The Japanese Real Estate Investment Market 2014

Transcription

1 The Japanese Real Estate Investment Market 2014 July, 2014 Marunouchi Kitaguchi Bldg Marunouchi, Chiyoda-ku, Tokyo , Japan

2 To create a transparent real estate investment market in Japan This report has been produced by Nomura Research Institute solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. No warranty for representation, express or implied is made as to the accuracy or completeness of any of the information herein and Nomura Research Institute shall not be liable to any reader of this report or any third party in any way whatsoever.

3 Research Framework and Perspectives for this Report Macrofundamentals GDP growth, corporate performance, demographic movements Financial and Capital Markets Interest rates, financial and other regulations, political trends Space Market Asset Market Demand What are the key drivers of demand? Which industries require more space? Which districts are in demand? Supply How much floor space is newly developed? When assets will be supplied? What kind of player supply? Buyers What properties interest buyers? How strong is their buying appetite? Lenders What properties are lenders willing to finance? What are the lending conditions? Sellers Who are the potential sellers? What assets are likely to be sold? Vacancies Increase or decrease? Rent and NOI Increase or decrease? Liquidity What kinds of properties are transacted successfully and what are not? Cap Rate What cap rate level leads to successful transactions? Will asset value rise or fall? Asset Price Estimation Times New Roman, size 8, color: Dark Gray Ex) Source: NRI based on IMF 2

4 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 3

5 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 4

6 Population movements in Japan Japan s population is aging and shrinking due to a low birth rate. The number of households will be decreasing soon. Total population peaked out in The number of households is increasing for now, but it is projected to decrease after The population of people 65 years or older is expected to level off in 2025 and head downwards in Population (thousand) 140,000 Population and Households in Japan Actual Forecast Households (thousand) 60, ,000 50, ,000 80,000 60,000 40,000 40,000 30,000 20, Household 20,000 10, Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 5

7 Population movements in Tokyo Population continues to increase in Greater Tokyo. Population inflow into Tokyo is expected to continue. (Population) Net Population Inflow into Greater Tokyo Inflow Outflow Source: NRI based on Basic Resident Register Population Migration Report 6

8 Population movements in Tokyo Population and households are projected to decrease in Tokyo in the future. In the Tokyo metropolitan area, total population and number of households are projected to peak out in 2015 and 2025 respectively. Population (thousand) Population in Greater Tokyo Households (thousand) Households in Greater Tokyo 40,000 Actual Forecast 18,000 Actual Forecast 35,000 16,000 30,000 25,000 20,000 Chiba Saitama 14,000 12,000 10,000 8,000 Chiba Saitama 15,000 Kanagawa 6,000 Kanagawa 10,000 Tokyo 4,000 Tokyo 5,000 2, Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 7

9 Population movements in Tokyo Households in Tokyo are expected to increase over the medium term on the strength of one-person households. The number of single-person households is expected to peak out in Households (thousand) Number of Households by Family Composition 7,000 Actual Forecast 6,000 5,000 4,000 3,000 2,000 One-person Couple-only Couple-and-child(ren) One-parent-and-child(ren) Other 1, Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 8

10 Population movements in Tokyo Population in Tokyo is predicted to increase over the long term only in the three wards along Tokyo Bay. Population is expected to increase in the Chuo, Koto and Minato wards. In seven wards, the population is projected to decrease by over 10% between 2010 and Population Trends in Tokyo (2010=100) Ward Chuo Koto Minato Shinjuku Nerima Sumida Arakawa Chiyoda Setagaya Shinagawa Edogawa Bunkyo Toshima Ota Itabashi Meguro Taito Shibuya Nakano Kita Suginami Katsushika Adachi Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 9

11 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 10

12 Macro Fundamentals of Japan Japan s economic growth is the lowest compared to other major economies with low forecasts for future growth. IMF forecasts estimate Japan s GDP growth rate at 1% for the next 5 years. (%) Real GDP growth rate of major economies Actual Estimate Source: NRI based on IMF data (2013 Oct. and 2014 Update) 11

13 Macro Fundamentals of Japan Despite the weak growth, Japan remains one of the largest economies in the world. Although Japan has been overtaken by China and fell to No. 3 in world nominal GDP, India, Brazil and Russia still won t catch up with Japan by 2020, assuming current growth rates continue. (Billion USD) Nominal GDP of Major Countries Actual Forecast Note: Figures up to 2018 are IMF forecasts and those up to 2020 are calculated with the assumption that the CAGR from 2013 to 2018 will be maintained.. Source: NRI based on IMF (2013 Oct.) 12

14 Macro Fundamentals of Japan Consumer prices reversed trends upwards in mid The increase was due to the higher cost of imported materials in the face of a weak yen and a buying spree ahead of the consumption tax hike in April (%) Year-on-Year Change in Japan s Consumer Price Index (excluding fresh foods) Inflation target set by BOJ Source: NRI based on Japan Ministry of Internal Affairs data 13

15 Macro Fundamentals of Japan The yen continues to decline, albeit at a slower pace. Large-scale monetary easing, the first arrow of Abenomics, has rapidly lowered the yen from the end of 2012 to the first half of Japan s expanding trade deficit and expectations of slower monetary easing in the US are pushing the yen lower. (USDJPY=X) USD-JPY exchange rate Source: NRI based on Bloomberg data 14

16 Macro Fundamentals of Japan The trade deficit is expanding, while the current account surplus is shrinking. Japan s trade balance posted a deficit for three consecutive years from 2011, while the current account surplus fell to a record low in On a monthly basis, the current account was in a deficit several times in the second half of (Trillion yen) Japan s Current Account (CY) Trade Balance Service Balance Income Balance Current Transfers Current Account Source: NRI based on Japan Ministry of Finance data 15

17 Macro Fundamentals of Japan Stagnant export volumes and rising import prices caused the trade deficit to worsen. The trade deficit worsened in 2013 due to the faster rise of import prices than that of export prices, coupled with a dip in exports and a slight rise in imports on a volume basis. (Trillion yen) Japan s Trade Balance (YoY Change) Exports quantum factor Exports unit value factor Imports quantum factor Imports unit value factor Approximation error Changes in trade balance (YoY) (CY) Source: NRI based on Japan Ministry of Finance data 16

18 Macro Fundamentals of Japan Despite the yen s depreciation, export prices have not declined and export volumes have not increased. The export unit value index on a contract currency basis has shown virtually no decrease even after the end of 2012, when the yen shifted into depreciation. The lack of change is partly attributable to a structural factor, i.e. the fact that products exported from Japan are mainly highvalue-added products free of price competition, now that low-value-added products are largely manufactured at local production centers. The export quantity increased from the end of 2012 to early 2013 but has been growing sluggishly thereafter. (2010=100) Japan s Export Indexes Exports quantum index (seasonally-adjusted) Exports unit value index (contract currency basis) Source: NRI based on MOF and BOJ data 17

19 Macro Fundamentals of Japan Government debt has mounted, raising concerns about a potential financial collapse. The IMF forecasts that Japan s ratio of government debt to GDP will peak out but still remain high. A surplus in the primary balance, which is one of the conditions for preventing financial collapse, is expected to be difficult to achieve at least for the next several years. Ratio of Government Debt to GDP (%) (%) Actual Forecast Ratio of Government Primary Net Lending/Borrowing to GDP Actual Forecast Source: NRI based on IMF data (2013 Oct.) Source: NRI based on IMF data (2013 Oct.) 18

20 Macro Fundamentals of Japan A financial collapse is unlikely as long as domestic capital remains in Japan and continues to circulate. The possibility of Japanese government bonds collapsing is seen to be small since more than 90% of the bonds are held by domestic investors. Household financial assets, which are a resource for government bond purchases, have increased due to rising stock prices in recent years. Government Bond Investors (Trillion yen) Household s Financial Assets in Japan Note: Figures for Japan and US are current as of Dec 2013; UK as of Sep. 2013; Germany as of Jul Source: NRI based on Bank of Japan data Source: NRI based on BoJ, FRB, ONS, Bundesbank, Bank of Greece data 19 (CY)

21 Macro Fundamentals of Japan Long-term interest rates remain stable at a low level. The ongoing easy-money policy and expectations of a further easing are preventing the rise of long-term interest rates. Nevertheless, interest rates may head upwards in the future depending on the exit strategy for monetary easing and progress in finance reform. Currently Japan s interest rates are kept at a lower level than that of countries rated higher than Japan. If the irrational gap between the interest rate level and sovereign ratings is closed, Japan s interest rates may rise. (%) Long-term Interest Rates (Monthly) and Sovereign Ratings US AA+/Negative/A-1+ UK AAA/Negative/A-1+ Germany AAA/Stable/A-1+ Japan AA-/Negative/A-1+ Note: Classifications are as of Feb (Long-term/expected/short-term, in local currency) Source: NRI based on IMF and S&P 20

22 Macro Fundamentals of Japan Economic stimulus measures of Abenomics provide a boost to the real estate market. National Strategic Special Zones are under consideration as a prime measure of structural reform, the third arrow of Abenomics. Greater Tokyo has been designated a National Strategic Special Zone subject to deregulation such as easier floor-space ratio requirements and lower property taxes. Main Measures and Systematic Changes Affecting the Real Estate Market 1 Establishment of price stability target Overview of Measures Establishment of 2% target inflation rate Expected Effect on Real Estate Market Money flow to real estate due to inflation outlook 2 3 Increased consumption tax Fundamental overhaul of tax system Establishment of Expanded Consumption Tax Law that will increase consumption tax to 8% in April 2014 and to 10% in October 2015 Extension of household tax exemptions and housing loan deductions Demand from last-minute housing purchases and reactionary downturn Leveling of reactionary downturn after lastminute demand spike 4 5 Revision of Investment Trust Act National strategic special zones Deregulation in urban redevelopment, health care, tourism and agriculture Removal of majority ownership provisions for investment business, to encourage foreign real estate acquisition Removal of prohibition on rights offerings or self-acquisition of investment equity Use of J-REIT for foreign investment J-REIT deregulation More active urban redevelopment, increased demand for real estate Possible worsening of supply-demand balance due to increase in supply in future 21

23 Macro Fundamentals of Japan Tokyo continues to be the world s largest city in terms of population and GDP. Tokyo is expected to maintain its overwhelming population and economic scale population by city ( in 1000 s) GDP/population estimation in 2025 (Top 30 cities of population) 2025 GDP scale by city (in billion USD at 2008 PPPs ) Source: NRI based on PricewaterhouseCoopers and UN data 22

24 Macro Fundamentals of Japan Tokyo has the largest concentration of world-class major enterprises. Greater Tokyo has the largest number of companies ranked in the Fortune Global 500. Number of Fortune Global 500 companies by city (2013) Fortune Global 500 companies in Greater Tokyo (within top 200) Rank Company Name Revenue(in mil. USD) 13 Japan Post Holdings Nippon Telegraph & Telephone JX Holdings Honda Motor Nissan Motor Hitachi Nippon Life Insurance Sony Tokyo Electric Power Mitsubishi Toshiba AEON Dai-ichi Life Insurance Seven & I Holdings Mitsui Marubeni Mitsubishi UFJ Financial Group Meiji Yasuda Life Insurance Itochu Nippon Steel & Sumitomo Metal Fujitsu Sumitomo Mitsui Financial Group MS&AD Insurance Group Holdings Sumitomo Life Insurance 50.5 Source: NRI based on Fortune Global 500 (2013) data 23

25 Macro Fundamentals of Japan Infrastructure development will accelerate in Tokyo ahead of the 2020 Olympic and Paralympic Games. Ueno-Tokyo line 足 立 (Scheduled to open in FY2014) Narita-Haneda line (Planning) Subway Tokyo line 8 (Planning) Extension of Yurikamome (Planning) Venue of Tokyo 2020 Olympic Games 24

26 Macro Fundamentals of Japan Construction costs have risen since 2012 due to higher building material costs and a shortage in skilled labor The shortage in skilled labor is a structural issue and therefore unlikely to be resolved anytime soon. (Yen/8hour) 20,000 Government-specified standard rate for unskilled labor in public works 18,000 16,000 14,000 12,000 10,000 8,000 National average Grater Tokyo average 6,000 4,000 2,000 0 Source: NRI based on Ministry of Land, Infrastructure, Transport and Tourism data 25

27 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 26

28 Overview of Real Estate Investment Market in Japan Japan has the second largest real estate investment market in the world accounting for around 10%. Estimated Size of Institutional-Grade Real Estate by Country Estimated Size of Institutional-Grade Real Estate by Country in Asia-Pacific Gulf Cooperation Council 2.5% 26,559 US$B Latin America 6.7% Asia Pacific 27.0% 26,559 US$B Europe 35.4% US/Canada 28.4% Source : Pramerica Investment Management A Bird s Eye View of Global Real Estate Markets: 2012 Update 27

29 Overview of Real Estate Investment Market in Japan Investors activities has been recovering to the 2005 level. In 2013, J-REIT acquired assets of more than 20 billion USD, matching the all-time high posted in ,000 Acquisitions of Securitized Real Estate Others J-REIT 8,000 6,000 6,242 7,205 4,000 2, ,159 4,439 3,307 1,791 2,123 2,210 2,236 1,549 1,772 2,031 1,359 1, ,555 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 Source: NRI based on MLIT 28

30 Overview of Real Estate Investment Market in Japan Logistics join the ranks of office, residential and retail properties as one of the market s key segments. As in 2012, there were many logistics transactions in Logistics properties are now one of the main pillars of the Japanese real estate investment market along with office, residential and retail properties. Hotel transactions have remained stagnant for many years. 8,000 Acquisitions of Securitized Real Estate by Asset Class Office Residential Retail Logistics Hotel Others Allocation of Securitized Real Estate by Asset Class in 5 years ( ) 6,000 1,707 1,645 1,399 Others, 19.3% 4,000 2, ,488 1, , ,293 1, ,611 1,516 1,728 2,194 2,124 2, , FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 Hotel, 2.4% Logistics, 10.5% Retail, 15.9% Office, 34.1% Residential, 17.7% Note: Because the utility of securitizations that require actual TMK is unclear, they have not been included after Because of this, the yearly totals and amounts will not match up with the documents cited for this entry. Source: NRI based on Ministry of Land, Infrastructure, Transport and Tourism s Survey of the Current State of Real Estate Securitization 29

31 Overview of Real Estate Investment Market in Japan Lack of assets in Tokyo is likely to cause investment money to head to other regions. Currently, it is very difficult for investors to find investment opportunities in Tokyo. In 2014, transactions in the ex- Tokyo area are expected to increase significantly in a trend similar to the one seen in Number of Properties Securitized by Region Tokyo Greater Tokyo Osaka Nagoya Fukuoka Others FY % 15.3% 9.5% 5.1% 19.9% FY % 12.0% 8.0% 4.0% 14.9% FY % 11.8% 6.9% 12.0% FY % 10.5% 8.4% 6.9% 17.2% FY % 12.7% 8.8% 5.5% 17.4% FY % 12.1% 10.5% 6.4% 23.1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Tokyo Kanagawa Chiba Saitama Osaka Hyogo Kyoto Aichi Fukuoka Hokkaido Miyagi Others Note: not including securitization of real estate of SPC Source: NRI based on MLIT 30

32 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Overview of Real Estate Investment Market in Japan Total return recovered to 5%, and capital return finally turned positive. Capital return in Japan has been negative for more than four years since 2008, making the total return significantly low. Capital return turned positive in June 2013 and recorded 0.8% in Dec Performance Trend in Japan Income Return Total Return Capital Return Source: IPD Japan 31

33 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Overview of Real Estate Investment Market in Japan Cap rates fell sharply in 2013 and are highly likely to drop to the 2006 level in In the Tokyo market, an increasing number of office and retail deals have cap rates of less than 4% and 4.5% respectively. Cap rates in Tokyo are highly likely to drop to the 2006 level in Cap rate spreads between asset classes had been stable up to the 2008 financial crisis but have changed over the last couple of years, reflecting the differences in risk premiums among assets. 8.0% Cap Rate Trend in Japan 7.0% 6.0% 5.0% 4.0% Office Osaka CBD Logistics Tokyo Multi Residential Tokyo Retail Tokyo Office Tokyo CBD 3.0% Office Tokyo CBD Office Osaka CBD Retail Tokyo Residential Tokyo Logistics Tokyo Multi Source: NRI based on Japan Real Estate Institute 32

34 Overview of Real Estate Investment Market in Japan Mega deals of over 500 million USD have increased. The liquidity of assets which worth more than 100 million USD has increased thanks to a substantial easing of the equity and debt environments. In general, the main buyers are domestic investors such as J-REITs and real estate developers, but foreign investors are also active in certain sectors. Transaction Month/Year Aug, 2013 Feb, 2013 Oct, 2013 Aug, 2013 Dec, 2013 Asset Shiba Park Building Sony City Osaki Logi Port Nagareyama (and 5 other logistics) Sheraton Grande Tokyo Bay Hotel Ebisu Prime Square Property Type Office Office Logistics Hotel Office Area Tokyo Minato Tokyo Shinagawa Seller Bank(s) Sony Buyer Transaction Amount Gross Floor Area Notes Asia Pacific Land Secured Capital ADIC and others Nippon Building Fund (J-REIT) Kanagawa, Saitama, Osaka and others LaSalle Investment Management Tosei and others Chiba Morgan Stanley and others Fortress Investment Group Tokyo Shibuya INVESCO Tokyu Land 1,170million USD 1,111million USD 740million USD 420million USD 500million USD 97,294m2 123,603m2 NA 107,147m2 68,995m2 Da Vinci Advisors acquired Shiba Park Building in 2006 with 1,430million USD and defaulted in Acquired by Morgan Stanley in 2007, and had been defaulted since Acquired by Morgan Stanley in 2001 with 400 million USD, and acquired by AIG in 2005 with 650million USD. 33

35 Overview of Real Estate Investment Market in Japan Pipeline deals between developers and REITs, which account for a significant portion of the market, may decrease in Major Japanese developers have sold their trophy assets mostly to affiliated J-REITs over the past few years, making it very hard for foreign investors and startups to find investment opportunities. This tendency may change in Recently J-REITs have been unable to offer the highest prices to sellers owing to their inability to leverage more than 50-60%. Some of the major developers have started selling their assets to the highest bidder rather than to affiliated REITs. Transaction Month/Year Jan, 2013 Mar, 2014 Jan, 2014 Dec, 2013 Mar, 2014 Asset Celestin Shiba Mitsui Building (acquired 47%) Tradepia Yodoya-bashi (land only) Hamarikyu Intercity (acquired 60%) Hulic Kamiyacho Building and 13 assets Otemachi Financlal City (acquired 3.4%) Property Type Office Office Office Office and others Office Area Tokyo Minato Osaka Tokyo Minato Seller Mitsui Fudosan Group NTT Urban Development Buyer Transaction Amount Gross Floor Area Nippon Building Fund (J-REIT) Premier Investment Corporation (J-REIT) Nippon Steel Kowa Real Estate Japan Excellent, Inc (J-REIT) Tokyo Minato and other areas Hulic Hulic REIT (J-REIT) Tokyo Chiyoda Sankei Building Mitsubishi Estate Japan Real Estate (J-REIT) 275million USD 65million USD 120million USD 838million USD 154million USD 16,915m2 6,517m2(land) 35,555m2 NA 239,769m2 34

36 Overview of Real Estate Investment Market in Japan Money from investors with different perspectives has caused real estate prices to rise and capital to diversify in various market segments. Properties that domestic investors do not favor due to risk concerns have been purchased by foreign and non-professional (e.g. highnet-worth) investors with different goals, causing real estate prices to rise in the ex-tokyo area. The trend is undoubtedly due primarily to the fact that such investors cannot find any investment opportunities in Tokyo. Transaction Month/Year Mar, 2014 Mar, 2014 Mar, 2014 Oct, 2013 Jul, 2013 Asset NIS WAVE.I Hyatt Regency Osaka Nakano Central Park East Building Tiffany Ginza Building MUSEUM TOWER Property Type Retail Hotel Office Retail Residential Area Tokyo out of 23 wards Osaka Tokyo out of CBD Tokyo Chuo Kobe Seller NA Obayashi Buyer Transaction Amount Gross Floor Area Notes Croesus Retail Trust(Singapore REIT) Gaw Capital Partners (Hong Kong) Tokyo Tatemono Hulic Axa Life Asia Pacific Land High Net Worth 108million USD NA 380million USD 320million USD NA PAG High Net Worth (Hong Kong) 10,534m2 76,458m2 39,025m2 5,671m2 34,093m2 The first investment in Japan for Gaw Capital Partners People familiar with the matter says the cap rate was 2.6% PAG acquired it in Mar 2012 and sold 16 months later 35

37 Overview of Real Estate Investment Market in Japan Because of the lack of investment opportunities, equity heads to the ex-tokyo area. Many investors are seeking investment opportunities in Osaka, Nagoya and other regions other than Tokyo, repeating a similar trend seen between 2004 and How to build good relations with regional banks is one of the key issues for real estate investors at present. Transaction Month/Year Jul, 2012 June Dec, 2013 Mar, 2014 Feb, 2014 Asset Portas Sakai Hotel Tsubogawa Square Building Kyoto Kowa Building Maison des Centenaires Hannan and 2 properties Amusement property portfolio (17 properites) Property Type Hotel Office Retail Healthcare Retail Area Osaka Okinawa Kyoto Osaka Akita, Tochigi, Kagawa and other prefectures Seller Blidgestone Ranica Taiyo Corporation Miyako Enterprise Round One Buyer Transaction Amount Gross Floor Area Agora Hospitality Group United Urban Investment Corporation (J-REIT) Angelo Gordon Parkway Life REIT (Singapore REIT) Orange Grove Capital Management NA 41million USD NA 30million USD 233million USD 78,206m2 14,742m2 11,933m2 NA 90,281m2 Notes 36

38 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 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 Overview of Real Estate Investment Market in Japan Competition among commercial banks help boost prices. Banks lending attitude toward the real estate industry is nearly the most lenient since 2000 and almost as lenient as in Many people in Japan believe that there are too many banks, and competition among lenders is quite fierce. Along with major banks, regional mid-size banks are trying to reduce spreads and loosen covenants. One big difference from the last peak we saw in 2006, however, is the non-participation of foreign lenders. One reason why foreign lenders are staying away from the Japanese debt market is the fact that the CMBS market has been frozen since Financial Institutions Lending Attitude DI toward Real Estate Industry Loose Tight Source: NRI based on BOJ 37

39 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 38

40 Office Market Tokyo, Osaka and Nagoya account for 50% of Japan s commercial real estate. Commercial Real Estate Stock in Japan by region New Construction of Office Space by Area Tokyo 東 京 16.0% Tokyo Area 29.7% ( 1,000 千 mm 2 ) 2 25,000 22,711 Other その Prefectures 他 27 県 23.9% 20,000 20,099 Kanagawa 神 奈 川 6.0% 栃 Tochigi 木 1.5% 1.5% 長 Nagano 野 1.6% 1.6% 宮 Miyagi 城 1.6% 1.6% 新 Niigata 潟 1.8% 1.8% 茨 Ibaraki 城 2.1% 2.1% Hiroshima 広 島 2.3% 2.3% Shizuoka 静 岡 2.9% 4.1% Fukuoka 福 岡 4.1% 4.1% Commercial 商 業 用 不 Real 動 Estate 産 Approximately 約 8 億 800 m2 million m 2 Hokkaido 北 海 道 4.1% 三 Mie 重 1.4% 岐 Gifu 阜 1.6% Hyogo 兵 庫 3.9% Kyoto 京 都 2.0% Nara 奈 良 0.7% Aichi 愛 知 6.3% Chiba 千 葉 3.9% Saitama 埼 玉 3.8% Osaka 大 阪 8.5% Osaka Area 15.1% 15,000 10,000 5, ,777 3,352 1,803 2,506 8,344 7,616 13,857 1,134 11,337 10,132 12,262 11,602 8,699 8,345 9,001 8,496 8,369 7,670 7,852 6,955 7,053 6, ,803 1, ,248 1,028 1,397 1, , , ,354 1,450 1, , ,249 3,019 2,878 2,443 2,885 2,934 3,798 3,495 2,195 2,365 2,331 3,094 3,460 3,491 3,921 2,432 2,452 2,736 2,548 8,659 6,941 6,350 5,684 Nagoya Area 9.3% Note: Commercial Real Estate means offices, retails, and banks. Source: NRI based on Ministry of Internal Affaires and Communications その Others 他 名 古 屋 圏 大 Osaka 阪 圏 東 Tokyo 京 圏 Area Area Area Source: NRI based on MLIT Statistics of Building Construction Starts 39

41 Office Market Corporate-owned rental real estate is 96 trillion yen in 2008, which has increased by 30 trillion yen over five years. Based on the land survey conducted by Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) every 5 years, the asset value of corporate-owned rental real estate (excluding residential) increased by 30 trillion yen over five years, from 68 trillion yen in 2003 to 96 trillion yen in ( 兆 Trillion 円 ) 100 Asset Value of Corporate-Owned Rental Real Estate (excl. Residential) 貸 し 付 Rented けている land 土 地 建 物 Sites を 貸 with し 付 rented けている buildings 敷 地 貸 し 付 Rented けている buildings 建 物 Source: NRI based on MLIT Basic Survey on Land 40

42 Office Market Tokyo Area holds 58% of Japan s office rental market. Japan has a stock of around 94 million m2 of available office rental space. The Tokyo area holds an overwhelming share of the market at 55 million m2, comprising 58% of the total. 100% 90% 80% 70% 60% 50% 40% 30% 20% 57.9% (54.48 million m2) 5.2% (4.9 million m2) 1.1% 2.1% (1.9 million m2) (1.0 million m2) 14.6% Tokyo Metropolitan Area 66.3% Office Floor Space Shares by Major City (13.71 million m2) 2.0% 1.2% (1.9 million m2) (1.1 million m2) Osaka Area 17.8% 5.5% (5.2 million m2) 3.7% (3.5 million m2) 2.7% (2.5 million m2) 2.3% 1.8% (2.1 million m2) (1.7 million m2) 12 major cities million m2 10% 0% Tokyo 東 京 Area 区 部 Yokohama 横 浜 さいたま Saitama 千 Chiba 葉 Osaka 大 阪 神 Kobe 戸 京 Kyoto 都 名 Nagoya 古 屋 Fukuoka 福 岡 Sapporo 札 幌 Sendai 仙 台 Hiroshima 広 島 Source: NRI based on JREI As of Dec.2011 The investigation focus on central area of each city. In Tokyo, Osaka and Nagoya buildings which are smaller than 5,000 square meter are excluded In other nine cities buildings which are smaller than 3,000 square meter are excluded 41

43 Office Market There are five sub sectors in Tokyo s Central Business District. Tokyo s Central Business District(CBD) has an accumulation of office buildings and is concentrated in an area around 5km wide. 35 million people from 1 municipality and 3 prefectures use this space to make Tokyo function like a megacity unlike any other in the world. Saitama 715 million people Tokyo million people Kanagawa 9.07 million people Chiba 6.15 milion people Setagaya Itabashi Kita Minato Adachi Nerima Arakawa Toshima Nakano Bunkyo Taito Sumida Suginami Shinjuku Chiyoda Shibuya Chuo Koto Meguro Shinagawa Katsushika Edogawa 30 km Ohta 30 km 42

44 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Office Market Historically high vacancy rates in the Tokyo office market have finally dropped In the fourth quarter of 2013, vacancies in Chiyoda and Shibuya dropped to less than 6%. Class S and Class A office spaces are now difficult to secure for tenants. Vacancies are likely to decline further in Vacancy rate movement in Tokyo CBD Yearly( ) Monthly(Mar 2012 Feb 2014) 14.0% 14.0% 12.0% 12.0% 10.0% 8.0% Shinjuku Minato Chuo 10.0% 8.0% Shinjuku Minato Chuo 6.0% Chiyoda Shibuya 6.0% Chiyoda Shibuya 4.0% 4.0% 2.0% 2.0% 0.0% 0.0% Source: NRI based on Miki Shoji Co., Ltd. data 43

45 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Office Market Some investors expect rent increase in Office rents in Tokyo have dropped six consecutive years. Some investors expect the rent level to rise hereafter in a clear reflection of the tightened demand-supply gap, while other market players believe that office tenants will not accept higher rents. Rent trends in Tokyo CBD (yen/tsubo per month) (yen/tsubo per month) Yearly( ) Monthly(Mar 2012 Feb 2014) ,000 22,000 20, Chiyoda Shibuya Minato Chuo 18,000 16,000 Chiyoda Shibuya Minato Chuo Shinjuku 14,000 Shinjuku , ,000 Note: One tsubo is 3.3 square meters Source: NRI based on Miki Shoji Co., Ltd. data 44

46 Office Market New office supply in Tokyo will be partly limited over the next couple of years. In 2012, 32 new Class S and Class A office buildings were completed, generating a new supply of 1.75 million square meters of office space, the third highest in the last 25 years. Developers are likely to limit supply to relatively moderate levels from 2013 to While some investors are concerned about a possible over-supply in 2016 or 2017, most market players are optimistic. After 2017, however, the supply of office space is expected to increase significantly. In the mid-run, the demand-supply gap may worsen. Supplied floor area (1,000 m2) Office supply area Number of building supplied Office Space Supply in Tokyo s 23 districts # of buildings Estimate 0 Source: NRI based from Mori Building Company s Mega Office Building Market Trends Survey (Preliminary figure) dated March 21,

47 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 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 Office Market Cap rates drop significantly in 2013, and the momentum will continue in Cap rates for trophy office buildings in the CBD area are currently around %. Lower vacancy rates and expectations for higher rent are likely to depress cap rates continuously in There are no signs as yet that cap rates have bottomed out. 6.0% Tokyo office market cap rate trend 5.5% 5.0% 4.5% 4.0% Shinjuku Nishi- Shinjuku Shinagawa Konan Shibuya Minato Toranomon Chuo Nihonbashi Chiyoda Marunouchi 3.5% 3.0% Chiyoda(Marunouchi) Minato(Toranomon) Shinjuku Chuo(Nihonbashi) Shinagawa Shibuya Source: NRI based on Japan Real Estate Institute s Real Estate Investor s Survey 46

48 Office Market Major developers will focus most of their development in three central wards, may make the other submarkets to be uncompetitive in the long run. Office Supply Projects by Major Developers (Completed in 2017 or later) Mitsubishi Estate Mitsui Fudosan Sumitomo Realty & Development Other Major Developers Others Otemachi 1-1 Shin Hibiya PJT Kojimachi Kioicho Otemachi2 B-3 Shinsei Bank ex-hq ,000 sqm ,000 sqm 2020~ NA ,000 sqm ,000 sqm Chiyoda Marunouchi 3-2 Otemachi 1-2 Akihabara 2020~ NA 2019 NA 2020~ NA Tokiwabashi 2020~ NA Nihonbashi Honmachi 2 Nihonbashi 2 Yaesu ,000 sqm ,000 sqm 2020~ NA Nihonbashi 2 Kita Yaesu Fujiya Hotel ,000 sqm 2020~ NA Nihonbashi Muromachi ,000 sqm Nihonbashi Muromachi 1 Chuo 2020~ NA Nihonbashi zone 2020~ NA Nihonbashi1 1-2zone 2020~ NA Yaesu2 Kita 2020~ NA Yaesu2 Naka 2020~ NA Tamachi TGMM Roppongi 5 Takeshiba Akasaka ,000 sqm 2020~ NA ,000 sqm ,000 sqm Roppongi 6 Tranomon 10 mori building Hamamatsucho Nishi ~ NA 2020~ NA 2020~ 369,000 sqm Toranomon 9 mori builidng Toranomon2 2020~ NA 2020~ 168,000 sqm Minato Toranomon Azabudai 2020~ NA Akasaka Twin Tower 2020~ NA Mita43 Building 2020~ NA Toranomon4 2020~ NA Dogenzaka Shibuya Station South Shibuya ,000 sqm ,000 sqm Sakuragaoka Shibuya Station South 2020~ 174,000 sqm 2020~ 270,000 sqm Sendagaya 5 Shinjuku 2018 NA Yotsuya Station 2019 NA Nishi Shinagawa1 Meguro Station Shinagawa sqm sqm Sony ex-hq 2020~ NA Source: NRI based on public information 47

49 Office Market Office demand in Tokyo may peak out around 2015 but supply is likely to continue increasing, creating a substantial demand-supply gap in the long run. Office stock in Tokyo s 23 wards is currently about 90 million square meters, 10 million square meters greater than 12 years ago. Tokyo Government statistics indicate that Class S and Class A office spaces have been increasing continuously over the last 10 years as large-scale, state-of-the-art buildings replace smaller, older buildings. At the same time, the number of office workers is projected to decrease after Demand-Supply Relationship in Tokyo Office Market Supply:Office Floor Space in Tokyo 23 wards(1,000m2) Demand: Number of Office Workers in Tokyo 23 wards 110, ,000 CAGR:0.50% 400 CAGR:-0.32% 90,000 80,000 70,000 60,000 50,000 29,977 31,398 32,855 34,358 35, Wards Wards 40,000 30,000 20,000 57,842 58,659 59,486 60,324 61,174 5 Wards Wards 10, Note: Assume that the office supply speed between 2009 to 2012 will continue after 2015 Source: NRI based on Tokyo Government 48

50 Office Market In terms of business concentration, the core CBD (3 wards) has a strong advantage over the greater CBD (5 wards). Of the 1,520 listed companies in Tokyo, 33% relocated their headquarters between 2007 and The number of corporate head offices located in the three core-cbd wards of Chiyoda, Chuo, and Minato has decreased, but most of Japan s major firms continue to be located in these three wards. Should office stock exceed office demand significantly in the future, the three wards are likely to experience an inflow of office tenants from other wards, making other office areas such as Shinjuku and Shinagawa problematic. Number of Listed-Company Headquarters in Tokyo s 23 Wards Non-CBD Area CBD Area(5 Wards) Core CBD Area(3 Wards) 10%~15% Adachi Sumida Shinagawa Increasing 5%~10% Taito Growth Ratio ( ) 0%~5% 0%~-5% Koto, Edogawa, Arakawa, Suginami Bunkyo -5%~-10% Kita, Nerima Chiyoda Minato Setagaya, Nakano, Katsushika, -10%~-20% Meguro,Ota, Tpshima Minato Chuo 20%~ Itabashi Shibuya 0~50 51~ ~ ~ ~ ~ ~350 Number of head quarters in 2012 (Listed Company) Source: NRI based on Toshi Mirai Soken Decreasing 49

51 Office Market There is no clear sign of recovery in the ex-tokyo office market. In most major cities such as Osaka and Nagoya, vacancy rates have improved over the last 12 months. Nevertheless, vacancy remains high at around 10%, making it difficult to maintain current rent levels. Office Vacancy Trend in ex-tokyo Market Office Rent Trend in ex-tokyo Market 20.00% 24, % 16.00% 14.00% Fukuoka Sendai 22,000 20, % 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Sapporo Yokohama Osaka Tokyo Nagoya 18,000 16,000 14,000 12,000 10,000 8,000 Tokyo Osaka Nagoya Yokohama Fukuoka Sendai Sapporo Source: NRI based on Miki Shoji Co., Ltd. data 50

52 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 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 Office Market Real estate prices are climbing despite weak fundamentals. Office cap rates in most major cities have decreased due to investors strengthening interest in opportunities outside of Tokyo. This trend is expected to strengthen in 2014 but is unlikely to last over the long term. 8.0% Ex-Tokyo Office Market Cap Rate Trend 7.0% 6.0% Sendai Sapporo Fukuoka Nagoya Yokohama Osaka 5.0% 4.0% 3.0% 札 幌 仙 台 横 浜 名 古 屋 大 阪 福 岡 Source: NRI based on Japan Real Estate Institute s Real Estate Investor s Survey 51

53 Population movements in Japan Macro fundamentals of Japan Overview of Real Estate Investment Market in Japan Office market Residential market Retail property market Logistics Property Market Hotel Market Real Estate Investment Products 52

54 Number of Households (unit: 10,000) Residential Market About 20% of all households in Japan are living in non-public rental apartments, and the percentage is trending upwards. Households living in non-public rental apartments (excluding wooden apartments; hereafter the same in this section), which numbered 3.32 million in 1988, increased by about 2.6 times to 8.77 million (about 18% of all households) in Breakdown of All Households by Housing Type (2008) Number of Households by Housing Type Public Rental House 6% Private Rental Housing, Others 10% Private Rental House, Apartment House (nonwood) 18% Company Housing 3% Own House 63% 6,000 5,000 4,000 3,000 2,000 1, ,741 9% 1, ,077 12% 15% 4,392 16% 4,686 18% 4,960 1,569 1,673 1,717 1, '88 '93 '98 '03 ' % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Ratio of Households Living in Private Rental & Apartment Houses (non-wood) Households Living in Housing Households Living in Rental Houses Households Living in Private Rental & Apartment Houses (non-wood) Ratio of Households Living in Private Rental & Apartment Houses (non-wood) Source: NRI based on data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. 53

55 Number of Moving Households (Unit: 10,000) Residential Market The total number of moving households has decreased, but the number of households moving to non-public rental apartments has remained fairly steady. The number of moving households peaked out in and decreased to about 85% of the peaktime level in The number of households moving to non-public rental apartments remained steady, resulting in a higher proportion of such households in the total number of moving households. Housing Choices of Moving Households ,600 1,400 1,200 1, ,103 39% % 46% 1,186 1, ,135 44% 45% 778 1, Number of Moving Households in Past 5 Years Number of Households Moved into Rental Houses Number of Households Moved into Private Rental (Apartment) Houses Ratio of Households Moved into Private Rental (Apartment) Houses 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Ratio of Households Living in Private Rental & Apartment Houses Source: NRI based on data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. 54

56 Breakdown of In-Flow Households Moved in Private Rental Houses (non-wood) (Unit: 1,000) Residential Market The majority of households moving to non-public rental apartments moved within the same city. Looking at the former locations of households moving into non-public rental apartments in seven major cities, those that moved within the same city were greater in number than those that moved in from outside the city. Tokyo s 23 wards and Osaka saw a decline in households moving into non-public rental apartments from outside the city, while major regional cities saw no change Location Choices of Moving Households Household moving in a city Household moving out a city Sapporo Sendai Tokyo 23 Wards Nagoya Osaka Hiroshima Fukuoka Source: NRI based on data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. 55

57 Housing Stock (Unit: 1 million) Growth Rate (1988 = 100) Residential Market The supply of non-public rental apartment units has increased more sharply than total housing stock. The growth of rental apartments (public and non-public combined) outpaced the growth of overall housing as well as the more modest rise of rental housing in general. As a result, the ratio of rental apartments to total rental houses increased from 60 to 70%. Housing Stock by Type Housing Growth Rates by Type '88 '93 '98 '03 ' Number of Houses Number of Rental Houses Number of Rental & Apartment Houses (non-wood) Number of Houses Number of Rental Houses Number of Rental & Apartment Houses (non-wood) '98 '03 ' Source: NRI based on data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. 56

58 Number of Construction Starts(Unit:1,000) New Rental Housing Construction by Region(Unit:1,000) Residential Market Construction of new rental housing declined in 2009 but is now on a recovery path. New housing construction decreased drastically in 1997, 2007 and The ratio of rental housing dropped sharply in 2009, and new construction of rental housing decreased significantly. Looking at yearly breakdowns of new rental housing construction by region, the composition ratio of the Tokyo Metropolitan Area has dropped sharply, while that of the Kinki region has increased. Both the number of new constructions and rent ratios for 2013 have gone up, but have not returned to their 2008 levels. 2,000 1,800 1,600 1,400 1,200 1, New Housing Supply Trend: Own House Rental House Company House House Built for Sale Ratio of Rental House 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Ratio of Rental Houses Breakdown of New Rental Housing Construction by Region 800 Provincial Region 700 Kinki Region Chuubu Region 600 Metropolitan Region Source: NRI based on data from Survey of Construction Work Started, Ministry of Land, Infrastructure, Transport and Tourism of Japan. 57

59 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Vacancy Rate of Rental Housing(non-wood) (Unit:%) Rental Housing Vacancy Rate (Unit: %) Residential Market Vacancy rates are rising in Tokyo s 23 wards. Vacancy rates for long-term rentals trended downwards in central Tokyo (23 wards) but upwards in major regional cities. Most recently, vacancy rates in the Tokyo area have been on an upward trend, especially in the 23 wards. Vacancy Rates of Rental Housing (non-wood) in Major Cities Vacancy Rates of Rental Housing in Tokyo Metropolitan Area 25% '98 '03 ' % % 10% % 0% Sapporo Sendai Tokyo 23 Wards Nagoya Osaka Hiroshima Fukuoka Source: NRI based on data from Data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. Source: NRI based on data from Report on Rental Housing Market, TAS Corp. (Analyzed by TAS Corp. Data Supplied by At Home Co., Ltd.) All Tokyo areas 23 Tokyo districts Tokyo cities Kanagawa

60 Private (Annual Average) Rent Index (Base Year 2010) Residential Market The rent level of non-public rental housing continues to fall. The rent level of non-public rental housing rose steadily from 1990 to 2000, after which it gradually declined. The rent level downward trend continued in Rent in the Private Sector (Annual Average) Nationwide and Central Tokyo Japan Tokyo 23 Wards Source: NRI based on data from Consumer Price Index, Ministry of Internal Affairs and Communications of Japan. 59

61 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Occupancy Rate (Unit:%) Monthly Rent Level (Unit : Yen/m 2 ) Residential Market Occupancy rates of REIT-owned and private fund-owned properties are rising, while their rent levels remain stable. Looking at the changes in the REIT-owned and private fund-owned occupancy rate and monthly rent, the monthly rent level has slightly decreased although the occupancy rate in Tokyo s 3 central districts and its 23 districts has been on an uptrend since % 98% Occupancy Rates of REIT-owned and private fund-owned Properties Tokyo 3 central districts Tokyo 23 districts Nagoya city Osaka city Fukuoka city 5,000 4,500 4,000 Monthly Rents of REIT-owned and private fund-owned Properties 96% 94% 92% 90% 3,500 3,000 2,500 2,000 1,500 1, Tokyo 3 central districts Tokyo 23 districts Nagoya city Osaka city Fukuoka city Source: NRI based on data from ARES J-REIT Property Database, Association for Real Estate Securitization of Japan. 60

62 Home ownership rate Residential Market The rate of housing ownership, which has a negative impact on rental housing demand, has reversed trends upwards. Average annual income has decreased since 2007, but the housing ownership rate has increased since Housing Ownership Rate and Average Annual Income in Japan 76.0% 75.0% 74.0% % 75.4% % 72.0% 71.0% 70.0% 69.0% 68.0% 67.0% 69.2% 69.4% 71.5% 72.5% % 71.9% 71.0% Annual income (10,000 Yen) Ownership rate Yearly income 66.0% Source: NRI based on data from Consumer Price Index (CPI), Ministry of Internal Affairs and Communications of Japan. 61