) Dept Store (Tokyo/Osaka) Chain Store (nationwide) Convenience Store Source: Japan Council of Shopping Center, Japan Franchise Association, Japan Chain Store Association, Japan Department Store Association, Deutsche Asset Management. As of Jan 2018 Japan Real Estate First Quarter 2018 January

16 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 O/N 4.3 Residential The average price per unit of newly-built condominiums sold in Greater Tokyo was JPY55.6 million in October and November 2017, a 9.5% correction from the previous period. The price adjustment was a usual cyclical move at the year-end period in Japan, while high rises in Central Tokyo and the Tokyo Bay area still contributed to the elevated price. The average contract rate for newly built units remained below 7, reflecting slower sales in low to mid rise units in the suburbs, especially among the first time buyers. Exhibit 22: Average New Condo Price and the Contract Rate in Greater Tokyo (JPY mm / unit) 65 (%) Avg. unit price (LHS) Contract rate (RHS) Sources: Real Estate Economic Institute, Deutsche Asset Management. As of Jan Due to the recent price escalation among for-sale condominiums in Tokyo, an increasing number of households continue to remain in rental apartments as opposed to buying. Rental demand among young couples and upper middle class workers remains especially strong in central, convenient locations near to public transportation. Rents increased by 4.5% for prime apartments in the Central 3 ward in Tokyo (blue line) in the year to September 2017, and by 3.4% for the broader 23 wards in the year to December 2017 (orange line). Exhibit 23: Residential Rent in Tokyo (year-on-year) 12% 8% 4% -4% -8% Office - 5 ward Residential - 23 ward Residential - 5 ward Residential - 3 ward (prime) Sources: TAS Corporation with data from At Home Co. (23-ward vacancy), Leasing Management Consulting (5-ward asking rent), IPD- RECRUIT Residential Index (23-ward rent index), Miki Shoji. As of Jan Japan Real Estate First Quarter 2018 January 2018

17 Industrial The industrial market shows a divergent trend by market. Vacancy rates at multi-tenant logistics assets remained at a healthy level of 5.6% in September 2017 in Greater Tokyo, while vacancy rates moved down mildly from the previous spike both in Greater Osaka and Greater Nagoya, from 18.4% to 15.7% and from 18. to 14.2% respectively in the same period. Rents strengthened in Greater Nagoya by 4.1% and 0.7% in the year to September 2017, while they declined 7.1% in Greater Osaka where supply peaked in the same period. Exhibit 24: Logistics Leasing in Japan by Metro Vacancy Rate of Multi-tenant Logistics Logistics Rent 35% 3 25% Greater Tokyo Greater Osaka Greater Nagoya (JPY/tsubo/month) 4,800 4,200 Greater Tokyo Greater Osaka Greater Nagoya 2 15% 3, ,000 5% 2,400 Sources: CBRE, Deutsche Asset Management. As of Jan Notes: Past performance is not indicative of future results. The level of vacancy rates varied significantly among sub markets in Greater Tokyo. Vacancy rates in established logistics precincts including Tokyo Bay, Gaikando and Route 16 remained at a healthy level below 1 in September 2017, while the vacancy rate in Ken-o-do, the most outer ring road in the Tokyo metro area where new completions are concentrated, widened again to 19.4% in the period. Rents strengthened by 4.7% in Tokyo Bay, the most expensive submarket, whilst remaining almost flat in other areas. Exhibit 25: Logistics Leasing by Sub-Market in Greater Tokyo Vacancy Rate of Multi-tenant Logistics Logistics Rent 25% 2 15% Greater Tokyo Tokyo Bay Gaikando Route 16 Ken-o-do (JPY/tsubo/month) 7,000 6,500 6,000 5,500 Greater Tokyo Tokyo Bay Gaikando Route 16 Ken-o-do 1 5,000 4,500 5% 4,000 3,500 3,000 Sources: CBRE, Deutsche Asset Management. As of Jan Notes: Past performance is not indicative of future results. Japan Real Estate First Quarter 2018 January

18 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q F F The annual supply of logistics assets peaked at 1.3 million square meters in 2016 in Greater Tokyo, followed by a moderate 0.8 million square meters in Greater Osaka saw an all-time high supply of 0.9 million square meters in 2017 causing a short term demand-supply imbalance. Vacancy rates are forecast to remain elevated in some sub regions including the Ken-o-do area in Greater Tokyo and in the Osaka Bay area where supply is concentrated. Exhibit 26: Logistics Supply in Greater Tokyo and Greater Osaka Greater Tokyo Greater Osaka (mm sqm) 2.0 New Supply (LHS) Vacancy Rate (RHS) Forecast (mm sqm) 1.0 New Supply (LHS) Vacancy Rate (RHS) Forecast Sources: Ichigo Real Estate Service, Deutsche Asset Management. As of Jan Notes: F = forecast, there is no guarantee forecast returns will materialise. Past performance is not indicative of future results. 4.5 Hotel The number of foreign tourist arrivals to Japan grew by 19% in the first eleven months of 2017 on a year-on-year basis, with more than 28 million tourists estimated to have visited the country in 2017, more than four-fold from the number in Hotels continued to show strong occupancy rates at 84.7% on average in Tokyo and Osaka. Occupancy rate recovery continued to outpace in Tokyo in the last three quarters while a recent supply increase helped moderate the demand-supply balance in Osaka. Exhibit 27: Hotel Occupancy Rate in Tokyo and Osaka (12 months trailing) (million visitors/quarter) Foreign Visitors to Japan (LHS) Tokyo Upscale Hotel (RHS) Osaka Upscale Hotel (RHS) Series6 Tokyo Budget Hotel (RHS) Osaka Budget Hotel (RHS) Sources: JTA, Deutsche Asset Management. As of Jan Past growth is not a reliable indicator of future growth. 18 Japan Real Estate First Quarter 2018 January 2018

19 Past Topics of This Report Vol Year Publication Research Topic 1 Q2 Jun-08 Making sense of the rental market in Japan Q3 Sep-08 Impact of the credit crunch 3 Q4 Dec-08 Revitalisation of ailing J-REITs 4 Q1 Mar-09 Tokyo office market in its global context 5 Q2 Jul-09 Japan residential market Q3 Oct-09 History repeats itself? A comparison of the Year 2003 Problem with Q4 Jan-10 Introducing unit pricing analysis in Japan 8 Q1 Apr-10 Portfolio optimisation analysis in Japan 9 Q2 Jul-10 Japan s capital market in a global context Q3 Oct-10 Quarterly Report 11 Q4 Jan-11 Cross-border investment into and out of Japan 12 Q1 Apr-11 The Great Tohoku Earthquake and its impact on the Japanese real estate market Q2 Jul-11 Adapting Japan s land price index for real estate analysis 14 Q3 Oct-11 Quarterly Report 15 Q1 Jan-12 The J-REITs next 10 years Q2 Apr-12 Quarterly Report 17 Q3 Jul-12 Quarterly Report 18 Q4 Oct-12 The inward-looking focus of the real estate investors in Japan 19 Q1 Jan-13 Can the housing tax credit boost demand? Q2 Apr-13 Quarterly Report 21 Q3 Jul-13 Logistics : Rapid Modernisation Underway in the Asia Pacific Region 22 Q4 Oct-13 Quarterly Report 23 Q1 Jan-14 Japan, Asia and Global Investing Q2 Apr-14 Quarterly Report 25 Q3 Jul-14 Quarterly Report 26 Q4 Oct-14 Quarterly Report 27 Q1 Jan-15 Quarterly Report Q2 Apr-15 Emergence of Private REITs in Japan and Implications to the market 29 Q3 Jul-15 Quarterly Report 30 Q4 Oct-15 Quarterly Report 31 Q1 Jan-16 Will the Third Arrow of Abenomics Fly? Q2 Apr-16 Quarterly Report 33 Q3 Jul-16 Impact of Negative Interest Rate 34 Q4 Oct-16 Quarterly Report 35 Q1 Jan-17 Quarterly Report Q2 Apr-17 Quarterly Report 37 Q3 Jul-17 Quarterly Report 38 Q4 Oct-17 Quarterly Report Q1 Jan-18 Quarterly Report Japan Real Estate First Quarter 2018 January

20 Important Information Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries. In the U.S., Deutsche Asset Management relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Australia Limited (ABN ) an Australian financial services incense holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. 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22 Research & Strategy Alternatives Office Locations: Chicago 222 South Riverside Plaza 26 th Floor Chicago IL United States Tel: Frankfurt Taunusanlage Frankfurt am Main Germany Tel: London Winchester House, 1 Great Winchester Street, London, EC2N 2DB Tel: New York 345 Park Avenue 26 th Floor New York NY United States Tel: San Francisco 101 California Street 24 th Floor San Francisco CA United States Tel: Singapore One Raffles Quay South Tower 20 th Floor Singapore Tel: Tokyo Sanno Park Tower Nagata-cho Chiyoda-Ku 18 th Floor Tokyo Japan Tel: Team: Global Mark Roberts Head of Research & Strategy mark-g.roberts@db.com Gianluca Minella Infrastructure Research gianluca.minella@db.com Americas Kevin White Head of Strategy, Americas kevin.white@db.com Ross Adams Industrial Research ross.adams@db.com Bradley Doremus Quantitative Strategy bradley.doremus@db.com Ana Leon Retail Research ana.leon@db.com Europe Matthias Naumann Head of Strategy, Europe matthias.naumann@db.com Tom Francis Property Market Research tom.francis@db.com Farhaz Miah Property Market Research farhaz.miah@db.com Asia Pacific Koichiro Obu Head of Research & Strategy, Asia Pacific koichiro-a.obu@db.com Seng-Hong Teng Property Market Research seng-hong.teng@db.com Jessica Elengical Head of ESG Strategy jessica.elengical@db.com Yasmine Kamaruddin Global Strategy yasmine.kamaruddin@db.com Brooks Wells Head of Research, Americas brooks.wells@db.com Liliana Diaconu Office Research liliana.diaconu@db.com Michael Kodesch Capital Markets Research michael.kodesch@db.com Joseph Pecora Apartment Research joseph.pecora@db.com Simon Wallace Head of Research, Europe simon.wallace@db.com Martin Lippmann Property Market Research martin.lippmann@db.com Julien Scarpa Property Market Research julien.scarpa@db.com Natasha Lee Property Market Research natasha-j.lee@db.com Hyunwoo Kim Property Market Research hyunwoo.kim@db.com 22 Japan Real Estate First Quarter 2018 January 2018

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