Research Report Japan Real Estate Fourth Quarter 2013realestate.deutscheam.com/content/_media/Research_DeAWM...DEUTSCHE ASSET & WEALTH MANAGEMENT Japan Real Estate Fourth Quarter 2013

Japan Real Estate Fourth Quarter 2013

October 2013

Research Report

DEUTSCHE ASSET & WEALTH MANAGEMENT Japan Real Estate Fourth Quarter 2013 | October 2013

Table of Contents

Executive Summary ............................................................................ 1

Macro Economy .................................................................................. 2

Capital Market ..................................................................................... 4

Lending ................................................................................... 4

Pricing .................................................................................... 4

Transactions ........................................................................... 6

Performance ........................................................................... 7

J-REITs .................................................................................. 8

Market Fundamentals ....................................................................... 10

Office .................................................................................... 10

Residential ............................................................................ 13

Industrial ............................................................................... 15

Past Issues ....................................................................................... 17

Important Notes ................................................................................ 18

Research & Strategy Team – Alternatives and Real Assets .............. 19

Prepared By:

Koichiro (Ko) Obu

Head of Research & Strategy

Asia Pacific

+81 (0) 3 5156 6522

[email protected]

Minxuan Hu

Property Market Research

+81 (0) 3 5156 6525

[email protected]

Mark Roberts


+1(212) 454-0974

[email protected]

DEUTSCHE ASSET & WEALTH MANAGEMENT Japan Real Estate Fourth Quarter 2013 | October 2013 1

Executive Summary

Economy: Abenomics — a policy that combines aggressive monetary easing and fiscal

stimulus — has put Japan’s economy on a path toward rapid recovery. GDP grew at an

annualised rate of 3.8% in the second quarter of 2013 as consumer sentiment improved

and exports increased. The Tankan Survey conducted by the Bank of Japan (BoJ) made

a large leap in the third quarter 2013, rising from an index value of 8 in June to 13 in

September, its highest level in five-and–a-half years. Encouraged by the healthy

economic recovery, the government moved ahead with its plan to increase the

consumption tax (VAT) rate from 5% to 8% in April 2014. The tax hike, intended to

address long-term public debt, is also expected to moderate near-term GDP growth in

2014.

Capital market: The current government’s “re-flation” policy to tackle the decade-long

spiral of deflation has started to produce results, with Japan’s core CPI inflation rate once

again entering positive territory. Japan’s credit conditions remain favourable for borrowers.

Fuelled by recovering real estate fundamentals in Japan, the J-REIT index rose to 1,500

at the end of September 2013, a 15.0% improvement in two months. This is unique

among other global REITs, most of which declined during this period due to an uptick in

long-term interest rates. The aggregate amount of capital raised by equity offerings by J-

REITs was JPY 625 billion in the last seven months (preliminary). Given this ample new

capital, J-REITs remained the most active purchasers in the local market.

Property markets: A new housing boom seems to have arrived to Japan. The average

sales price per unit for newly-built for-sale condos in Greater Tokyo rose to JPY 49.8

million in July/August 2013 (preliminary), an increase of 9.3% from the same period a year

earlier, and the highest average price in the last 20 years. Leasing markets, in general,

have made steady improvements, with vacancy rates recovering in the office, logistics,

and residential sectors. Signs of rental recovery are less consistent across sectors, with

the recovery still patchy and nascent. A robust recovery in rents across all property

sectors has yet to take hold.


Macro Economy

Aggressive monetary easing and fiscal stimulus — policies referred to as “Abenomics” in

reference to Shinzo Abe, Japan’s prime minister — have put Japan’s economy on a path

toward rapid recovery. GDP grew at an annualised rate of 3.8% in the second quarter of

2013 as consumer sentiment improved and exports increased. The buoyant sentiment

strengthened even further with Tokyo’s selection in September 2013 as the host city for

2020 Summer Olympic Games. Encouraged by the healthy economic recovery, the

government moved ahead with its plan to increase the consumption tax (VAT) rate from

5% to 8% in April 2014 just as initially scheduled. The tax hike, intended to address long-

term public debt, is also expected to moderate near-term GDP growth in 2014.

Exhibit 1 — GDP Growth Outlook for Japan

Notes: F = forecast, there is no guarantee forecast growth will materialise. Please refer to Important Notes (see end of report)

Sources: Deutsche Bank “Japan Economics Weekly”

As of October 2013

The Diffusion Index (DI) of the Tankan Survey conducted by the Bank of Japan (BoJ)

made a large leap in the third quarter 2013. The DI improved from an index value of 8 in

June 2013 to 13 in September 2013, the highest level in the five-and–a-half years since

March 2008. The outlook for December 2013 is stable. The recovery is evident especially

among large-sized manufacturers and construction firms. The Business Condition Leading

Index reported by Japan’s Cabinet Office remains at a six-year high, indicating a

sustainable, healthy recovery.

Exhibit 2 — Diffusion Index of Business Conditions

Sources: The Bank of Japan, Japan’s Cabinet Office, Deutsche Asset & Wealth Management

As of October 2013

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014F

2015F

2016F

2017F

Q1 Q2 Q3 Q4 annual growth

DB Forecast

Global Financial Crisis

Dot-com Bubble burst

Consumption Tax Increase Asian Financial Crisis Earthquake

aftermath

ConsumptionTax Increase

-50

-25

0

25

50

74

87

100

113

126

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Business Condition Leading Index (LHS) Diffusion Index of Tankan Survey (RHS)

Diffusion Index of Business Conditions:('favourable' minus 'unfavourable', % points)

(2010=100)

Dot.com Bubble burst

Global Financial CrisisConsumption

Tax increase


Long-term interest rates in Japan are expected to rise in accordance with the possible

tapering of quantitative easing in the United States later this year and in early 2014, but

the impact in Japan is expected to be limited compared to other Asian countries. The 10-

year government bond yield is forecast to rise only moderately from the current 0.7% to

around 1% by the end of 2013 or in early 2014.

The current government’s “re-flation” policy to tackle the decade-long spiral of deflation

has started to produce results, with Japan’s core CPI inflation rate once again entering

positive territory. The upward momentum will likely reach its peak in the first half of 2014,

with CPI reaching around 1.3% on a like-for-like basis (excluding the effect of the planned

consumption tax increase), or 3.4% including the consumption tax effect.

Exhibit 3 — Forecast of Interest Rate and CPI

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)

Sources: The Bank of Japan, Japan’s Cabinet Office, Deutsche Bank

As of October 2013

-3

-2

-1

0

1

2

3

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

E

20

14

F

20

15

F

20

16

F

20

17

F

Call Rate (overnight) 10y JGB

CPI CPI incl tax effect(%)

DB Forecast

Consumption Tax hike in April 2014


Capital Market

Lending

Japan’s credit conditions remain favourable for borrowers. The Bank of Japan’s DI for

lending attitudes of banks to the real estate industry (orange line in Exhibit 4) remained at

an index value of 16 in September 2013, the highest level in five years. The lending

volume to new real estate projects increased by 10.5% in the second quarter of 2013

(year-on-year), reflecting the active deal flow during the period.

Exhibit 4 — Real Estate Lending by Japanese Banks

Sources: The Bank of Japan, Japan’s Cabinet Office, Deutsche Asset & Wealth Management

As of October 2013

Vigorous J-REIT activities kept the volume of real estate transactions elevated in the third

quarter of 2013. The preliminary transaction volume in the rolling 12 months to September

2013 exceeded JPY 3.0 trillion for the first time since September 2008. This increase

occurred along with a recovery in the lending attitudes of banks. The positive trend is

expected to continue through the foreseeable future.

Exhibit 5 — Real Estate Transaction Volume and Lending Attitude DI

Notes: E = preliminary estimate. Please refer to Important Notes (see end of report)

Sources: Urban Research Institute, Bank of Japan, Real Capital Analytics, Deutsche Asset & Wealth Management

As of October 2013

F = forecast, there is no guarantee rate forecasted will materialise (see end of report)

Pricing

The TMAX all-property “economic” cap rate which incorporates actual market prices

tightened to 5.24% in June 2013, the lowest level in five years. This is in line with the

-40

-20

0

20

-40%

-20%

0%

20%2008.0

3

2008.0

6

2008.0

9

2008.1

2

2009.0

3

2009.0

6

2009.0

9

2009.1

2

2010.0

3

2010.0

6

2010.0

9

2010.1

2

2011.0

3

2011.0

6

2011.0

9

2011.1

2

20

12

.03

2012.0

6

2012.0

9

2012.1

2

2013.0

3

2013.0

6

2013.0

9

growth of lending to new projects (yoy, LHS)lending attitude DI to all industries (RHS)lending attitude DI to real estate industries (RHS)

Diffu

sio

n In

dex

-36

-24

-12

0

12

24

36

0

1

2

3

4

5

6

2000

.09

2001

.03

2001.0

9

2002

.03

2002

.09

2003

.03

2003

.09

2004

.03

2004

.09

2005

.03

2005

.09

2006

.03

2006

.09

2007

.03

2007

.09

2008

.03

2008

.09

2009

.03

2009

.09

2010.0

3

2010

.09

2011

.03

2011

.09

2012

.03

2012.0

9

2013

.03

2013

.09E

2014.0

3F

transaction volume (12 months, LHS) lending attitude DI (6 months prior, RHS)

(JPY tn)

Diffu

sio

n In

dex (D

I)


continuous compression of office appraisal cap rates in Tokyo, which reached a

preliminary 3.97% in June 2013. The gap between the cap rates of the office and

residential sectors widened, reflecting a stronger anticipation of rent increases in the office

sector. The average yield spread — the difference between the cap rates and 10 year

bond yields — declined by 40 basis points to 430 basis points in Tokyo. The city remains,

nevertheless, one of the most attractive spreads among the major global markets.

Exhibit 6 — Cap Rate (appraisal) and Yield Spread (transacted)

Average Appraisal Cap Rate for Assets Held by J-REITs

Average Office Yield Spread for

Actual Transactions

Notes: Past performance is no guarantee of future results

Sources: ARES, TMAX, Real Capital Analytics, Bloomberg, Deutsche Asset & Wealth Management

As of October 2013

The TMAX Commercial Property Price Index1, a measurement incorporating actual market

price trends, rebounded to 86.2 in August 2013, marking three consecutive quarters of

recovery. The TMAX index is expected to increase strongly through the remainder of the

year, aligning more closely with the J-REIT index, which is a leading indicator of

commercial real estate prices in Japan.

Exhibit 7 — Real Estate Capital Value in Japan

Notes: TMAX (Oct 2005=100) and ARES AJPI (31 December 2001=100).

Sources: ARES, TMAX, Bloomberg, Deutsche Asset & Wealth Management

As of October 2013

1 TMAX Commercial Property Price Index, provided by TMAX (a real estate appraisal and market research company in Japan), measures the current price of

commercial real estate owned by J-REIT.

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2

2007 2008 2009 2010 2011 2012 13

Tokyo Office Osaka Office

Tokyo Residential Osaka Residential

TMAX Economic

preliminary

-1%

0%

1%

2%

3%

4%

5%

6%

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

2007 2008 2009 2010 2011 2012 13

Tokyo Manhattan

Central London Hong Kong

Singapore Sydney

0

800

1600

2400

70

90

110

130

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

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

TMAX Property Price Index (LHS) J-REIT (stock, RHS)

Sep 08Global Financial Crisis

Mar 11Tohoku Earthquake


Transactions

Among the transactions completed or announced since July 2013 that exceed JPY 10

billion, J-REITs continued to be the most active buyers, but corporate investors, high net

worth individuals, and private REITs also actively bought assets, including Tiffany Ginza

(acquired by Masayoshi Son, an individual investor, for JPY 32 billion) and Tamagawa

Renaissance City (acquired by NEC Corporation for JPY 58 billion). The largest

transaction in value was Shiba Park Building, a JPY 110 billion purchase by a consortium

of Asia Pacific Japan (APJ), Secured Capital, Abu Dhabi Investment Council (ADIC), and

CV Starr. The most expensive unit price was recorded by the sale of Tiffany Ginza, at JPY

5.6 million per square metre.

Exhibit 8 — Major Transactions in the Third Quarter 2013

Notes: Non-office deals, assets outside Tokyo, and acquisitions by foreign managers are highlighted in gray. This table is prepared solely for information purposes and not intended to recommend or endorse any specific company's shares or other products.

Sources: Real Capital Analytics, Nikkei Real Estate Market Report, Deutsche Asset & Wealth Management

As of October 2013

Tokyo’s volume of commercial real estate transactions for the rolling 12-month period

ending in September 2013 was US$29.0 billion, a 23% increase from the previous 12-

month run ended June 2013. Tokyo ranked third among global cities in transaction volume,

up from fourth place at the end of June 2013. Within the Asia Pacific region, Tokyo

maintained the top position for transaction volume. About 60% of these transactions were

by J-REITs, according to Deutsche Asset & Wealth Management’s (DeAWM’s) own

estimates.

Month Type Asset

Price

(JPY

billion)

Unit price

(JPY m

/sqm)

Cap

rates

Pre-

fectureAcquired by

Investor

origin

Mar-13 residential MUSEUM TOWER - - - Hyogo Private Investor Hong Kong

Apr-13 residentialApartments in Tokyo

(9 properties)- - - Tokyo Goldman Sachs US

May-13 office/retail MG Yakuin Bldg - - - Fukuoka Goldman Sachs US

May-13 office Aoyama Kyodo Bldg - - - Tokyo Goldman Sachs US

May-13 office/retail Creglanz Shimbashi ll - - - Tokyo Private Investor Taiwan

Jun-13 retail Aeon Mall Kashiwa 約130 - 約6% Chiba Diamond Realty Management Japan

Jun-13 retail/office Quartier Blanc GINZA - - - Tokyo Global Investments Japan Malaysia

Jul-13 office Akasaka Business Place 9 0.68 4.8% Tokyo Daiwa Office (REIT) Japan

Jul-13 office TKS Musashi Kosugi Bldg 9 0.56 - Kanagawa Kenedix Japan

Jul-13 retail/officeKaleido-Shibuya etc

(3 properties)25 1.15 5.2% Tokyo TOKYU REIT Japan

Jul-13 dev. siteNissan Motor's Shonan No.1

Factory16 0.11 - Kanagawa Mitsui Fudosan Japan

Jul-13 officeFormer HQ of Kirin in Shinkawa

and Harajuku20 - - Tokyo

Tokyo Tatemono , Stern Chuo,

Kyoju no kaiJapan

Jul-13logistics /

officeShiomi Bldg 14 0.26 - Tokyo Senko Co. Japan

Aug-13 logisticsMusashi Murayama Logistics

Centre9 0.21 - Tokyo Japan Logistics Fund (REIT) Japan

Aug-13 hotel Sheraton Grande Tokyo Bay 42 0.39 - Chiba Fortress US

Aug-13 office Shiba Park Bldg 110 1.13 - Tokyo

Asia Pacific Land, Secured

Capital, Abu Dhabi Investment

Council, CV Starr

US/UAE/

Japan

Aug-13 office2.8% of Roppongi Hills Mori

Tower22 2.54 4.0% Tokyo Mori Hills REIT Japan

Aug-13 office50% of Nihonbashi-Muromachi

Center Bldg14 1.23 - Tokyo Mitsui Fudosan Japan

Aug-13 office/retailItopia Nihonbashi SA Bldg,

Ginza 4chome Tower12 1.44 - Tokyo Kenedix REIT Japan

Aug-13 dev. site Ginza Branch, Tokyo Electric 24 2.97 - Tokyo Yomiuri Shimbun Japan

Aug-13 dev. site Dev. Site in Ariake, Koto-ku 42 1.16 - Tokyo Daiwa House Industry Japan

Sep-13 logistics GLP Urayasu III 18 0.27 - Chiba GLP REIT Japan

Sep-13 retail Value Plaza Ageo Atago 6 0.14 - Saitama Morgan Stanley US

Sep-13 retailKawasaki Le Front etc

(8 properties)74 0.53 6.2%

Kanagawa,

Osaka and

others

Japan Retail Fund (REIT) Japan

Sep-13 logisticsSG Realty Yokohama etc

(2 properties) and a dev. site19 0.33 5.3%

Kanagawa, Gifu

and othersJapan Logistics Fund (REIT) Japan

Sep-13 dev. site Dev. Site in Ibaraki City, Osaka 1 0.07 - Osaka Digital Realty Trust (REIT) US

Sep-13 health care senior housing (7 properties) 5 0.22 -Mie, Ehime and

othersParkway Life REIT Singapore

Sep-13 retail Recipe SHIMOKITA 10 1.22 4.4% SetagayaNomura Real Estate Master

FundJapan

Sep-13 office Tamagawa Renaissance City 58 0.31 - Kanagawa NEC Japan

Sep-13 retail Tiffany & Co 32 5.64 2.6% Tokyo Private Investor Japan

Oct-13 office/retail J Tower etc (20 properties) 75 0.45 5.9%Tokyo, Osaka

and others

Simplex Investment Advisors

(REIT IPO)Japan

Nov-13 retail

AEON Lake Town and AEON

Taman Universiti Shopping

Centre etc (16 properties)

142 - -

Saitama,

Malaysia and

others

Aeon REIT (IPO) Japan


Exhibit 9 — Real Estate Transaction Volume by City (12 months to Sept)

2013)

Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions

Sources: Real Capital Analytics, Deutsche Asset & Wealth Management

As of October 2013

Performance

IPD reported that the average annual total return for unlevered direct real estate

investment in Japan edged up to a preliminary 4.5% in June 2013 (the latest period

available), representing an improvement from 3.9% in March 2013. Among the major

property sectors, office returns still lagged at 2.9% for the 12 months ended in June 2013,

while all the other sectors, including retail, residential, and logistics posted 6%-7% returns

during the period.

Exhibit 10 — Real Estate Total Returns in Japan (unlevered)

Total Return by Component Total Return by Sector

Notes: There is a time lag because of raw data being collected through semi-annual reports. Past performance is not indicative of future results

Sources: IPD Japan Monthly Indicator, Deutsche Asset & Wealth Management

As of October 2013

0 10 20 30 40 50

NYC Metro

London Metro

LA Metro

SF Metro

DC Metro

Paris

Hong Kong

Chicago

Singapore

Sydney

Seoul

Shanghai

Beijing

Guangzhou

Taipei

Office Retail Apartment Industrial Hotel

Tokyo

($bn)

othersJ-REITs

Osaka

～

～

-15%

-10%

-5%

0%

5%

10%

15%

20

04

20

06

20

08

.03

20

08

.09

20

09

.03

20

09

.09

20

10

.03

20

10

.09

20

11

.03

20

11

.09

20

12

.03

20

12

.09

20

13

.03

20

13

.09

Total Return Income Return

Capital Growth

preliminary

-15%

-10%

-5%

0%

5%

10%

15%

20

04

20

06

20

08

.03

20

08

.09

20

09

.03

20

09

.09

20

10

.03

20

10

.09

20

11

.03

20

11

.09

20

12

.03

20

12

.09

20

13

.03

20

13

.09

Office Retail

Residential Industrial

preliminary


J-REITs

Fuelled by recovering real estate fundamentals in Japan, the J-REIT index rose to 1,500

at the end of September 2013, a 15.0% improvement in two months. This is unique

among other global REITs, most of which declined during this period due to an uptick in

long-term interest rates.

Exhibit 11 — J-REIT Index and Long-Term Global Comparison

J-REIT Index and Nikkei 225 (5-year) Global REIT Comparison (10-year)

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)

Sources: Bloomberg, Deutsche Asset & Wealth Management

As of October 2013

On average, the expected J-REIT dividend yield was 4.2% overall (and 3.4% for office

REITs) in August 2013. This represents an increase of more than 90 basis points in just

five months from March 2013 while the long term bond yields edged up only 6 basis points

during the same period. The J-REIT dividend yield, therefore, provides a healthy spread of

more than 340 basis points (and 270 basis points for office REITs) over the 10-year

government bond yield. The spread is believed to have compressed in September due to

the stock price recovery but is still healthier than that of the US-REIT and the UK-REIT

(about 100 basis points or even below).

Exhibit 12 — J-REIT Expected Dividend Yield

Notes: Past performance is no guarantee of future results. JGB = Japanese Government Bond. Commercial real estate transactions exclude non-income producing assets, such as development site transactions

Sources: Sumitomo Mitsui Trust Research Institute, Bloomberg, Deutsche Asset & Wealth Management

As of October 2013

7,000

10,000

13,000

16,000

19,000

700

1,000

1,300

1,600

1,900

20

08

.10

20

09

.04

20

09

.10

20

10

.04

20

10

.10

20

11

.04

20

11

.10

20

12

.04

20

12

.10

20

13

.04

20

13

.10

J-REIT Index (LHS)

Nikkei 225 (RHS)

(JPY)

50

100

150

200

250

300

350

400

20

03.0

92

00

4.0

32

00

4.0

92

00

5.0

32

00

5.0

92

00

6.0

32

00

6.0

92

00

7.0

32

00

7.0

92

00

8.0

32

00

8.0

92

00

9.0

32

00

9.0

92

01

0.0

32

01

0.0

92

01

1.0

32

01

1.0

92

01

2.0

32

01

2.0

92

01

3.0

32

01

3.0

9

J-REIT US-REIT

A-REIT (Australia) S-REIT (Singapore)

(Mar-09 = 100)

0%

2%

4%

6%

8%

2001.0

8

2002.0

2

2002.0

8

2003.0

2

2003.0

8

2004.0

2

2004.0

8

2005.0

2

2005.0

8

2006.0

2

2006.0

8

2007.0

2

2007.0

8

2008.0

2

2008.0

8

2009.0

2

2009.0

8

2010.0

2

2010.0

8

2011.0

2

2011.0

8

2012.0

2

2012.0

8

2013.0

2

2013.0

8

J-REIT Office REIT 10Y JGB


The J-REIT market has continued to attract new capital from retail investors. Three new

listings and many other secondary offerings have occurred or were announced since July

2013. The aggregate amount of capital raised by these offerings was JPY 625 billion in

the last seven months (preliminary), still at a very buoyant level allowing continuous active

purchase activities.

Exhibit 13 — Capital Raising and Transactions by REITs in Japan

Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions

Sources: ARES, Nikkei, Deutsche Asset & Wealth Management

As of October 2013

The volume of commercial real estate transactions in Japan in the six months to

September 2013 was a preliminary JPY 1.39 trillion, about 70% of which involved

acquisitions by listed J-REITs. This marked the highest six-month total on record,

surpassing the previous six months ended in March 2013 (66%).

Exhibit 14 — Real Estate Transactions in Japan and J-REIT Share

Notes: E = preliminary estimate. Commercial real estate transactions exclude non-income producing assets, such as development site transactions

Sources: ARES, Urban Research Institute, Real Capital Analytics, Deutsche Asset & Wealth Management

As of October 2013

Name of REIT Month JPY bn

Public Offerings

previous POs total Apr-Jun 126

Japan Logistics Fund Sep-13 16

GLP J-REIT Sep-13 23

Japan Retail Fund Oct-13 43

Mori Hills REIT Oct-13 11

other POs Jul-Sep 109

Total 329

Initial Public Offerings

other IPOs Apr-Aug 161

Hoshino Resorts REIT Jul-13 10

Simplex Investment Advisors Oct-13 35

Aeon REIT Nov-13 90

Total 296

Planned: Hulic, Shinsei Bank, SMBC (NEC), Kenedix

0.0

0.5

1.02001.0

92002.0

32002.0

92003.0

32003.0

92004.0

32004.0

92005.0

32005.0

92006.0

32006.0

92007.0

32007.0

92008.0

32008.0

92009.0

32009.0

92010.0

32010.0

92011.0

32011.0

92012.0

32012.0

92013.0

32013.1

0E

Bond3rd Party AllotmentPublic OfferingIPO

JPY tn

Net Acquisitionby J-REITs

-20%

0%

20%

40%

60%

80%

-1

0

1

2

3

4

2000.0

9

2001.0

3

2001.0

9

2002.0

3

2002.0

9

2003.0

3

2003.0

9

2004.0

3

2004.0

9

2005.0

3

2005.0

9

2006.0

3

2006.0

9

2007.0

3

2007.0

9

2008.0

3

2008.0

9

2009.0

3

2009.0

9

2010.0

3

2010.0

9

2011.0

3

2011.0

9

2012.0

3

2012.0

9

2013.0

3

2013.0

9

Acquisition by others

Acquisition by J-REITs

Disposition by J-REITs

(JPY tn)

J-REIT share (%) of all transactions (RHS)


Market Fundamentals

Office

The amount of new office supply in Tokyo peaked in 2012, and the office vacancy rate in

the central five wards has since been recovering. The average office vacancy rate was

8.2% in August 2013, a healthy improvement from 9.2% in the same month of the

previous year. The vacancy rate for newly developed buildings rose to 17.9% in August

from 11.1% last quarter. This uptick followed a rapid, continuous recovery in the previous

five quarters. At 17.9%, this represented a manageable level compared to the peak

vacancy of 39.2% a year earlier.

Exhibit 15 — Office Vacancy Rate in Central Tokyo (5 wards)

Notes: GFA = gross floor area. sqm = square metres

Sources: Miki Shoji, Deutsche Asset & Wealth Management

As of October 2013

In the eight months to August 2013, the vacancy rate in Tokyo steadily declined across all

categories of floor plate sizes. For larger assets with a floor plate size of more than 200

tsubos2 (660 square metres), the vacancy rate dropped from 6.6% to 5.7% in the period

while it declined from 11.5% to 9.7% for the smallest category of assets, i.e., floor plates

of 50-100 tsubos (165-330 square metres).

2 The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)

Building Date Floors Phase GFA (sqm)

Mar-12 10 East 39,025

May-12 21 South 190,000

Sumitomo RD Shibuya Garden Tower Jun-12 22 61,600

Ark Hills Sengokuyama Mori Tower Aug-12 47 143,720

Sep-12 31 North 110,000

Sep-12 35 South 132,500

WATERRAS TOWER Feb-13 41 129,223

New Kabuki-za Theater Building Feb-13 29 94,097

Tokyo Square Garden Mar-13 24 117,025

Ochanomizu Sola City Mar-13 23 102,179

Lazona-Kawasaki Toshiba Bldg Mar-13 15 104,594

ARK Hills South Tower Sep-13 20 55,033

Major Office Supply in Tokyo

Nakano Central Park

Otemachi Financial City


Exhibit 16 — Office Vacancy Rate in Central Tokyo by Building Floor Plate

Notes: sqm = square metres

Sources: Sanko Estate, Deutsche Asset & Wealth Management

As of October 2013

Historically, office rental growth rates correlate inversely to the vacancy rate. The vacancy

rate for buildings with floor plates of 200 tsubos (660 square metres) or more was 5.7% in

Tokyo in September 2013, close to the pivotal 5% threshold. Average office rents in this

category rose by 3.8% in the second quarter from the previous year.

Exhibit 17 — Vacancy Rate and Rent Growth in Tokyo (floor plate > 660 sqm)

Sources: Miki Shoji, Sanko Estate, Deutsche Asset & Wealth Management

As of October 2013

The average rent for prime offices in Tokyo stepped up 2.1% in the two months to August

2013 while rent for newly-built offices posted a temporary decline following rapid growth in

previous two quarters. The all-class average rent softened slightly during the same period,

falling -0.8%. Given a steady recovery in the vacancy rate, rent stabilisation is expected in

late 2013 or early 2014.

0%

4%

8%

12%

19

96

.08

19

97

.02

19

97

.08

19

98

.02

19

98

.08

19

99

.02

19

99

.08

20

00

.02

20

00

.08

20

01

.02

20

01

.08

20

02

.02

20

02

.08

20

03

.02

20

03

.08

20

04

.02

20

04

.08

20

05

.02

20

05

.08

20

06

.02

20

06

.08

20

07

.02

20

07

.08

20

08

.02

20

08

.08

20

09

.02

20

09

.08

20

10

.02

20

10

.08

20

11

.02

20

11

.08

20

12

.02

20

12

.08

20

13

.02

20

13

.08

Floor Plate : 165 sqm - 330sqm Floor Plate : 330 sqm - 660 sqm Floor Plate > 660 sqm

1%

3%

5%

7%

9%

11%-12%

-8%

-4%

0%

4%

8%

19

95

.09

19

96

.09

19

97

.09

19

98

.09

19

99

.09

20

00

.09

20

01

.09

20

02

.09

20

03

.09

20

04

.09

20

05

.09

20

06

.09

20

07

.09

20

08

.09

20

09

.09

20

10

.09

20

11

.09

20

12

.09

20

13

.09

Actual Rent Growth (QoQ, 3Q rolling avg.) Vacancy Rate (RHS)


Exhibit 18 — Office Asking Rent in Central Tokyo by Building Floor Plate

Notes: F = forecast, there is no guarantee forecast rents will materialise. Please refer to Important Notes (see end of report)

*The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)


As of October 2013

Due to limited supply of new buildings, office vacancy rates continued to recover in most

of Japan’s regional cities. The vacancy rate in Osaka declined to 10.3%, a significant

improvement from 11.3% at the beginning of the year, while it widened marginally in

Sapporo due to weak demand among call centres.

Exhibit 19 — Office Vacancy Rates in Major Cities in Japan (all grades)

Notes: P = plan. Please refer to Important Notes (see end of report)

sqm = square metres


As of October 2013

10,000

20,000

30,000

40,000

50,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008.0

32008.0

62008.0

92008.1

22009.0

32009.0

62009.0

92009.1

22010.0

32010.0

62010.0

92010.1

22011.0

32011.0

62011.0

92011.1

22012.0

32012.0

62012.0

92012.1

22013.0

32013.0

62013.0

82013.1

2F

(JPY/tsubo*/mon) (USD/sqf/year)

109

182

145

73

Prime Buildings in CBD

floor plate > 660 sqm

All classesfloor plate > 330 sqm

Newly builtfloor plate > 330 sqm

DB Forecast

0

4

8

12

16

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

.03

20

13

.06

20

13

.08

Sapporo Fukuoka Nagoya Osaka Tokyo(%)

Building Date Floors GFA (sqm)

ORE Nishiki 2 chome (Nagoya) Aug-12 13 21,105

Nakanoshima Festival Tower (Osaka) Oct-12 39 146,395

Daibiru Honkan (Osaka) Feb-13 22 48,153

Grand Front Osaka A/B (Osaka) Mar-13 38 net 236,800

Nagoya Tokio Marine-Nichido Bldg May-13 15 10,854

NTT Shin Aoba dori Bldg (Sendai) 2013P 14 29,574

Fuji Film Orix Sakae 1-chome (Nagoya) 2013P 14 21,637

Major Office Completion in Regional Cities


Retail Average high street retail rents started to rise in the first quarter of 2013 in the top

submarkets in Tokyo, and the trend continued in the second quarter. Rents increased

4.8% in Ginza and 7.2% in Omotesando in the second quarter compared to the same

period last year. Improved consumer confidence and the increasing number of foreign

visitor arrivals contributed to the recovery for high street retail stores. Among other

submarkets in Tokyo, however, average rents softened marginally.

Exhibit 20 — Average High Street Retail Asking Rents in Tokyo and Osaka

Sources: Attractors Lab, Miki Shoji, Deutsche Asset & Wealth Management

As of October 2013

Sales at shopping centres, department stores, and chain stores were broadly flat in July

and August 2013, compared to the same period a year earlier (on an existing store basis).

This indicates the combination of continuous strong demand for luxury goods and

stagnant demand for consumer staples such as groceries and daily commodities.

Improved consumer sentiment is expected to boost retail demand in coming months while

gradually increasing consumer prices present a potential deterrent to demand.

Exhibit 21 — Retail Sales Growth in Japan (year on year)

Sources: JCSC, JDSA, JCSA, Deutsche Asset & Wealth Management

As of October 2013

Residential

A new housing boom seems to have arrived to Japan. The average sales price per unit for

newly-built for-sale condos in Greater Tokyo rose to JPY 49.8 million in July/August 2013

10,000

20,000

30,000

40,000

50,000

2008.0

3

2008.0

6

2008.0

9

2008.1

2

2009.0

3

2009.0

6

2009.0

9

2009.1

2

2010.0

3

2010.0

6

2010.0

9

2010.1

2

2011.0

3

2011.0

6

2011.0

9

2011.1

2

2012.0

3

2012.0

6

2012.0

9

2012.1

2

2013.0

3

2013.0

6

Ginza Omotesando Shinjuku

Shibuya Shinsaibashi Office (Central Tokyo)(JPY/tsubo/mon)

-15%

-10%

-5%

0%

5%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

.03

20

08

.06

20

08

.09

20

08

.12

20

09

.03

20

09

.06

20

09

.09

20

09

.12

20

10

.03

20

10

.06

20

10

.09

20

10

.12

20

11

.03

20

11

.06

20

11

.09

20

11

.12

20

12

.03

20

12

.06

20

12

.09

20

12

.12

20

13

.03

20

13

.06

20

13

.08

Shopping Centre Department Store Chain Store

(for existing stores for all categories)


(preliminary), an increase of 9.3% from the same period a year earlier, and the highest

average price in the last 20 years. The number of units sold rose 40.2% over the same

period a year ago, the fastest rate of growth in five years. The contract rate exceeded

80.0% in the period, also the highest rate in the last five years. This recovery was broadly

in line with our previous forecasts, and is believed to be driven by the current buoyant

economic sentiment, strong anticipation of possible inflation ahead, and an expectation

that the consumption tax will be increased in April 2014.3 We expect the average sales

price to remain strong for the remainder of the year.

Exhibit 22 — New Condo Unit Price and Contract Rate in Greater Tokyo

Sources: REEI, Deutsche Asset & Wealth Management

As of October 2013

Limited development of new residential rental units kept the vacancy rate on a recovering

trend in Tokyo in the last two years, although it widened marginally to 10.1% in July 2013

from 9.99% in January in the 23-ward area of Tokyo (orange line in Exhibit 23). Rents

increased 0.29% in the 23-ward area (gray bar) in the same period while they rose 0.70%

in central five-ward area (dark blue bar).

Exhibit 23 — Residential Rent and Vacancy in Tokyo

Notes: The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)

Sources: TAS Corporation with data sourced from At Home Co. Ltd. (23-ward vacancy), Leasing Management Consulting (5-ward asking rent), IPD-RECRUIT Residential Index (23-ward rent index)

As of October 2013

3 The housing mortgage tax incentive will be increased together with the consumption tax hike in April 2013, so the average net effect is expected to

be minimal (if any), while many house buyers do not seem to fully understand it. Please refer to the research topic of the past edition of this report, Japan Real Estate Quarterly First Quarter 2013.

-60%

-30%

0%

30%

35

40

45

50

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007.0

32007.0

62007.0

92007.1

22008.0

32008.0

62008.0

92008.1

22009.0

32009.0

62009.0

92009.1

22010.0

32010.0

62010.0

92010.1

22011.0

32011.0

62011.0

92011.1

22012.0

32012.0

62012.0

92012.1

22013.0

32013.0

62013.0

8

Avg. unit price (LHS) Units Sold YoY (RHS)(JPY mn/unit)

7

8

9

10

11

13,100

13,500

13,900

14,300

14,700

20

05

.03

20

05

.12

20

06

.09

20

07

.06

20

08

.03

20

08

.12

20

09

.09

20

10

.01

20

10

.04

20

10

.07

20

10

.10

20

11

.01

20

11

.04

20

11

.07

20

11

.10

20

12

.01

20

12

.04

20

12

.07

20

12

.10

20

13

.01

20

13

.04

20

13

.07

23 ward Rent Index5 ward Asking Rent

(JPY/tsubo) (%)(Index)

103

106

109

100

97

23 ward Vacancy (RHS)(%)


The vacancy rate of high-end apartments in Tokyo declined from 9.15% in the first quarter

of 2013 to 8.0% in the second quarter of 2013 reflecting a demand recovery in the high

end market. This uptick in demand has yet to impact rents, which held almost flat in the

same period. The rental market for high-end residential units correlates closely with the

office sector, and seems to be stabilising.

Exhibit 24 — High-end Residential Rent and Vacancy Rate in Tokyo

Sources: Ken Real Estate Investment Advisors Ltd., Miki Shoji, Deutsche Asset & Wealth Management

As of October 2013

Industrial

Due to a combination of limited supply and healthy demand for modern spaces, the

leasing market for multi-tenant logistics assets remained tight in the second quarter of

2013, with 2.4% vacancy in Greater Tokyo and 1.2% in Greater Osaka. Given this tight

market, average logistics rents increased 3.2% in Greater Tokyo in the first half of 2013

while it was almost flat in Greater Osaka.

Exhibit 25 — Logistics Leasing Market in Greater Tokyo and Greater Osaka

Vacancy Rate of Multi-tenant Logistics Logistics Rent

Notes: F = forecast, there is no guarantee forecast returns will materialise. Past performance is not indicative of future results.

Sources: Ichigo Real Estate Service, Deutsche Asset & Wealth Management

As of October 2013

0

3

6

9

12

15

7,000

10,000

13,000

16,000

19,000

22,000

25,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008.0

3

2008.0

6

2008.0

9

2008.1

2

2009.0

3

2009.0

6

2009.0

9

2009.1

2

2010.0

3

2010.0

6

2010.0

9

2010.1

2

2011.0

3

2011.0

6

2011.0

9

2011.1

2

2012.0

3

2012.0

6

2012.0

9

2012.1

2

2013.0

3

2013.0

6

office rent high end residential rent

office vacancy high end residential vacancy(Yen/tsubo/month) (%)

QuarterlyAnnually

0%

5%

10%

15%

20%

20

08

.06

20

08

.12

20

09

.06

20

09

.12

20

10

.06

20

10

.12

20

11

.06

20

11

.12

20

12

.06

20

12

.12

20

13

.06

20

13

.12

F

Greater Tokyo Greater Osaka

forecast by Ichigo

1,000

2,000

3,000

4,000

5,000

2008.0

6

2008.1

2

2009.0

6

2009.1

2

2010.0

6

2010.1

2

2011.0

6

2011.1

2

2012.0

6

2012.1

2

2013.0

6

2013.1

2F

Greater Tokyo

Greater Osaka (JPY/tsubo/month)

forecast by Ichigo


With a number of new completions scheduled in the second half of 2013 and 2014,

however, the vacancy rate is expected to increase again moderately to the high single

digits in the next 6-12 months in both Greater Tokyo and Greater Osaka. Logistics rents,

therefore, are not likely to rebound strongly during this period, despite continuous, healthy

demand for quality spaces from major tenants.

Exhibit 26 — Logistics Supply and Vacancy Rate in Greater Tokyo

Sources: Ichigo Real Estate Service, Deutsche Asset & Wealth Management

As of October 2013

0%

5%

10%

15%

0.0

0.5

1.0

1.5

04

05

06

07

08

09

10

11

12

13F

14F

New Supply (LHS) Vacancy Rate (RHS)(million sqm)

Forecast


Past Issues

Vol Year

1 Q2 Jun-08 Making sense of the rental market in Japan

2 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

6 Q3 Oct-09History repeats itself? A comparison of the ‘Year 2003

Problem’ with 2009

7 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

10 Q3 Oct-10 Quarterly Report

11 Q4 Jan-11 Cross-border investment into and out of Japan

12 Q1 Apr-11The Great Tohoku Earthquake and its impact on the

Japanese real estate market

13 Q2 Jul-11 Adapting Japan’s land price index for real estate analysis


15 Q1 Jan-12 The J-REITs next 10 years

16 Q2 Apr-12 Quarterly Report

17 Q3 Jul-12 Quarterly Report

18 Q4 Oct-12The inward-looking focus of the real estate investors in

Japan

19 Q1 Jan-13 Can the housing tax credit boost demand?

20 Q2 Apr-13 Quarterly Report

21 Q3 Jul-13Logistics : Rapid Modernisation

Underway in the Asia Pacific Region


Publication Research Topic

2008

2009

2010

2011

2012

2013


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