KENEDIX MARKET REPORT · Market View MarketMarket View View Probing the 2013 Office Market As the end of 2012 approaches, perhaps it can be said that the real-estate market, which

KENEDIX MARKET REPORT Dec. 2012

Hot TopicHot TopicContentsMacroeconomic Conditions~An Economic Recovery is Expected through 2013~

The real GDP growth rate (vs. previous quarter, seasonally adjusted) of-0.9% (-3.5% annualized) for July-September announced November 12showed significant negative growth. A look at contributing factorsshows that domestic demand fell by 0.2% and foreign demand by 0.7%,

1. Hot Topic・・・・・・・・・・・・・・・1

2. Market View・・・・・・・・・・・・・5

3. Real Estate Investment

Market・・・・・・・・・・・・・・・7

4. J-REIT Market・・・・・・・・・・・・8with the major cause being a decrease in exports amid economicslowdowns in major foreign markets and the appreciation of the yen oninternational currency markets, although faltering personalconsumption also was a factor driving down GDP.In response to the massive negative growth in GDP in the period July-September, many research institutes are revising their 2012 GDPgrowth rate forecasts downward A look at the November ESP forecast

4. J REIT Market 8

5. Office Market・・・・・・・・・・・9

6. Residential Market・・・・・・・10

7. Logistics/Retail・・・・・・・11

growth rate forecasts downward. A look at the November ESP forecastannounced by the Japan Center for Economic Research (a consensusforecast by about 40 private-sector economists, released monthly)shows a downward revision to the forecast for Q4 2012. However,forecasts for Q1 2013 and beyond remain largely unchanged. This isbecause the general view is that the GDP growth rate will be strong in2013 due to factors including reconstruction demand in response to theG t E t J E th k idi d i i f th

10

12 (%)Actual Oct-12 survey

Great East Japan Earthquake providing underpinning for the economy,expectations of a recovery in overseas economies in 2013, andforecasts of a last-minute rise in demand prior to the planned April2014 increase in consumption tax.

【Fig.1】Real GDP Growth Rate

-2

0

2

4

6

8

10

Nov-12 survey Dec-12 survey

-10

-8

-6

-4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2011 2012 2013 2014 1Source: Prepared by Kenedix based on The Cabinet Office,

「ESP Forecast」 made by Japan Center for Economic Research

Hot Topic

Investors’ Risk Tolerance Appears to be RisingThe October 2012 edition of The Japanese Real Estate Investor Survey released semiannually by the JapanReal Estate Institute shows decreases in investors’ expected yields across a wide range of properties and areas.Among office buildings, while expected yields in the Marunouchi/Otemachi area of Tokyo, an importantmarket indicator, remained largely unchanged from the previous half at 4.5%, those in the Nihonbashi,Toranomon, Akasaka, Nishi-Shinjuku, Shibuya, Ueno, and Osaki areas fell by 0.1% point from the previousToranomon, Akasaka, Nishi Shinjuku, Shibuya, Ueno, and Osaki areas fell by 0.1% point from the previoushalf. Even in the Marunouchi/Otemachi area, the average expected yield fell by 0.1% point from the previoushalf, to 4.4% (the figures announced in the survey are median values). The number of investors tolerant ofsomewhat lower yields appears to be increasing.Expected yields on rental residential properties remain in the decreasing trend that began in April 2010.Expected yields on single-room units in the eastern Tokyo area have fallen for six consecutive halves, whilethose on (low-rise) high-end multifamily have fallen for the first time in four halves. Yields are decreasing inmost of the leading provincial cities as well, indicating that investor interest is spreading to those cities too.The market recovery has been slower for retail facilities than for other assets. However, for this period, yieldsdecreased in multiple areas. Yields on suburban shopping centers in Tokyo have fallen for three consecutivehalves, and yields on suburban shopping centers in Sendai, Nagoya, Kyoto, Kobe, and Fukuoka have fallen aswell. Yields on urban shopping centers are decreasing in Sendai, Chiba, and Kobe.Logistics facilities are a category of assets currently attracting attention from investors. Yields on suchfacilities whether single tenant or multi tenant are decreasing in nearly all areas Also many areas (including

【Fig.2】Real Estate Investor’s Expected Yield

facilities, whether single-tenant or multi-tenant, are decreasing in nearly all areas. Also, many areas (includingthe Nagoya coastal area, the Osaka coastal area, the Tama area of Tokyo, and northern Nagoya) show arelatively large decrease of 0.2% point.

Office Building Residential Property

6

7

8 (%)Tokyo (Marunouchi/Otemachi)OsakaNagoyaFukuoka

6

7

8 (%)

Retail Property Logistics Facility

3

4

5

03 04 05 06 07 08 09 10 11 124

5

03 04 05 06 07 08 09 10 11 12

Tokyo (Jonan) OsakaNagoya Fukuoka

(%)

6

7

8(%)

Tokyo (Coastal area) Nagoya (Coastal Area)

Osaka (Coastal Area) Tokyo (Inland)

5

6

7

8

9(%)

Tokyo (Suburban) Osaka (Suburban)Tokyo (Urban) Osaka (Urban)

5

6

10/08 4/09 10/09 4/10 10/10 4/11 10/11 4/12 10/12 2Source: Japan Real Estate Institute

3

4

5

03 04 05 06 07 08 09 10 11 12

Hot Topic

Appetite for Investment in Offices Again IncreasesThe Japan Real Estate Institute’s survey of real-estate investors also collects data on investors’ most recent stancestoward real-estate investment. The percentage of respondents stating that they had made real-estate investments instandard studio over the past six months had increased over two consecutive halves, rising to a high level of44%. Still, the percentage indicating that they would invest in single-room residential properties over the comingyear decreased. The percentages of investors reporting that they would invest in office building have increased.

【Fig 3】Acquired Property in Past 6 Months (Proportion of Investors multiple selection allowed)

While until now expected yields on rental residential properties have continued to decrease as investors havesought out such properties, from now on it appears likely that investors’ interest in office properties will increase.Though, while appetite for investment in grade-A office buildings is high, the survey’s results imply that thisappetite is not leading to actual investment. Also, appetite for investment in warehouse/distribution center is risinggradually, and appetite for investment in retail facilities (downtown retail property and suburban shopping centers)also appears to be in the process of recovering.

20%

30%

40%

50%

Oct-11 Apr-12 Oct-12

【Fig.3】Acquired Property in Past 6 Months (Proportion of Investors, multiple selection allowed)

0%

10%

Source: Japan Real Estate Institute

【Fig.4】Property Type of Possibility to Invest in Next 12 Months(Proportion of Investors, multiple selection allowed)

40%

50%

60%

70%

Oct-11 Apr-12 Oct-12

Source: Japan Real Estate Institute

0%

10%

20%

30%

The TSE REIT Index Continues to RiseAfter bottoming out in June, the TSE REIT index has been rising, exceeding the important 1,000-point inSeptember. It remains strong despite some minor adjustments in underlying conditions. While Topix has risenby only 0.2% since the end of June 2012, the TSE REIT index has outperformed it substantially, rising by10 2% over the same period A look at trading volume by investor type shows continual net buying by banks

Source: Japan Real Estate Institute

3

10.2% over the same period. A look at trading volume by investor type shows continual net buying by banksand investment trusts since July. While net selling by foreign investors was seen in August, in September andOctober they too returned to net buying. While this could be seen as speculative buying due to macroeconomicfactors such as a shift to domestic-demand-related stocks due to the strong yen and expectations of monetaryeasing, it also could be considered a reflection of positive fundamentals such as expectations of improvement inthe rental office market and improving fund-raising conditions in the real-estate sector.

Hot Topic

【Fig.5】Trading Volume of Real Estate Investment Trust by Investor Type

1 050

1,100

1,150

1,200

10

20

30

40（JPY in billion）

Foreigners Individuals Business Companies Investment TrustsBanks Insurance Companies Proprietar TSE REIT Index (RHS)

800

850

900

950

1,000

1,050

-40

-30

-20

-10

0

10

A Succession of Equity Financing through J-REITsAs the J-REIT market remains strong, there is a succession of new REIT listings and capital increases throughpublic offerings. The Daiwa House REIT was listed on November 28, 2012, and listing of GLP InvestmentCorporation is planned for December 21.

Source: Prepared by Kenedix based on Tokyo Stock Exchange

E h f th li ti i l d t th

1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12

【Fig.6】Equity Finance Trend by J-REITEach of these listings is valued at more thanJPY 100 billion. The value of equityfinancing through J-REITs in 2012 isestimated at approximately 1.3 times the2011 figure (based on figures announced asof the end of November 2012) as newlistings have resumed for the first time inabout four and one-half years Tokyu Land

10

250

300(JPY in billion)

Volume (LHS)Number of Cases (RHS)

about four and one-half years. Tokyu LandCorp. and Hulic are aiming to list newREITs in 2013, and it has been reported thatthe AEON Group and the Prologis(USA) also will list a REIT. As such, listingof new REITs appears likely to continue in2013 as well. The movement towardestablishment of private REITs also

5

50

100

150

200

【Fig.7】Newly Listing REIT and Private REIT (2012 Second Half)

Source: Prepared by Kenedix based on public announcement by J-REIT

pcontinues. Diamond Realty ManagementInc., an affiliate of Mitsubishi Corp.,registered a new investment corporation inJuly, as did Goldman Sachs AssetManagement in August.

002010 H2 2011 H1 2011 H2 2012H1 2012H2

【Private REIT】

【New Listing】

Date Fund Name Asset Management Company Amount of Asset (¥bn)

2012/7/30 DREAM Private REIT Diamond Realty Management 31.7

2012/8/14 Japan Private REIT Goldman Sachs Asset Management 100.0

4Source: Prepared by Kenedix based on public announcement by J-REIT and Media news

Name Asset Management Company Asset size at IPO (¥bn) Asset Type

2012/11/28 Daiwa House REIT Investment Corporation Daiwa House REIT Management 114.5 Industry/Retail

2012/12/21 GLP Investment Corporation GLP Japan Advisors 208.7 Industry

Market View

MarketMarket ViewViewProbing the 2013 Office Market

As the end of 2012 approaches, perhaps it can be said that the real-estate market, which had remained sluggishsince the financial crisis, showed signs of a clear recovery in 2012 despite a temporary delay in the recovering, g y p p y y gtrend due to the effects of the Great East Japan Earthquake. However, from a look at the survey of real-estateinvestors mentioned above it would appear at first glance that the market conditions for office buildings stillhave not recovered, as expected yields on office properties remain largely unchanged. On the other hand, at anunderlying level the number of investors turning their attention to investments in offices is increasing. For thesereasons, we would like to probe the outlook for the office market in 2013 from the two aspects of theinvestment market and the leasing market.

P i F t B hi d V i ti i Offi B ildi P iPrimary Factors Behind Variation in Office Building PricesFig.8 shows trends in the rates of change in appraised value, capitalization rates (on an appraisal basis), andNOI (annualized) for properties in REIT portfolios for which the relevant data are available on a continualbasis (from March 2005 through August 2012 for offices and from March 2007 through August 2012 forresidential properties). In both asset categories appraised value fell rapidly beginning H2 2008, but while thecapitalization rate for residential properties rose massively at the same time as the drop in appraised value, thecapitalization rate for office buildings rose only in H1 2009. On the other hand, a look at NOI conditions showsp g y ,that while NOI on residential properties has fallen since H2 2008 it rose temporarily in H2 2010. Although itsubsequently dropped again, the extent of this drop has been limited. In the case of office buildings, thedecrease in NOI began in H2 2009, one year later than the drop in appraised value. The rate of decrease grewsubsequently, peaking in H2 2011. In other words, in the case of office buildings only the massive drop inappraised value in H2 2008 can be said to be an effect of the rise in capitalization rate, while the decrease inNOI can be said to be the main cause of the small decreases in appraised value that continued subsequently.F th b it ld th t th ff t f NOI i i ti i t i th f ffiFrom the above, it would appear that the effect of NOI on price variations is stronger in the case of officebuildings than residential properties. In H2 2012, both office buildings and residential properties showeddecreases in capitalization rates. While appraised values rose at that time for residential properties, they did notrise for office buildings, due to the effects of the drop in NOI. There are signs of an underlying bottoming outof office-building rents, centered on prime properties, so that in 2013 rents are expected to rise. Sinceexpectations of rising rents are linked directly to improving appetite for investment in office buildings, it can behoped that the rental office market will improve in accordance with expectations.

ResidentialOffice

【Fig.8】The Factor of the Movement of Appraisal Value(Asset hold by J-REIT, % change from previous half period)

6.0

8.0 (%)

6.0

8.0 (%)

Appraisal value Cap Rate NOI

-4.0

-2.0

0.0

2.0

4.0

Appraisal value-4 0

-2.0

0.0

2.0

4.0

5

-8.0

-6.0

0 pp

Cap Rate

NOI

Source: Prepared by Kenedix based on public announcement by J-REIT

-8.0

-6.0

4.0

Market View

2012 Rental Office MarketAccording to Mori Building, the supply of space in office buildings in 2012 is forecast to reach 1.81 millionsquare meters. The massive supply of space from large-scale buildings led to a significant increase in thevacancy rate, which recorded a record high average vacancy rate of 9.43% in June (according to Miki Shoji,for the five central wards). However, the vacancy rate has been in a decreasing trend since then, and it can besaid that the market has not worsened to the extent feared.New demand (change in floor area in use) in 2012 has been high at approximately 180 thousand tsubo (594thousand square meters) as of November (in the five central wards, according to Kenedix estimates based onfigures released by Miki Shoji). Asking about tenants’ reasons for relocating shows that many relocationsinvolve office consolidation or centralization, and it appears that many are strategic relocations takingadvantage of the current historically low rent levels. However, relocations to consolidated offices alone wouldnot result in true new demand. Possible primary factors behind the high level of new demand include (i) truenew demand for reasons such as expansion of floor space, (ii) the possibility that secondary vacancies have notyet materialized, and (iii) relocations to better locations from the surrounding 18 wards. As for the first reason,we have heard that there are unexpectedly large numbers of expansions of floor space within a building. Withregard to the second of these reasons, since Miki Shoji counts a space as vacant when activities to attracttenants begin, it would appear that in some cases even after a tenant has relocated to a new office building itsprevious space is not recognized as a vacancy if activities to attract tenants does not begin due to reasons suchas lengthy construction work to return the space to its original condition.

Existing Medium-Sized and Medium-Large Buildings are StrongFig.10 shows vacancy rates by property size as announced by Sanko Estate (for the five central wards ofTokyo). While the vacancy rate has increased rapidly in 2012 for large-scale buildings due to the effects of newsupply, it clearly is decreasing for medium/large-scale buildings (those with typical floor plate of 100-200tsubo (330-660 square meters)). While it would seem from this data that new demand is arising to some extent,there appears to be demand for existing medium/large-scale buildings in particular. While the reason isunclear, conceivable possibilities include such buildings capturing demand for both office upgrades anddowngrades, companies preferring affordable existing buildings to high-priced new large buildings, andsecondary or tertiary vacancies not yet having materialized.

Outlook for 2013New supply of office buildings in the 23 wards of Tokyo in 2013 appears likely to be at a very low level, evenhistorically speaking, of 570 thousand square meters. Since pressure from new supply will decrease rapidly, ifunderlying strong demand continues then it can be expected that vacant space in new buildings will decreasesteadily. Also, concerns about secondary vacancies in existing buildings probably will not become too severe.However, this most likely depends on the assumption that macroeconomic conditions will recover prior to

2 0

2.5 (million sqm)

y p p pspring 2013. The possibility cannot be denied that if macroeconomic conditions turn out worse than expected,then new demand could decrease.

【Fig.9】Office Supply 【Fig.10】Vacancy Rate by Size (Central 5 Wards in Tokyo)

12%

14%Large-scaleMedium/large-scaleMedium-scale

1.0

1.5

2.0

4%

6%

8%

10%Small-scale

0.0

0.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 6Note: Large-scale:>200 tsubo/floor, Medium/large-scale: 100-200 tsubo/floor,Medium-scale: 50-100 tsubo/floor, Small-scale: 20-50 tsubo/floor

Source: Sanko Estate

Source: Mori Building

0%

2%

01/05 11/05 09/06 07/07 05/08 03/09 01/10 11/10 09/11 07/12

Real Estate Investment Market

Commercial Property Transaction

300%

400%

500%

800

1,000

1,200 (billion in yen)

Transaction volume (LHS) % change YoY (RHS)

Real-estate transaction volume decreasesAccording to DTZ, the value of commercial real-estate transactions in Q3 2012 fell by 20% yearon year to approximately JPY 217 billion. Whiletransaction volume had been in an increasingtrend in Q1 and Q2, due in part to new J-REIT

-100%

0%

100%

200%

0

200

400

600 offerings, in Q3 the value of J-REIT acquisitionstoo fell by 40% year on year. While hoteltransactions increased in Q3, hotels are notincluded in DTZ figures, so in fact the decreaseprobably is more moderate than it appears.Types of investor are broadeningOne conceivable reason for the difficulty in

Property Transaction by J-REITSource: DTZ

%

350

400 (JPY in billion)

Disposition Aquisition

yincreasing transaction volume is the continuingshortage of properties suitable for investment. Atthe same time, types of investors appear to bebroadening. For example, AVIVA and SecuredCapital have implemented additional fundofferings and the Japanese subsidiary ofAustralia’s Goodman has announced a joint

100

150

200

250

300investment with the Abu Dhabi InvestmentCouncil (ADIC) on the scale of JPY 80 billion.Goldman Sachs established its own private REITin August as well.In Q4 2012, in addition to new listings of twoREITs and capital increases through a publicoffering, numerous large-scale transactions

Si ifi t D l

Source: Prepared by Kenedix based on data of J-REIT

0

50

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011 2012

already have surfaced as well. For this reason, itappears likely that transaction value will increasesubstantially, so that the value of transactionsover the whole year probably will be at roughlythe same level as in 2011.

Significant DealsName Asset Type Buyer Prefecture Price (¥bn) GFS （sqm） Date

COMODIO Shiodome Office Nippon Building Fund Tokyo 28.8 28,796 Jul-12

Olinas Mall, Olinas Core Retail CapitaMalls Asia Tokyo 22.8 55,400 Jul-12

Aliake Prime Building Hotel Ascendas Hospitality Trust Tokyo 15.5 33,017 Jul-12

Yakuin Business Garden Office Japan Prime Realty Fukuoka 10.9 22,286 Aug-12

Toshin Building Office NTT Urban Development Tokyo 25.0 27,687 Sep-12

Yokohama Machida IC Logistics Center Logistics SPC which was invested

by Mitsui& Co., Realty Management Tokyo - 66,093 Sep-12

mozo Wonder City Retail Japan Retail Fund Aichi 26.7 233,606 Oct-12

SPC which was invested

Source: Prepared by Kenedix based on Nikkei Real Estate Market Report, other news report

7

Portas Sakai Hotel Hotel SPC which was invested by Agora Hospitality group Osaka - 52,378 Oct-12

D-project Urayasu Ⅱ Logistics Daiwa House REIT Chiba 21.4 72,320 Nov-12

D-project Hachioji Logistics Daiwa House REIT Tokyo 12.6 58,678 Nov-12

Building which was former Shinsei Bank Heed Office Office Joint Project with Kenedix, Tokyu Land

and Development Bank of Japan Tokyo - 62,423 Dec-12

J-REIT Market

120

140J-REIT Index & Stock Market Index (2010=100)J-REIT index outperforms Topix

In July 2012, both Topix and the TSE REITindex fell. However, since August they havemaintained positive monthly performance overfour consecutive months. A look at performancefrom July through the end of November shows

60

80

100

01/10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12

Topix TSE REIT Topix Real Estate

Source: Bloomberg (As of 30th November 2012)

from July through the end of November showsthe boom in the real-estate sector clearly, asTopix rose by 1.5%, the TSE REIT index by11.3%, and the TSE real-estate equities index by12.6 % .

A yield spread of 4.05%

6

8 (%)

TSE REIT Dividend Yield JGB 10 Yeild Yield Gap

Sou ce oo be g ( s o 30 o e be 0 )

Yield Spready p

The yield spread calculated based on the TSEREIT index as of the end of November 2012 was4.05%. This reflects a decrease of approximately0.5% points compared to the end of June, and theyield spread fell below 4.0% during this period.While the yield on 10-year JGBs fell over this

0

2

4

01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12 10/12Source: Bloomberg (As of 30th November 2012)

period as well, it fell by less than the decrease inthe J-REIT dividend yield.

Residential and retail/logistics REIT indicesrisingPerformance of REIT indices by asset type

120

140

160TSE REIT Index REIT Office Index

REIT Residential Index REIT Ret&Logi Index

J-REIT Index by Asset Class (Feb. 2010=100)g ( )

showed increases of 9.7% in the office index,14.9% in the residential index, and 12.8% in theretail/logistics index, resulting inunderperformance of the office index (July–November 2012). Performance of the officeindex appears to have got off to a bad start inJuly. This can be surmised to have resulted from

80

100

120

02/10 08/10 02/11 08/11 02/12 08/12Source: Bloomberg (As of 30th November 2012)

ythe fact that it was announced in July that theaverage vacancy rate in the five central wards ofTokyo had reached its highest level on record atthe end of June. Since August the office index tooshows a bullish trend.

120

140

160

180

JPN US UK AU Singapore

Key Country REIT Index (Jan. 2010=100)US REIT index has been bearishThe U.S. REIT index, which had demonstratedstrong performance in H1 2012, has been bearishsince H2. On the other hand, REIT markets incountries other than the U.S. were strong, withincreases of 11.3% in Japan, 14.6% in Singapore,and 9 6% in Australia during July November

60

80

100

01/10 07/10 01/11 07/11 01/12 07/12

8Source: Bloomberg (As of 30th November 2012)

and 9.6% in Australia during July – November2012. The yield spread based on each index as ofthe end of November was 1.8% in the U.S., 1.9%in the U.K., 2.1% in Australia, and 4.1% inSingapore.

Office market : Tokyo

6

8

10

15

20

25 (%)(thousand yen / tsubo)

Vacancy Rate & Asking Rent RateA tug of war between steady new demandand secondary vacanciesAfter peaking at 9.43% at the end of June 2012,the average vacancy rate in the five central wardsof Tokyo has fallen to 8.76% at the end ofNovember 2012 (Miki Shoji). During this period,the vacancy rate continued to fall through

0

2

4

0

5

10

02 03 04 05 06 07 08 09 10 11 12

Asking Rent Rate (LHS)

Vacancy Rate (RHS)

Note: Tokyo Business area (chiyoda-ku, chuo-ku, Minato-ku, Shinjuku-ku, Shibuya-ku)

October and new demand reached 71thousand sqm. However, the vacancy rate roseslightly in November, by 0.02% point over thepreceding month. The main cause of this increaseappears to be the fact that vacancies in spacesvacated by tenants who had relocated to newlyconstructed office buildings were countedbecause marketing activities already have begunfor such spaces. This can be said to be a typical

Vacancy Rate of Newly Built Bldg & Existing BldgSource: Miki Shoji Co., ltd. (Monthly, As of November 2012）

6

8

10

30

40

50 (%)(%)Newly Built Bldg (LHS) Existing Bldg (RHS)

for such spaces. This can be said to be a typicalexample of secondary vacancies surfacing in thestatistics after a delay.Supply pressure will decrease in 2013In H2 2012 vacancies are being filled steadily asthe volume of new supply is low. However,vacancies at the end of November had risen by1.7% point from the previous month, anindication that the underlying pace of concluding

Note: Tokyo Business area (chiyoda-ku, chuo-ku, Minato-ku, Shinjuku-ku, Shibuya-ku)

0

2

4

0

10

20

02 03 04 05 06 07 08 09 10 11 12

y g p gleases on newly constructed buildings hadslowed. Conceivable reasons include lessflexibility in setting rents as occupancy ratesincreased to some degree or a decrease in largegroupings of vacant floor space. While newsupply will decrease massively in 2013, the officebuildings to be supplied include many large-scaleoffices. It appears that tenants already have beendecided on for roughly 40 50% of the spaces in

8.0%

10.0%

12.0%

40

50

60 (thousand yen / tsubo)

Average Assumed Achievable Rent (LHS) Vacancy Rate (RHS)

Vacancy Rate & Asking Rent Rate for Grade A

y ( y j y )Source: Miki Shoji Co., ltd. (Monthly, As of November 2012）decided on for roughly 40-50% of the spaces in

leading buildings, so that new supply will be lesslikely to become a major factor causing vacancyrates to rise.Vacancy rate in grade-A buildings starts to fallThe vacancy rate in grade-A office buildings atthe end of September 2012 had fallen by 1.0%point from the previous quarter to 9.3% (CBRE).This appears to be due to a gradual decrease in

0.0%

2.0%

4.0%

6.0%

0

10

20

30

05 06 07 08 09 10 11 12Source: CBRE (Quarterly, As of September 2012)

This appears to be due to a gradual decrease invacant floor space in newly completed large-scaleoffice buildings. Average assumed achievablerent on grade-A office buildings remainsunchanged from the previous quarter at JPY29,900/tsubo.Asking rents continue to fallAsking rents by size in September 2012 fell in allclasses A look at year-on-year changes shows

Asking Rent Rate by building size

20

25

30

500-1,000 tsubo 1,000-3,000 tsubo 3,000 tsubo or more

(thousand yen / tsubo)

classes. A look at year on year changes showsthat in the total-floor-area class of 500-1,000tsubo asking rents fell by 3.6%, while they fell by5.9% in the 1,000-3,000 tsubo class and 7.9% inthe class of 3,000 tsubo or more. As such, thelarger the size of the space the higher the rate ofdecrease. While some predict that rents willbottom out against a background of strongdemand, unfortunately there is no clear trend at

t I th f t f t h

Note: Tokyo 23 wards, Source: CBRE （Quarterly, As of September 2012)

910

15

20

6/07 12/07 6/08 12/08 6/09 12/09 6/10 12/10 6/11 12/11 6/12

present. In the future factors such asmacroeconomic trends, how secondary vacanciesare filled, and the timing of their surfacing in themarket are likely to play increasingly importantroles.

Residential Market

Population in Major Cities

Sep-11 Jun-12 Sep-12 QoQ YoY

Tokyo 13,185,098 13,227,914 13,215,048 -12,866 36,590

Tokyo 23 ward 8,965,873 9,003,238 8,995,199 -8,039 31,387

Central 5 wards 912 343 923 693 922 957 736 6 707

Actual population seems to have increasedPopulation decreased statistically this quarter.This appears to be an effect of the change in thebasic resident register system that took effectbeginning July 9 (while the alien registrationsystem was abolished and the basic residentregister applied to foreign residents it appears

Occupancy Rate for Rental Apartment (Hold by J-REIT)

in Tokyo 912,343 923,693 922,957 -736 6,707

Nagoya city 2,266,817 2,268,298 2,266,851 -1,447 1,818

Osaka city 2,670,472 2,676,023 2,677,203 1,180 6,873

Fukuoka city 1,478,882 1,489,142 1,491,842 2,700 8,520

Source: Respective city

register applied to foreign residents, it appearsthat there are some cases of foreign residentsfailing to register on the basic resident register).For example, from July through October thepopulation in Tokyo of foreign residents from 10leading nations decreased by 16,000 people, butthis appears mainly to be an effect of the changein systems. The estimated population of Tokyofell by approximately 13 000 over the period

0.0

2.0

4.0

6.0

92

94

96

98 (%)(%)fell by approximately 13,000 over the periodJune-September, a decrease smaller than thedecrease in the population of foreign residents,and this would appear to indicate that the actualpopulation has increased.Occupancy rate at rental apartment in greaterTokyo area maintains a high levelThe occupancy rate at rental apartment in the

-4.0

-2.0

88

90

1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

Occupancy Rate (LHS) YoY % change (RHS)

Note: Occupancy rate＝occupancy area / rentable area, in the greater Tokyo areaSource: Prepared Kenedix based on data of major residential REIT (AS of October 2012)

Rent for Rental Apartment (Greater Tokyo Area by Area)

The occupancy rate at rental apartment in thegreater Tokyo area held in J-REIT portfolios was95.3% as of the end of October 2012. While therate has been on the increase since bottoming outin August, it still is at a level down 0.3% pointsyear on year. However, at this level it can bedescribed as maintaining a high rate. Observersare looking forward to the trends in the highseason at the end of the calendar and fiscal years Rent for Rental Apartment (Greater Tokyo Area, by Area)

105

110

115

120

season at the end of the calendar and fiscal years.Asking rent in central Tokyo is turning to riseAccording to the IPD/Recruit Residential IndexMonthly Report, rents on rental apartment (on anasking-rent basis) in the greater Tokyo area hitbottom around summer 2011 and have begunrising again since then. However, there is someminor variation in trends by region. While rents

Note: Asking Rent Rate (As of October 2012)Source: Prepared by Kenedix based on “ IPD/RECRUIT Residential Index Monthly Report”

90

95

100

1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12

Tokyo 23 wards KanagawaSaitama ChibaOver All Greater Tokyo Area

appear to be in a clear rising trend in the 23wards of Tokyo, they are decreasing, albeit bysmall degrees, in Kanagawa, Saitama, and Chiba.Newly supplied properties are driving upasking rentsRents on rental apartment located in centralTokyo and held in investors’ portfolios can bedi id d i t th i d h ki t

15

16 (thousand yen/tsubo)Rent for Rental Apartment (Central 5 Ward in Tokyo)

divided into those in wards where asking rentsare rising, due to the effects of new supply ofhigh-grade apartment, and those where they arenot. While the effects of new supply are strong inShinjuku and Shibuya wards, average askingrents are decreasing together with a decrease inofferings of newly constructed apartment. At thesame time, asking rents continue to decrease inCh W d h h ff f

12

13

14

01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12

Chuo-ku Minato-ku Shibuya-kuShinjuku-ku Chiyoda-ku 10

Note: Asking Rent Rate (As of September 2012) Source: Leasing Management Consulting

Chuo Ward, an area where the effect of newsupply is almost nonexistent. The downwardtrend in rents in Chiyoda Ward appears to becoming to a halt.

Logistics / Retail

15%

20%

6.0

7.0 Asking Rent Rate (LHS)Vacancy Rate for Existing Facility (RHS)Average Vacancy Rate (RHS)

(thousand yen)Asking Rent & Vacancy Rate for LogisticsVacancy rates in logistics facilities rose for the

first time in five quartersThe vacancy rate in large-scale, multi-tenantlogistics facilities in the greater Tokyo area roseby 1.0% points from the previous quarter to4.6%, its first increase in five quarters (CBRE).O t l t d thi t t

0%

5%

10%

3.0

4.0

5.0

05 06 07 08 09 10 11 12Source: CBRE (Quarterly for Vacancy Rate Half yearly for Rent Rate)

One property completed this quarter appears tohave begun operation at less than full occupancy.The vacancy rate appears to have increased inexisting properties as well, due to factors such astermination of short-term leases. However, thevacancy rate can be said to remain at a low levelof 5.0% or less.N l d d d b th t hi h Source: CBRE (Quarterly for Vacancy Rate, Half-yearly for Rent Rate)

Supply-Demand Balance in Tokyo Area for Logistics

200

300

400 (thousand sqm)

New Supply New Demand

New supply and new demand both are at highlevelsAccording to Ichigo Real Estate Service, newsupply over the period May-July 2012 was highat 245,000 sqm. However, new demand also wasstrong at 223,000 sqm, so that the vacancy rateincreased only slightly. Prologis announced thatP l i P k Z 2 ( l fl 116 000

S I hi R l E t t S i C Ltd

0

100

200Prologis Park Zama 2 (total floor area: 116,000sqm), completed in August, had 60% occupancyupon completion of construction, and this appearsto have been one factor pushing up the vacancyrate. However, in November it was announcedthat its occupancy rate had risen to approximately90%. This can be seen as a sign of the steadydemand for logistics facilities

Asking Rent Rate for Retail Property (ground floor)Source: Ichigo Real Estate Service Co, Ltd.

40

50

60(thousand yen)

demand for logistics facilities.

Demand along main streets appears strongFrom statistics on asking rents in commercialareas in central Tokyo it appears that it cannot besaid unconditionally that if rents are rising thenthe market is improving. Asking rents on first-floor retail stores decreased in Q2 2012 in the

Source: Nikkei Real Estate Market report (Quarterly, As of Q2 2012）

10

20

30

09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2

Ginza Omotesando ShinjukuShibuya Ikebukuro

Qfour areas other than Shinjuku. However, due to acertain level of demand for stores along mainstreets such as Ginza and Omotesando actualrents in those areas appear strong. Rather, askingrents appear to be falling as the number ofproperties offered in areas other than primelocations is increasing.

Source: Nikkei Real Estate Market report (Quarterly, As of Q2 2012）

Retail Sales (YOY % change)

0.0

5.0

10.0

15.0

Existing Shopping Center Department Store

Overall Retail Sales

A weakening trend in personal consumptionShopping-center sales in June and July fell yearon year, and while they temporarily showed year-on-year increases in August they fell again yearon year in September and October. Over the sameperiod department-store sales continued todecrease year on year, and retail sales as a whole

Source: Japan Council of Shopping Centers, Japan Department Stores Association,The Ministry of Economy, Trade and Industry (As of October 2012)

11-15.0

-10.0

-5.0

0.0

1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12

y y ,appeared to be sluggish. In addition to worseningbusiness confidence, continued low temperaturesduring the summer and high temperatures in thefall appear to have weakened sales, centered onapparel.

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