Japan Real Estate Fourth Quarter 2017

Transcription

1 Marketing Material Research Report Japan Real Estate Fourth Quarter 2017 October 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 AM s real estate 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 2004/39/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 Distributors, Inc. 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 Fourth Quarter 2017 October 2017

3 1 Executive Summary Macro Economy: In the third quarter of 2017, Japan s real GDP growth was estimated to be around the mid 1% range with a strong corporate sector and recovering consumer spending contributing to growth 1. The Nikkei 225 index marked 21,000 for the first time in 21 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: In September 2017, the Bank of Japan s Diffusion Index for lending attitudes of banks to the real estate industry recorded two consecutive quarters of decline as some banks gradually became more cautious over tightly priced transactions. The value remains at a favorable level despite limited deal flow in Central Tokyo, with the exception of the bay areas, and a decline in the volume of commercial real estate transactions. The J-REIT index softened by 10.9% in the first nine months of 2017 amid gradual long term interest rate rises and also continuous capital outflows from J-REIT mutual funds. Real Estate Market Fundamentals: Leasing markets and real estate fundamentals remained broadly 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 retail sales picked up in most store types. Condominium unit price and residential rents also rose in Tokyo. Demand remained robust in the logistics and hotel sectors both in Tokyo and Osaka, while a recent supply surge continued to moderate the occupancy rates in some sub markets in both sectors. 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 Deutsche Bank Japan Economics Weekly. As of Oct The Bank of Japan s Tankan Survey. As of Sep 2017 Japan Real Estate Fourth Quarter 2017 October

4 F 2018F 2019F 2020F 2021F 2 Macro Economy In the third quarter of 2017, Japan s real GDP growth was estimated to be around the mid 1% range. Production, exports, and consumer spending showed a positive contribution to growth, while increased geopolitical risk around the Korean peninsula remained a concern. The number of unemployed has declined for 87 months, with the unemployment rate standing at only 2.8% in August Given tight controls over the foreign labour force in the country, a serious labour shortage in the construction, transport, and service industries could be a stumbling block to future growth 3. Exhibit 1: Japan s GDP Growth Outlook and Nikkei 6% 4% 2% Forecast % -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 Oct 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 moderate 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 23 points in September 2017 from 16 points in March It was the highest reading since 2006 with rising corporate earnings a big contributor. The Business Condition Leading Index has been improving since the beginning of 2016 and posted a healthy level with a reading of 107 as of August 2017, compared to a reading of 99 in February Exhibit 2: Diffusion Index of Business Conditions (2010=100) Diffusion Index of Business Conditions: ('favourable' minus 'unfavourable,' % points) Outlook Consumption Tax Hike Dot.com Bubble burst Global Financial Crisis -50 Business Condition Leading Index (LHS) Diffusion Index of Tankan Survey (RHS) Sources: Bank of Japan, Japan s Cabinet Office, Deutsche Asset Management. As of Oct Past performance is not a reliable indicator of future performance. 3 Concerns over a supply surge in the coming years in the office, industrial and hotel sectors, could moderate due to the labor shortage. 4 Japan Real Estate Fourth Quarter 2017 October 2017

5 F 2018F 2019F 2020F 2021F Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 The Nikkei 225 index recovered temporarily to the JPY 20,000 mark in June, and marked JPY 21,000 on October 13, 2017, the highest reading in the last 21 years. The stock price rose by 6.3% in the first nine months of 2017, while the Japanese yen strengthened by 3.3% against the US dollar in the same period. Exhibit 3: Stock (Nikkei) and Forex 25, , , , Global Financial Crisis 5, JPY peaked at 75 "Abenomics" Nikkei 225 (LHS) USD/JPY (RHS) Sources: The Bank of Japan, Japan s Cabinet Office, Deutsche Bank. As of Oct 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 January 2017 and was 0.7% in August 2017, up from 0.4% in April 2017, reflecting the improved recent consumer demand. Exhibit 4: Forecast of Interest Rate and CPI (%) Forecast Overnight Call Rate 10Y JGB CPI CPI (VAT effect) Sources: The Bank of Japan, Japan s Cabinet Office, Deutsche Bank. As of Oct 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 Fourth Quarter 2017 October

6 E F JPY in trillion 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 21 as of September 2017, two consecutive quarterly declines from 29 in March, with the index indicating the lowest level since Credit conditions remain accommodative for stabilized assets, but some of the banks became gradually more cautious over high valuations. Lending volumes for new projects dropped by 7.8% in the year ended June 2017, demonstrating the largest drop since 2011 when the Great East Japan Earthquake hit the country. 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 Oct Past performance is not a reliable indicator of future performance. The volume of commercial real estate transactions in Japan in the rolling 12 months to September 2017 was JPY 3.2 trillion. The number is still preliminary but indicates a 12% drop from the same period last year. Deal flow has become tight in Central Tokyo due to expensive valuations, with investors seeking opportunities in the surrounding areas with large sized assets in the Tokyo Bay area among the top targets. Exhibit 6: Real Estate Transaction Volume and Lending Attitude DI Diffusion Index (DI) 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 Oct 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 Fourth Quarter 2017 October 2017

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 decrease to a preliminary 3.7% in the second quarter of 2017, a marginal compression from the previous quarter. Cap rates for core assets are still under extreme pressure, with similar compressions seen in other cities such as Osaka and other sectors such as residential. The average transacted office yield spread the difference between the cap rates and ten year bond yields were broadly flat at the mid-4% range in Tokyo in the third quarter of 2017, providing the most attractive spreads among select global cities, while it is also a possible reflection of the lower growth potential in Tokyo. Exhibit 7: Cap Rate and Yield Spread 6.5% % % % 3. Appraisal Prime Cap Rate Preliminary Office Yield Spread (RCA Average Transacted) 5% 4% 3% 2% 1% -1% 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 Oct Past performance is not a reliable indicator of future performance. The capital value for grade-a office in Central Tokyo stood at JPY 8.45 million per tsubo 4 in June 2017, still 27% lower than the previous peak recorded in 2008 before the Global Financial Crisis and 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 been softening since the beginning of 2017 and therefore the capital value is not expected to make continuous growths from the current level. 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 Oct Tsubo is a Japanese unit of area. It is equivalent to 3.3 square metres (35.6 square feet) Japan Real Estate Fourth Quarter 2017 October

8 3.3 Transactions Exhibit 9 shows major real estate transactions completed or announced between July 2017 (the previous edition of this publication) and September. The largest transaction was the acquisition of Blackstone s 221 residential property portfolio by Anbang Insurance Group for an estimated JPY 260 billion, followed by Sheraton Grande Tokyo Bay hotel by GIC and Invincible Investment Corp for JPY 98 billion. The tightest cap rates recorded in the period were 3.5% at Shiodome Building acquired by Japan Real Estate, and 3.8% at Yokohama Tamachi IC Logistics Center by Japan Logistics Fund. Foreign capital was dominant in the residential and hotel sectors while J-REITs monopolized major transactions in the industrial sector in the period. Exhibit 9: Major Transactions in the First Quarter 2017 Type Asset Price (JPY bn) Unit price (JPYm /GFA sqm) Cap rate Location Month Acquired by Investor Origin Shinsaibashi Plaza Bldgs (4 Props) Osaka May-17 Hulic Japan J Tower % Fuchu Sep-17 Unknown Japan Office 5 of Ariake Central Tower Koto Sep-17 FUKIDE Bldg Minato Jul-17 Korea Investment Securities Sanshin, Toyo Property Korea Japan 5% of Shiodome Bldg % Minato Aug-17 Japan Real Estate J-REIT Retail NT Bldg Shinagawa Apr-17 PAG AEON Mall Shimotsuma etc. (3 props) % Ibaraki etc. Sep-17 Aeon REIT Hong Kong J-REIT Prologis Park Ibaraki % Ibaraki Jul-17 Nippon Prologis REIT J-REIT Logistics Yokohama Tamachi IC Logistics Center % Machida Sep-17 Japan Logistics Fund J-REIT 49% of Logiport Sagamihara % Kanagawa Sep-17 Mitsubishi Estate Logsitics REIT J-REIT GLP Maishima Ⅰ % Osaka Mar-18 GLP J-REIT J-REIT 45% of Logiport Hashimoto % Kanagawa Sep-17 Mitsubishi Estate Logsitics REIT J-REIT Apartment Hotel/ Healthcare GLP Misato % Saitama Mar-18 GLP J-REIT J-REIT Blackstone Portfolio (221 Props) est. 260 KW Residence Portfolio (39 Props) est JEED Residence Portfolio (523 props) Sheraton Grande Tokyo Bay (Tokyo Disney Resort) Mystays Shin-Osaka Conference Center - - Chuo etc. Mar Chiyoda etc. Shinagawa etc. May-17 Jun /Rm 4.9% Chiba Sep /Rm 5.2% Osaka Sep-17 Anbang Insurance Group CBRE Global Investors Fortress Investment Group GIC, Invincible Investment Corp. Invincible Investment Corp. China U.S. U.S. Singapore/ J-REIT J-REIT Source: Real Capital Analytics, Nikkei Real Estate Market, Deutsche Asset Management. As of Oct 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. Tokyo s volume of commercial real estate transactions for the rolling 12-month period ended September 2017 (preliminary) was US $12.6 billion, a decline from US $15.2 billion for the period ended in March It ranked third in the Asia Pacific region after Hong Kong and Shanghai. According to our own estimates about 5 of transactions in Tokyo were purchased by listed J-REITs while 24% were acquired by foreign capital in the period, up from 14% in the previous period ended June In the wake of a series of large sized transactions Yokohama maintained its ninth position in the region, followed by Osaka which ranked tenth in the period. 8 Japan Real Estate Fourth Quarter 2017 October 2017

9 Exhibit 10: Real Estate Transaction Volume by City (12 months rolling ended Sep. 2017) Office Retail Apartment Industrial Hotel (of which cross border %) Hong Kong 5% Shanghai 2 Tokyo Singapore Seoul Sydney Beijing Melbourne Yokohama Osaka Brisbane J-REIT Domestic Overseas 27% 38% 38% 14% 56% 45% 32% 48% 24% Nanjing 34% ($ bn) Sources: Real Capital Analytics, Deutsche Asset Management. As of Oct 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 Fourth Quarter 2017 October

10 Performance The average annual total return for unlevered direct real estate investment in Japan moderated to a preliminary 6.9% in May 2017 (the latest period available), from a recent peak of 8.8% recorded in March This was due to a slowdown in cap rate compression, together with subdued rental growth in the occupier market. Among property sectors, returns were highest at 8.2% in the industrial sector in the period whilst hovering at the 6-7% range in the office, residential and retail sectors respectively. The newly covered hotel sector made astonishingly high returns in the year to December 2015, exceeding the 2 mark, while now stabilized at 8. in the 12 month period ended May Exhibit 11: Real Estate Total Returns in Japan (unlevered) Total Return by Component Preliminary 15% 1 5% -5% -1-15% Total Return by Sector Preliminary 25% 2 15% 1 5% -5% -1 Total Return Capital Growth Sources: MSCI Real Estate - IPD, Deutsche Asset Management. As of Oct 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 Income Return Office Retail Residential The J-REIT index softened by 10.9% in the first nine months of 2017 amid gradual long term interest rate rises and also continuous capital outflows from REIT mutual funds among retail investors. Capital outflows intensified in April 2017 when Japan s Financial Services Agency requested tighter fiduciary duty and customer-oriented principles at REIT mutual funds that pay monthly distributions, with the J-REIT index adversely affected to date. Exhibit 12: J-REIT Index and Long-Term Global Comparison J-REIT Index and Nikkei 225 (5-year) Global REIT Comparison (10-year) 2,300 23, ,000 20, ,700 17, ,400 14, , ,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 Oct 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 Fourth Quarter 2017 October 2017

11 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 On average, the J-REIT dividend yield was 4.1% overall and 3.6% for office REITs in August 2017, marginally above the previous period ended May 2017 respectively. The spread over the ten-year government bond yield remained at an attractive level of 408 basis points in Japan in August 2017, compared to 170 basis points for U.S. REITs and around 240 basis points for U.K. REITs 5. 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 Oct Notes: Past performance is no guarantee of future results. JGB = Japanese Government Bond. The amount of capital raised by J-REITs was JPY 414 billion in the trailing six months ended September 2017 (preliminary), a 48% drop from the same period last year. There was only one initial public offering (IPO) in the last six months, Mitsubishi Estate Logistics REIT in September 2017, and two IPOs in total since the beginning of the year. Reflecting recent J-REIT s underperformance in the stock market, the amount of public offerings by listed REITs declined to JPY174 billion in the trailing six months ended September 2017, a 32% drop from the same period last year. 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 Name of REIT Public Offerings Month JPY bn Invincible Investment Co Sep Nippon Prologis REIT Jul AEON REIT Sep Japan Logistics Fund Sep Other POs Apr-Sep 73 Total Initial Public Offerings Mitsubishi Estate Logistics REIT Sep Total 52 Planned: ITOCHU (logistics), CRE (logistics), Sources: ARES, Nikkei, Deutsche Asset Management. As of Oct 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. 5 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 Fourth Quarter 2017 October

12 E JPY in trillion The preliminary volume of commercial real estate transactions in Japan in the rolling six months to September 2017 was JPY 1.1 trillion, a 3 decline (preliminary) from the period ended in September Although J- REIT activity moderated according to the recent underperformance of the REIT shares in the stock market, acquisitions by J-REITs continued to account for 5 (preliminary) of all transactions reported in the same six months, which indicates an even steeper drop of activities of non-reit sectors in the period. Exhibit 15: Real Estate Transactions in Japan and J-REIT Share (rolling 6 months) 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 Oct 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 Fourth Quarter 2017 October 2017

13 F 2018F 2019F 2020F 4 Market Fundamentals 4.1 Office The average office vacancy rates in Tokyo s central five wards remained tight at 3.4% in August 2017, making little movement in the last three months. Recently completed large sized new buildings including Akasaka InterCity AIR showed good take up and 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 19. in August. The vacancy rate is expected to remain tight for the remainder of the year while concern is focused on the supply surge expected between 2018 and 2020 in Tokyo. Exhibit 16: Office Vacancy Rate and Supply in Central Tokyo (5 wards) (m sqm) Grade-A Grade-B&C Vacancy (RHS) Sources: Mori Building, Miki Shoji, Deutsche Asset Management. As of Oct Notes: GFA = gross floor area. sqm = square metres. There is no guarantee the supply pipeline will materialize. (%) 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 Tokyo Midtown Hibiya Jan ,500 Sumitomo RE Osaki Project Jan ,762 Taiyo Life Insurance Nihonbashi Jan ,084 msb Tamachi S May ,300 Nihonbashi 2 chome C Jul ,372 Shibuya Stream Aug ,200 Nissay Hamamatsucho Crea Twr. Aug ,900 Marunouchi 3-2 Project Oct ,100 Okura Redevelopment Office Twr. Feb ,400 Muromachi 3 chome A Mar ,000 Shibuya Nanpeidai Project Mar ,954 Seibu Railway Ikebukuro Bldg. Mar ,661 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 The average rent free period offered to tenants stood at 2.7 months in June 2017, only a marginal increase from 2.6 months in March Landlords with large backfill space or concerned about the supply surge in coming years still tended to provide generous incentives. Exhibit 17: Office Vacancy Rate and Rent Free Period in Tokyo 15% 1 5% (month) % 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 Oct Notes: sqm = square metres. Japan Real Estate Fourth Quarter 2017 October

14 F (JPY/tsubo*/mon) On the back of the tight market, the average asking rent grew by 3.5% in August 2017 (year-on-year) in Central Tokyo, recording continuous growth for three years since Asking rents at prime buildings in the CBD posted stronger growth of 8.7%, while the average rents at newly built buildings continued to experience a mild decline of 3.7% over the same period. Exhibit 18: Office Asking Rent in Central Tokyo by Building Floor Plate (USD/sqf/year) 50,000 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 Oct 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 August It recovered to 2.6% in Sapporo, 3.2% in Fukuoka, 4. in Osaka and 5.3% in Nagoya, respectively, with numbers at their lowest levels in the last two decades in their respective market. The exception was Yokohama where the vacancy rate inched up to 5.8% in the same period, due to a series of new supply in Minato Mirai, a reclaimed new CBD area. There were multiple new large sized building completions in Nagoya this year too, but looking forward large sized supply is limited to only one per regional city respectively in the year to come, therefore the tight leasing environment is expected to persist. 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 Oct 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 Shin Nankai Kaikan (Osaka) ,818 Sapporo Sosei Square (Sapporo) ,112 OBIC Midosuji Bldg (Osaka) ,000 Tenjin Business Center (Fukuoka) ,250 MM21-54 Project (Yokohama) ,056 Source : Miki Shoji, Sanko Estate, Deutsche Asset Management. As of Oct Notes : GFA = gross floor area. Sqm = square metres. There is no guarantee the supply pipeline will materialize. 14 Japan Real Estate Fourth Quarter 2017 October 2017

15 J/A 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 rapid increase of 13.1% in the second quarter of 2017 on a year-on-year basis, this was not translated into high street rental growths. High street retail rents recorded adjustments in some submarkets on a quarter-on-quarter basis, including Ginza (-9.5%), Omotesando (-8.1%) and Shinjuku (-1.8%), while many of these submarkets still showed rental growths on a year-on-year basis. 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. Healthy growth was also seen at department stores and shopping centers where sales grew by 3.2% and 1.4%, respectively, in July-August period in 2017, while they declined at chain stores marginally by 0.3% compared to the same period last year. Exhibit 21: Retail Sales Growth by Store Category (year on year) (for existing stores for all categories) 15% 1 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 Oct Japan Real Estate Fourth Quarter 2017 October

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 J/A (JPY mn/unit) 4.3 Residential The average price per unit of newly-built condominiums sold in Greater Tokyo was JPY 62.7 million in July and August 2017, a further increase from the previous period and at the highest level in the last two decades. High rises in Central Tokyo and the Tokyo Bay area drove the recent price surge, while demand in the low to mid rise units in the suburbs, the main option for first time buyers, struggled to recover. The average contract rate for newly built units stood at around 7 in the last two years, lower than the higher end of the 7 range prior to Exhibit 22: Average New Condo Price and the Contract Rate in Greater Tokyo 65 (%) Avg. unit price (LHS) Contract rate (RHS) Sources: Real Estate Economic Institute, Deutsche Asset Management. As of Oct Due to the recent price escalation among for-sale condominiums in Tokyo, an increasing number of households have opted for rental apartments as opposed to buying. Rental demand among young couples remains especially strong in central, convenient locations near to public transportation. Rents increased by 3.8% for prime apartments in the Central 3 ward in Tokyo (blue line) in the year to June 2017, and by 1. for the broader 23 wards in the year to September 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 Oct Japan Real Estate Fourth Quarter 2017 October 2017

17 Industrial The industrial market shows a divergent trend by market. Vacancy rates at multi-tenant logistics assets recovered from 9.1% in September 2016 to 5.1% in June 2017 in Greater Tokyo, while vacancy rates have risen sharply, both in Greater Osaka and Greater Nagoya, from 6.9% to 18.4% and from to 18. respectively in the same period. Demand for quality space is continuously strong in those markets while a number of large scale new completions are pushing up vacancy rates. Rents strengthened in Greater Nagoya by 8.3% in the three months to June 2017, while they declined 1.9% in Greater Osaka and remained flat in Greater Tokyo respectively. Exhibit 24: Logistics Leasing in Japan by Metro Vacancy Rate of Multi-tenant Logistics Greater Tokyo Greater Osaka 3 Greater Nagoya 25% 2 15% 1 5% Logistics Rent (JPY/tsubo/month) 4,800 Greater Tokyo Greater Osaka Greater Nagoya 4,200 3,600 3,000 2,400 Sources: CBRE, Deutsche Asset Management. As of Oct 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 were at around 5% or below in June 2017, while the vacancy rate in Ken-o-do, the most outer ring road in the Tokyo metro area where new completions are concentrated, still hovered at 15.5% in June Rents were highest in Tokyo Bay, followed by Gaikando, Route16 and then Ken-o-do areas. Exhibit 25: Logistics Leasing by Sub-Market in Greater Tokyo 25% 2 15% Vacancy Rate of Multi-tenant Logistics Greater Tokyo Tokyo Bay Gaikando Route 16 Ken-o-do (JPY/tsubo/month) 7,000 6,500 6,000 5,500 Logistics Rent 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 Oct Notes: Past performance is not indicative of future results. Japan Real Estate Fourth Quarter 2017 October

18 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q F 2018F F 2018F The annual supply of logistics assets peaked at 1.3 million square meters in 2016 in Greater Tokyo and is expected to peak at 0.9 million square meters in 2017 in Greater Osaka, an all-time high in each respective market. 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) forecast (mm sqm) forecast % % % % 0.8 8% 0.4 8% 0.4 4% 0.2 4% New Supply (LHS) Vacancy Rate (RHS) New Supply (LHS) Vacancy Rate (RHS) Sources: Ichigo Real Estate Service, Deutsche Asset Management. As of Oct 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 21.1% in the second quarter of 2017 on a year-on-year basis. Hotel occupancy rates continued to show strong numbers accordingly, around 85% at both upscale and budget hotels in Osaka and also at budget hotels in Tokyo in the second quarter of 2017, while it was 82% at upscale hotels in Tokyo. Recovery was stronger in Tokyo in the last two quarters while Osaka witnessed a recent surge in supply. Demand remained very strong while a concern in the medium term, though, is further supply and the impact from air B&B that could cause moderation in occupancy rates and room rates. Exhibit 27: Hotel Occupancy Rate in Tokyo and Osaka (12 months trailing) (million) 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 Oct Past growth is not a reliable indicator of future growth. 18 Japan Real Estate Fourth Quarter 2017 October 2017

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 Japan Real Estate Fourth Quarter 2017 October

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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21 For investors in the United Kingdom, Denmark, Finland and Norway: Marketing Material. This document is a non-retail communication within the meaning of the FCA s rules and is directed only at persons satisfying. This document is not intended for and should not be relied upon by a retail client. DB SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY A PROSPECTIVE INVESTOR OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF. Issued and approved in the United Kingdom by Deutsche Asset Management Limited of Winchester House, 1 Great Winchester Street, London, EC2N 2DB. Authorised and regulated by the Financial Conduct Authority ( FCA ). This document is a financial promotion for the purposes of the FCA s Handbook of rules and guidance. For investors in Bermuda: This is not an offering of securities or interests in any product. Such securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda which regulates the sale of securities in Bermuda. Additionally, non-bermudian persons (including companies) may not carry on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable Bermuda legislation Deutsche Bank AG. All rights reserved. CD212809, I (17/10/2017) Japan Real Estate Fourth Quarter 2017 October

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 Apartment Research 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 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 Fourth Quarter 2017 October 2017

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