Japanese Economy Japan experienced a historical change in April. The new central bank president Kuroda decided to pour liquidity into the market in unprecedented amounts and raise the monetary base by USD 600 to 700 bn per year. The Bank of Japan intends to use the liquidity to buy Japanese sovereign bonds, equities and other paper. In response to this ultra-expansive monetary policy, the exchange rate of the Japanese Yen depreciated visibly against other key currencies, with the Japanese currency having lost on average around 15% against the exchange rates of the country s most important trading partners since the beginning of the year. The prospect of rising asset prices and a weak exchange rate brightened up sentiment in the Japanese corporate sector noticeably. For example, the Purchasing Managers Index climbed from 45.0 in December to 51.1 in April. The perspectives for Japan s economy have thus improved significantly and the upswing can be expected to continue gathering pace as the year continues. In the months ahead, the inflation rate should also depart the deflationary zone marked in February of -0.7% and head upwards to 0.5% to 1.0% by year-end. 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 in Tokyo CBD continued to improve in Q1 of 2013. Strong demands for expansion of offices/relocation of offices from self-owned old buildings overcame the large supply of grade A buildings in 2012 and Q1 of 2013. According to CBRE, a wide range of sectors and sizes of companies have shown demand for space of various sizes. In addition to IT companies, trading companies and heavy industry companies became active. Downward trend of the vacancy rate is expected to become clear thanks to limited supply of grade A buildings in the coming years. The vacancy rates started varying in different wards, as office relocations become rapidly active. We expect vacancy rates to continue to decrease though we will be watching closely to see if it is a temporary phenomenon. 1
Office Rent Trend The rent of Chiyoda and Shibuya with reasonably low vacancy rate appeared to be starting to increase during Q1 of 2013. Monthly Rent Tokyo CBD and by CBD Ward 26 In JPY 000 24 22 20 18 16 14 12 12/1999 12/2001 12/2003 12/2005 12/2007 12/2009 12/2011 1/2013 3/2013 CBD 5 Chiyoda Chuo Minato Shinjuku Shibuya Source: Miki Shoji Vacancy Rate Tokyo CBD all and by CBD Ward 12 In % 10 8 6 4 2 0 12/1999 12/2002 12/2005 12/2008 12/2011 2/2013 CBD 5 Chiyoda Chuo Minato Shinjuku Shibuya Source: Miki Shoji 2
Rents of grade A buildings in Tokyo CBD also clearly started increasing in Q1 of 2013. CBRE is expecting the rent to rise by 5% to 7% in a year from the current level, revised up by 2% from their forecast in the previous quarter. We expect that the rent in Tokyo CBD 5 Wards will start to increase in H2 of 2013. Recent Office Transactions J-REITs held a position as absolute buyer of Tokyo large offices under the bullish stock market conditions. Well-funded Japanese corporations and multi - national investors such as Goldman Sachs Group purchased some offices. Building name Glass City Shibuya Ark Hills Sengokuyama Mori Tower Shinagawa Building Yaesu NTC Building Citi Group Center Shinyon Curumu Building Kamata Tosei Building Harumi Front Shinbashi M-Square Akasaka Inter City Core City Tachikawa GranTokyo South Tower SONY City Osaki Panasonic Tokyo Shiodoma Building Gate City Osaki Omiya Prime East Ikebukuro East Shibuya Garden Front Ikebukuro West Building Toranomon No. 33 Mori Building Onarimon M-Square Date Oct-12 Nov-12 Nov-12 Dec-12 Dec-12 Dec-12 9,7 Jan-13 Jan-13 31,3 Feb-13 11,9 Feb-13 Feb-13 Feb-13 Feb-13 Price Cap (in JPY rate bn) (in %) Seller Buyer Age Area 8,4 11,5 10,3 6,5 35,0 66,7 5,1 15,6 6,1 8,6 11,6 14,1 4,1 4,3 6,0 4,3 LaSalle Investment Management Mori Building Residence Building Management Panasonic 4,5 Mitsui Fudosan 6,1 Sumitomo Life Insurance Sumitomo Life Insurance Raysum Japan Post Insurance Mitsui Fudosan Aviva Investors & Secured Capital Investment Management Global One REIT (sponsored partially by Mori Building) Keihin Rail Way Kansai Electric Power Group Jowa Real Estate Japan Real Estate REIT (sponsored by Mitsubishi Estate) Nippon Building Fund REIT (sponsored by Mitsui Fudosan) Nippon Building Fund REIT (sponsored by Mitsui Fudosan) Nippon Building Fund REIT (sponsored by Mitsui Fudosan) Goldman Sachs Group NTT East Group Mitsui Warehouse Shibuya Minato Minato DIC Corporation Group 30 Chuo Morgan Stanley Group 21 Shinagawa 4,3 1 Shinjuku Tosei Real Estate 3 Ota 5,2 Mitsubishi Estate 1 Chuo 4,2 Mitsui Fudosan Nippon Building Fund REIT (sponsored by Mitsui Fudosan) 2 Minato 4,1 Nippon Steel Kowa Japan Excellent REIT (sponsored by Nippon Steel Kowa 8 Minato Real Estate RE) 5,7 Japan Excellent REIT (sponsored by Nippon Steel Kowa 9 Tachikawa RE) Kajima General Mitsui Fudosan 6 Chiyoda Contractor Group 4,3 SONY Nippon Building Fund REIT (sponsored by Mitsui Fudosan) 2 Shinagawa Minato Nippon Building Fund REIT (sponsored by Mitsui Fudosan) 14 Shinagawa Japan Prime Realty REIT (Sponsored by Tokyo Tatemono) 4 Saitama 9 1 37 10 10 10 25 36 2 Toshima Shibuya Toshima Minato Minato 3
2. Residential Market Apartment Rent Trend Rents in the greater Tokyo were weakening but remained stable in every area, within an annual rate of a percent range of fluctuations. Consumer con dence index Index of all households 55 50 45 40 35 30 25 20 1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 1/2012 1/2013 Source: Consumer Confidence Survey by Cabinet Office, as of March 2013 We expect that the rents will begin to grow healthily for the first time, now that consumer attidudes have been considerably improving and new apartments for rent are limited due to very low housing starts since 2009. 4
IPD/Recurit Residential Rent Index 120 Indexed (100 = 1/2005) 115 110 105 100 95 1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 1/2012 1/2013 2/2013 3/2013 Greater Tokyo Central Tokyo Other Areas in Tokyo prefecture Kanagawa prefecture Saitama prefecture Chiba prefecture Source: IPD Japan Housing starts of rented apartments 80,000 70,000 Number of units 60,000 50,000 40,000 30,000 20,000 10,000 0 12/1998 12/2000 12/2002 12/2004 12/2006 12/2008 12/2010 12/2012 Tokyo prefecture Kanagawa prefecture Saitama prefecture Chiba prefecture Source: Housing Starts by Ministry of Land, Infrastructure, Transportation and Tourism 5
3. Investment Market Institutional Investments In December 2012, J-REITs and Private Funds jointly held JPY 26.5 trn in Assets under Management (AuM). While J-REITs kept growing steadily, Private Funds decreased AuM by JPY 600 billion since June 2012. According to Sumitomo Mitsui Trust Research Institute conducting the survey, multinational investment management companies were taking the lead in setting up new funds and expanding their AuM, and meanwhile companies sold some of the properties of existing maturing funds, including selling to establish public REITs. Trends of private funds and REITs market size in Japan 20 18 16 14 12 10 8 6 4 2 0 In JPY trillion 12/2004 12/2005 12/2006 12/2007 12/2008 12/2009 12/2010 12/2011 6/2012 12/2012 Private funds J-REITs Source: STB Research Institute J-REITs AuM continued to grow by JPY 682 billion in Q1 of 2013. Total purchase price in Q1 of 2013 was JPY 800 billion at a record high and even exceeded annual acquisitions of JPY 788 billion last year. The capital increase through public offerings in Q1 of 2013 also hit a record high, JPY 342 billion and included two IPOs. 6
Assets owned by J-REITs by property type In % 100% = 9.7 JPY trillion* Other 12.9 Retail 17.7 51.5 Office Residence 17.9 * as of March 2013 Source: ARES The Association for Real Estate Securization Offices: NBF REIT sponsored by Mitsui Fudosan made an astounding amount of investments of JPY 130 billion in Q1 2013. NBF acquired 60% share of Sony office in Osaki, southern Tokyo, at JPY 66.7 billion, the largest deal in the quarter. J-REITs invested in larger offices than in the past few years. Most of the purchase prices were above JPY 5 billion and the purchases located not only in Tokyo but also in other large cities, such as Osaka, Nagoya and Sapporo. AXA Real Estate Investment Managers and Sumitomo Mitsui Trust Bank Group successively made investments in two large office buildings in Tokyo CBD, a 22-year-old building in Shinjuku and a just 3-year-old one in Kyobashi near Tokyo Station, with total investment amount of JPY 10 billion. MGPA Asia Special Fund bought 2 mid-sized office buildings in their 20s in Shinjuku and in Otsuka, northern Tokyo. Green Oak Real Estate, founded by ex-members of MSREF in Japan, acquired three mid-sized office buildings in their 20s and 30s in Tokyo CBD, and the total purchase price is reported to be around JPY 7 billion. Goldman Sachs also invested in four mid-sized office buildings in a row in Tokyo CBD, Kanda, Shibuya, Ginza and Ikebukuro, the age of buildings ranges between 25 and 56 years. Residential properties: Comforia Residential REIT sponsored by Tokyu Real Estate went public with 53 properties amounting to JPY 71 billion, on a purchase price base 96% of which locate in Tokyo 23 Wards. Rather than acquir - ing properties one by one, buying them as a portfolio became the mainstream for J-REITs. Major J-REITs started taking advantage of their sponsor s ability for bridge financing. Advance Residence REIT sponsored by Itochu trading company acquired 12 properties amounting to JPY 22 billion; on a purchase 7
price base 66% of which locate in Tokyo 23 Wards. Nippon Accommodations REIT sponsored by Mitsui Fudosan acquired 12 properties; amounting to JPY 18 billion, on a purchase price base 94% of which locate in Tokyo 23 Wards. Mitsui Fudosan Private REIT acquired two residential buildings in Megro Ward, Tokyo, with 236 units, from studio to 3 bed room. Daiwa Securities Group acquired a small residential property in Chuo Ward, CBD Tokyo, with 48 units (1-bedroom only). Daiwa Securities is aiming to form a private REIT specializing in residential property in Tokyo. Grosvenor bought a 3-yearold large luxury residential building in Minato Ward, CBD Tokyo, together with an Asian investor. They plan to renovate the property which has 99 units, from studio to 4 bed room. Danish Sparinvest Property Investors invested in four residential properties in Nagoya amounting to JPY 4.5 billion. Commercial properties: J-REITs invested mainly in large properties in Tokyo area. United Urban REIT sponsored mainly by Marubeni trading company bought a commercial building just in front of Kichijoji Station, one of the major terminal stations in western Tokyo, at JPY 28 billion. Frontier REIT sponsored by Mitsui Fudosan bought a commercial building in Ikebukuro in central Tokyo at JPY 20 billion. Orix REIT purchased a suburban commercial mall in Kawaski in southern Tokyo at JPY 13 billion. DREAM Private REIT sponsored by Mitsubishi Corporation acquired a mid-sized retail building wholly leased by ZARA in Ginza. Grove International Partners, spinning off from Soros Real Estate, is reported as buying a mid-sized newly built but vacant foreclosed commercial building also in Ginza. US-based Elliott Management bought a shopping mall with sale area of 11,000 sqm near Universal Studio Japan in suburban Osaka from Sumitomo trading company. US-based Oaktree Capital Management acquired a large commercial building with 15,000 sqm in central Sapporo from Rubicon Japan Trust, a delisted Australian REIT. Multinational and domestic investors including Australian REIT Astro Japan Property Trust acquired the lower floors of a condominium building in suburban Tokyo used for shops at JPY 4 billion. Industrial properties: GLP REIT sponsored by Singapore-based Global Logistics Properties Group got listed at the end of last year and purchased 33 lo - gistics properties amounting to JPY 221 billion in Q1, 2013. Nippon Prologis REIT sponsored by US-based Prologis got listed with 12 properties amounting to JPY 173 billion. Other industrial J-REITs also continued to make invest ments in properties. Hotels: United Urban REIT sponsored mainly by Marubeni trading company bought 2 budget hotels at JPY 7 billion, one in Yotsuya in Shinjuku Ward, Tokyo and the other in Nagoya. 8
Kenzo Capital Corporation Dr. Leonard Meyer zu Brickwedde President and CEO Sanno Park Tower 3F 2-11-1 Nagata-cho, Chiyoda-ku Tokyo 100-6162 Tokyo Office +81 3 62 05 33 84 Mobile +81 90 84 63 26 03 Munich Office +49 89 59 08 24 06 Mobile +49 171 3 23 86 05 E-mail: leonard.meyerzubrickwedde@ken-zo.com