The Japanese Real Estate Investment Market 2014

The Japanese Real Estate Investment Market 2014 July, 2014 Marunouchi Kitaguchi Bldg. 1-6-5 Marunouchi, Chiyoda-ku, Tokyo 100-0005, Japan

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.

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

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

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

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 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 2005. The number of households is increasing for now, but it is projected to decrease after 2019. The population of people 65 years or older is expected to level off in 2025 and head downwards in 2040. Population (thousand) 140,000 Population and Households in Japan Actual Forecast Households (thousand) 60,000 120,000 50,000 100,000 80,000 60,000 40,000 40,000 30,000 20,000 0-14 15-64 65+ Household 20,000 10,000 0 0 Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 5

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

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 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 2,000 0 0 Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 7

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 2030. 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 1,000 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 8

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 2040. Population Trends in Tokyo (2010=100) Ward 2010 2015 2020 2025 2030 2035 2040 Chuo 100.0 112.9 115.3 116.6 116.8 116.1 114.4 Koto 100.0 102.7 104.4 106.8 108.2 108.8 108.5 Minato 100.0 105.0 107.0 107.9 107.8 107.0 105.2 Shinjuku 100.0 103.3 104.4 104.8 104.4 103.4 101.6 Nerima 100.0 103.8 105.1 105.3 104.5 102.9 100.6 Sumida 100.0 100.8 101.7 102.6 102.7 102.0 100.6 Arakawa 100.0 102.4 103.0 102.8 102.2 101.2 99.7 Chiyoda 100.0 106.9 106.9 106.1 104.6 102.2 99.3 Setagaya 100.0 102.1 102.7 102.4 101.5 100.0 97.9 Shinagawa 100.0 102.4 102.9 102.7 101.7 100.0 97.8 Edogawa 100.0 101.5 101.7 101.1 99.8 98.2 96.2 Bunkyo 100.0 101.8 101.9 101.3 100.1 98.2 95.7 Toshima 100.0 107.3 106.1 104.5 102.2 99.2 95.3 Ota 100.0 101.6 101.6 100.8 99.4 97.5 95.1 Itabashi 100.0 100.9 100.5 99.1 97.2 94.7 91.8 Meguro 100.0 100.8 100.2 98.8 96.8 94.1 91.1 Taito 100.0 100.6 99.5 97.7 95.4 92.6 89.4 Shibuya 100.0 100.3 98.8 96.6 93.9 90.9 87.4 Nakano 100.0 99.4 97.7 95.5 92.9 89.8 86.2 Kita 100.0 99.4 97.6 95.1 92.2 89.0 85.5 Suginami 100.0 99.4 97.6 95.1 92.0 88.5 84.5 Katsushika 100.0 98.2 95.7 92.4 88.7 84.8 80.8 Adachi 100.0 98.0 95.2 91.6 87.5 83.1 78.7 Source: NRI based on National Institution of Population and Social Security Research Note: Medium-fertility (medium-mortality) projection 9

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

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

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

Macro Fundamentals of Japan Consumer prices reversed trends upwards in mid-2013. 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 2014. (%) 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

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 2013. 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

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 2013. On a monthly basis, the current account was in a deficit several times in the second half of 2013. (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

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

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

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

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. 2013. Source: NRI based on Bank of Japan data Source: NRI based on BoJ, FRB, ONS, Bundesbank, Bank of Greece data 19 (CY)

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. 2014 (Long-term/expected/short-term, in local currency) Source: NRI based on IMF and S&P 20

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

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. 2025 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

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 190.9 32 Nippon Telegraph & Telephone 128.9 44 JX Holdings 119.5 45 Honda Motor 119.0 47 Nissan Motor 116.0 54 Hitachi 108.9 86 Nippon Life Insurance 86.7 94 Sony 81.9 117 Tokyo Electric Power 72.0 118 Mitsubishi 71.9 126 Toshiba 69.8 127 AEON 69.3 142 Dai-ichi Life Insurance 63.6 150 Seven & I Holdings 60.9 156 Mitsui 59.1 160 Marubeni 58.5 163 Mitsubishi UFJ Financial Group 57.4 164 Meiji Yasuda Life Insurance 56.9 174 Itochu 55.2 185 Nippon Steel & Sumitomo Metal 52.9 186 Fujitsu 52.8 190 Sumitomo Mitsui Financial Group 52.1 191 MS&AD Insurance Group Holdings 52.0 200 Sumitomo Life Insurance 50.5 Source: NRI based on Fortune Global 500 (2013) data 23

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

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 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

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

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

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 2006. 10,000 Acquisitions of Securitized Real Estate Others J-REIT 8,000 6,000 6,242 7,205 4,000 2,000 0 5,159 4,439 3,307 1,791 2,123 2,210 2,236 1,549 1,772 2,031 1,359 1,679 539 611 305 676 895 628 439 604 792 1,555 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 Source: NRI based on MLIT 28

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 2013. 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 (2008-2012) 6,000 1,707 1,645 1,399 Others, 19.3% 4,000 2,000 0 1,488 1,107 981 790 916 1,321 835 1,293 1,589 267 525 404 615 808 161 807 424 267 686 494 610 452 270 552 1,611 1,516 1,728 2,194 2,124 2,503 479 369 252 550 348 289 441 309 235 406 710 891 1,092 556 768 512 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 2001. 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

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 2004-2006. Number of Properties Securitized by Region Tokyo Greater Tokyo Osaka Nagoya Fukuoka Others FY2012 47.9% 15.3% 9.5% 5.1% 19.9% FY2011 58.8% 12.0% 8.0% 4.0% 14.9% FY2010 66.0% 11.8% 6.9% 12.0% FY2009 53.0% 10.5% 8.4% 6.9% 17.2% FY2008 51.9% 12.7% 8.8% 5.5% 17.4% FY2007 41.9% 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

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 2013. 20.0 Performance Trend in Japan 15.0 10.0 5.0 0.0-5.0 Income Return Total Return Capital Return -10.0-15.0 Source: IPD Japan 31

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 2014. 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 2014. 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

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 2009. Acquired by Morgan Stanley in 2007, and had been defaulted since 2009. Acquired by Morgan Stanley in 2001 with 400 million USD, and acquired by AIG in 2005 with 650million USD. 33

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 2014. 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 2014. 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

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

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 2007. 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. 2013 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

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 2006. 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 2009. 15 10 Financial Institutions Lending Attitude DI toward Real Estate Industry Loose 5 0-5 Tight -10-15 -20-25 -30-35 Source: NRI based on BOJ 37

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

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 5,000 0 1,777 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 6,880 959 1,803 1,002 583 929 701 838 2,248 1,028 1,397 1,754 934 729 651 838 472 937 768 751 1,029 691 975 1,092 654 390 664 768 879 1,354 1,450 1,221 401 1,184 953 835 844 598 4,249 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

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 2008. ( 兆 Trillion 円 ) 100 Asset Value of Corporate-Owned Rental Real Estate (excl. Residential) 96 90 80 26 70 68 60 50 19 35 40 30 21 20 10 28 35 0 2003 2008 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

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 94.09 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

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 13.22 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

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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 2014. Vacancy rate movement in Tokyo CBD Yearly(1998-2013) 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

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Office Market Some investors expect rent increase in 2014. 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(1998-2013) Monthly(Mar 2012 Feb 2014) 24000 22000 20000 24,000 22,000 20,000 18000 16000 Chiyoda Shibuya Minato Chuo 18,000 16,000 Chiyoda Shibuya Minato Chuo 14000 Shinjuku 14,000 Shinjuku 12000 12,000 10000 10,000 Note: One tsubo is 3.3 square meters Source: NRI based on Miki Shoji Co., Ltd. data 44

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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 2015. 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) 250 200 150 100 50 56 55 83 Office supply area Number of building supplied 100 108 114 118 104 Office Space Supply in Tokyo s 23 districts 183 92 119 74 99 36 72 91 125 216 121 77 154 119 65 86 85 117 175 58 128 114 91 72 # of buildings 70 60 50 40 30 20 10 0 Estimate 0 Source: NRI based from Mori Building Company s Mega Office Building Market Trends Survey (Preliminary figure) dated March 21, 2012 45

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 2014. Cap rates for trophy office buildings in the CBD area are currently around 3.0-3.5%. Lower vacancy rates and expectations for higher rent are likely to depress cap rates continuously in 2014. 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

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 2017 149,000 sqm 2017 185,000 sqm 2020~ NA 2018 345,000 sqm 2017 57,000 sqm Chiyoda Marunouchi 3-2 Otemachi 1-2 Akihabara 2020~ NA 2019 NA 2020~ NA Tokiwabashi 2020~ NA Nihonbashi Honmachi 2 Nihonbashi 2 Yaesu1 2017 46,000 sqm 2017 138,000 sqm 2020~ NA Nihonbashi 2 Kita Yaesu Fujiya Hotel 2018 57,000 sqm 2020~ NA Nihonbashi Muromachi 3 2019 165,000 sqm Nihonbashi Muromachi 1 Chuo 2020~ NA Nihonbashi 1 4-12zone 2020~ NA Nihonbashi1 1-2zone 2020~ NA Yaesu2 Kita 2020~ NA Yaesu2 Naka 2020~ NA Tamachi TGMM Roppongi 5 Takeshiba Akasaka1 2019 280,000 sqm 2020~ NA 2019 104,000 sqm 2017 175,000 sqm Roppongi 6 Tranomon 10 mori building Hamamatsucho Nishi 2 2020~ 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 2018 59,000 sqm 2018 106,000 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 2017 17.70000 sqm 2017 80000 sqm Sony ex-hq 2020~ NA Source: NRI based on public information 47

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 2015. 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 110,000 100,000 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 35,909 18 Wards 300 200 153.0 164.2 165.5 162.8 160.4 18 Wards 40,000 30,000 20,000 57,842 58,659 59,486 60,324 61,174 5 Wards 100 177.5 187.8 188.5 185.6 183.0 5 Wards 10,000 0 2005 2010 2015 2020 2025 0 2005 2010 2015 2020 2025 Note: Assume that the office supply speed between 2009 to 2012 will continue after 2015 Source: NRI based on Tokyo Government 48

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 2012. 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 (2007-2012) 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 51~100 101~150 151~200 201~250 251~300 301~350 Number of head quarters in 2012 (Listed Company) Source: NRI based on Toshi Mirai Soken Decreasing 49

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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% 24,000 18.00% 16.00% 14.00% Fukuoka Sendai 22,000 20,000 12.00% 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

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

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

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 2008. Breakdown of All Households by Housing Type (2008) Number of Households by Housing Type 1988-2008 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 1,000 0 3,741 9% 1,401 332 4,077 12% 15% 4,392 16% 4,686 18% 4,960 1,569 1,673 1,717 1,777 502 647 747 '88 '93 '98 '03 '08 877 20% 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

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 1994-98 and decreased to about 85% of the peaktime level in 2004-08. 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 1984-2008 1,600 1,400 1,200 1,000 800 600 400 200 0 1,103 39% 782 427 45% 46% 1,186 1,221 884 868 532 557 1,135 44% 45% 778 1,039 698 502 466 84-88 89-93 94-98 99-03 04-08 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

94-98 99-03 04-08 94-98 99-03 04-08 94-98 99-03 04-08 94-98 99-03 04-08 94-98 99-03 04-08 94-98 99-03 04-08 94-98 99-03 04-08 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. 500 450 400 350 300 250 200 150 100 50 0 50 46 48 25 24 24 28 30 28 32 28 27 Location Choices of Moving Households 266 207 197 165 157 148 58 54 54 Household moving in a city Household moving out a city 105 86 77 56 57 57 73 61 53 36 37 32 27 27 23 45 47 49 47 46 41 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

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 1988-2008 Housing Growth Rates by Type 70 60 50 40 30 20 10 0 39 16 44 18 50 53 57 20 21 22 '88 '93 '98 '03 '08 12 14 Number of Houses Number of Rental Houses Number of Rental & Apartment Houses (non-wood) 15 130 125 120 115 110 105 100 95 90 85 80 100 Number of Houses 112 108 103 Number of Rental Houses Number of Rental & Apartment Houses (non-wood) '98 '03 '08 124 115 108 Source: NRI based on data from Housing and Land Survey, Ministry of Internal Affairs and Communications of Japan. 56

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 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 2009. 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 1,000 800 600 400 200 0 New Housing Supply Trend: 1991-2013 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 500 400 300 200 100 0 Source: NRI based on data from Survey of Construction Work Started, Ministry of Land, Infrastructure, Transport and Tourism of Japan. 57

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 '08 16 20% 15 14 15% 10% 13 12 11 5% 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.). 58 10 9 8 All Tokyo areas 23 Tokyo districts Tokyo cities Kanagawa 2012 2013 2014

91 91 91 91 91 91 91 91 91 00 01 02 03 04 05 06 07 08 09 10 11 12 13 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 2013. 108.0 106.0 Rent in the Private Sector (Annual Average) Nationwide and Central Tokyo 104.0 102.0 100.0 98.0 96.0 94.0 92.0 90.0 88.0 86.0 Japan Tokyo 23 Wards Source: NRI based on data from Consumer Price Index, Ministry of Internal Affairs and Communications of Japan. 59

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 2011. 100% 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 1,000 500 0 Tokyo 3 central districts Tokyo 23 districts Nagoya city Osaka city Fukuoka city 2011 2012 2013 2011 2012 2013 Source: NRI based on data from ARES J-REIT Property Database, Association for Real Estate Securitization of Japan. 60

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 2011. Housing Ownership Rate and Average Annual Income in Japan 76.0% 75.0% 74.0% 554 551 553 547 73.7% 75.4% 560 550 73.0% 72.0% 71.0% 70.0% 69.0% 68.0% 67.0% 69.2% 69.4% 71.5% 72.5% 535 71.4% 71.9% 71.0% 521 520 515 520 540 530 520 510 500 Annual income (10,000 Yen) Ownership rate Yearly income 66.0% 2005 2006 2007 2008 2009 2010 2011 2012 2012 490 Source: NRI based on data from Consumer Price Index (CPI), Ministry of Internal Affairs and Communications of Japan. 61

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 62

Floor Area (1000 m 2 ) Retail Property Market Development of large-scale retail stores has started to recover since 2010. Development of large-scale retail stores, which fell steeply after Lehman shock, bottomed out in 2009 and is now on the path to recovery. Local governments often try to attract large-scale retail properties because it leads to local revitalization and employment generation. New Retail Space Supply vs. Number of Development Projects 5,000 4,500 786 Floor Area 床 面 積 738 731 730 750 Number 届 出 of 数 projects 738 900 800 4,000 3,500 3,000 2,500 2,000 1,500 1,000 638 654 620 584 500 450 4,545 4,178 3,983 4,369 3,729 3,335 2,860 2,455 1,919 2,081 2,351 2,193 700 600 500 400 300 200 Number of projects (cases) 500 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 Note: The reported numbers for the fiscal years 2002 and 2008 include stores without floor space indication. Source: NRI based on data from the Ministry of Economy, Trade and Industry s Large-scale Retail Chain Site Expansion Report 63

Overall floor area Floor area per shopping center Retail Property Market For shopping centers, the total floor area for all stores and the floor area per store are both on the rise. Overall floor area and per-store floor area for shopping centers (in 1 million m 2 ) Overall 総 店 舗 面 floor 積 area Old SC Standard 60 13.2 13.6 11.8 12.1 12.4 12.8 50 11.6 40 36.5 38.0 33.1 34.6 30.6 30.4 31.5 30 Floor 店 舗 当 area たり 面 per 積 SC (in 1000m 2 /store) New 新 SC SC 基 準 Standard 14.1 14.2 14.5 14.8 15.0 15.3 16 14 42.1 42.7 44.2 45.7 46.4 47.9 12 10 8 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 6 4 2 0 NB: In the old SC standard, only shopping malls with more than 10 retail tenants were considered. In the new SC standard, the shopping center must have more than 10 tenants including food stalls, service centers and retail outlets. On the same note, the shopping center must have more than 1,500 m2 retail space. Source: NRI based on data from the Council of Shopping Centers SC White Book 64

Retail Property Market Five of the 10 largest retail properties to file for approval in 2012 were Aeon malls. Top 10* Large-Scale Retail Stores that Filed for Approval in 2012 (*in terms of floor space) 3AEON MALL Wakayama Opening : Apr.2014 Commercial area : 48,500m2 4AEON MALL Toin Opening : Nov.2013 Commercial area : 42,300m2 8Homac Super Depot Seinan Opening : Jul. 2013 Commercial area : 23,400m2 7Shimachu Home s Soka-Toneri Opening : Nov.2013 Commercial area : 24,100m2 6AEON MALL Higashikurume Opening : Feb. 2013 Commercial area : 28,300m2 5MARK IS Minato-Mirai Opening : Jun. 2013 Commercial area : 33,800m2 2AEON MALL Tsukuba Opening : Feb. 2013 Commercial area : 54,000m2 9Cainz-mall Chiba-Newtown Opening : Sep. 2013 Commercial area : 23,100m2 10Shisui Premium Outlet Opening : Apr.2013 Commercial area : 21,500m2 1AEON MALL Makuhari-Shintoshin Opening : Nov. 2013 Commercial area : 96,000m2 NB: Opening month is the scheduled month when the retail store plan is applied to the Ministry of Economy, Trade and Industry Source: NRI based on data from the Ministry of Economy, Trade and Industry s Large-scale Retail Chain Site Expansion Report 65

Retail Property Market AEON MALL and Mitsui Fudosan plan to develop retail properties actively. Conversely, some retail operators (such as general merchandise stores, department stores, consumer electronics shops and shopping malls) are retrenching. Competitive retail properties will continue to emerge while less-competitive retail properties will disappear. Plans of the major retail property developers FY2014 FY2015 FY2016 - AEON MALL Mitsui Fudosan AEON MALL Tendo (Total floor area : 68,000m2 Spring 2014) AEON MALL Nagoya-Chaya (Total floor area : 132,000m2 Spring 2014) AEON MALL Kyoto-Katsuragawa (Total floor area : 220,000m2 Oct. 2014) AEON MALL Kisarazu (Total floor area : 89,000m2 Oct. 2014) AEON MALL Tamadairanomori ( Total floor area : 75,000m2 Nov. 2014) AEON MALL Okayama ( Total floor area : 250,000m2 Nov. 2014) Plan the other 3 malls Mitsui Outlet Park Sapporo-Kitahiroshima (Ph.2) (Commercial area : 7,700m2 FY2014) Ikebukuro S Project (Commercial area : 4,300m2 FY2014) Mitsui Outlet Park Kisarazu (Ph.2) (Commercial area : 8,500m2 FY2014) LaLaport Izumi (Site area : 114,000m2 FY2014) AEON MALL JR Asahikawa (Commercial area : 19,000m2 Spring 2015) AEON MALL Okinawa Rycom (Commercial area : 100,000m2 Spring 2015) Plan the other 7 malls LaLaport Fujimi (Commercial area : 80,000m2 FY2015) Complex development on the site of Expoland (Commercial area : 97,000m2 FY2015) AEON MALL Higashi-Matsumoto (Site area : 62,500m2 Spring 2016) AEON MALL Hiratsuka (Site area : 126,000m2 2018) (Timeframe TBD) Retail property development plan in Nagoya-City (Timeframe TBD) Outlet park development plan in Oyabe-City (Timeframe TBD) Retail property development plan in Ebina Station west exit (Timeframe TBD) Retail property development plan in Hiratsuka-City Source: NRI based on respective company webpages 66

Retail Property Market Shopping center sales are declining at a slower pace. Sales at existing shopping centers decreased in 2013 due to unfavorable weather conditions (e.g. extreme heat and slow-to-arrive cold weather) coupled with competition from new shopping centers. Yearly comparison of existing shopping centers sales (%) 1 0 0.3 0.3 0.0 0.5-1 -2-2.2-2.1-1.6-1.7-1.5-2.0-1.3-0.5-3 -3.4-4 -5-6 -7-8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-6.8 Source: NRI based on the Japan Council of Shopping Centers Overall Sales Statistics Report 67

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Retail Property Market Abenomics has not changed consumer outlook dramatically. 60 50 Consumer outlook index chart Dec. 2012 Liberal Democratic Party becomes the ruling party again 40 30 20 10 0 2007 2008 2009 2010 2011 2012 2013 NB: Consumer outlook index calculation methodology: Consumers are asked to rate their outlook for the next 6 months for the following 4 categories: Lifestyle, Income, Job environment and Determining when to purchase consumer durables using a 5-scale index. Each of the 5 scales is assigned a value: +1 for Will get better, +0.75 for Will get somewhat better, +0.5 for Won t change, +0.25 for Will get somewhat worse, and +0 for Will get worse. This numerical index is used to provide a component ratio for each of the answers, from which the results are calculated. To illustrate, a value of 50 will be produced if all participates answer Won t change for all available items. Source: NRI based on from Cabinet Office Consumer Trends Survey 68

Estimated frequency of visits (index : 2006 = 100) Retail Property Market Frequency of visits to GMSs, department stores and consumer electronics retailers decreases sharply. NRI carries out questionnaire surveys of 10,000 ordinary consumers every three years, based on which it estimates visit frequency by type of retailer. The latest survey shows that the frequency of visits to department stores in 2012 dropped to 68.7% of the 2006 level. DIY shops experienced a decline in visit frequency but an expansion in the customer base to include active seniors, semi-professional DIYers and corporate customers. The expansion, attributable to the addition of new product categories, allowed total sales of DIY shops to remain stable. Visit Frequency by Type of Retail Outlet GMSs Department stores DIY shops Consumer electronics retailers Shopping centers Customer traffic has tended to decrease due to lack of attractive items despite an extensive product selection. All operators are trying to pull in more customers by switching to a strategy of less is more. Customer traffic has trended sharply downwards owing to a lack of differentiation from SCs and GMSs. Currently developing original products and renovating outlets to re-establish their raison d etre. The customer base has expanded to include active seniors, semiprofessional DIYers, and corporate customers. The market size is increasing steadily. Customer traffic had increased up to 2011 thanks mainly to Japan s switch to digital broadcasting and the introduction of the Eco Point gift system for eco-friendly purchases. Customer traffic has declined sharply in recent years due to termination of the Eco Point system and the expansion of e-commerce. Customer traffic has increased due to a successful focus on consumption of experience in addition to the consumption of goods. Shopping malls such as AEON MALL Makuhari-shintoshin will be increasingly popular as a new type of retail store. 120 100 80 100.0 103.4 89.0 100.0 76.0 68.7 100.0 112.7 86.5 100.0 101.2 85.1 100.0 119.8 106.7 60 40 20 0 GMSs terminated Aeon Aoyama, Itoyokado Niigata-Kido, Alta Sapporo, Marui Curren Shinjuku, Aeon Sasebo- Hakutake, Jusco Tamana, Seijoishii in Lumine Shinagawa, Daimaru Peacock Yokohama- Tachibana etc. Department stores terminated Temmanya Hacchobori, Nagasakiya Hachioji, Daimaru in LaLaport Yokohama, Seibu Numazu, Hankyu Kobe, Hankyu Ings, Fukudaya Maoka, Marumitsu, Sogo Kure, Daimaru Shinnagata etc. '06 '09 '12 '06 '09 '12 '06 '09 '12 '06 '09 '12 '06 '09 '12 NB) Examples of consumption of goods : Purchases of stationery, furniture, apparel, and sundry goods Examples of consumption of experience : Dining in restaurants, playing games, participating in special events, and learning to do something Source: NRI based on NRI s Questionnaire Survey of 10,000 Ordinary Consumers 69

Retail Property Market In the Tokyo Metropolitan Area, rents in Ginza, Omotesando, and Shinjuku reversed trends upwards. (yen / month / tsubo) 1 st floor rent ranking in 13 principal business areas (yen/month/tsubo) 60,000 Ginza 50,000 40,000 2 Ginza Omotesando Shinjuku Omotesando Ikebukuro Shinjuku Shibuya Yokohama Tokyo Metropolitan Area 30,000 1 Shinsaibashi Oodori (Sapporo) 20,000 3 Sannomiya (Kobe) Sendai Tenjin (Fukuoka) Provincial Areas 10,000 Shijokawaramachi (Kyoto) Sakae (Nagoya) 0 Late 2010 Early 2011 Late 2011 Early 2012 Late 2012 Early 2013 NB1: Rent in Yokohama is shown to have spiked in the early half of 2012, but this can be attributed to the extremely small sample size NB2: Rent in Shinjuku is shown to have spiked in the late half of 2012, but this can be attributed to a sample bias toward small, high-rent properties NB3: Rent in Ikebukuro is shown to have dived in the early half of 2013, but this can be attributed to a sample bias toward low-rent properties in unfavorable locations Source: NRI based on the Japan Real Estate Institute, BAC Urban Projects, and Attractors Lab s Retail Chain Rental Trends 70

Retail Property Market There were several large-scale transactions worth around 30 billion JPY. Major transactions of retail properties Transaction month / year Feb / 2013 Apr / 2013 Sep / 2013 Sep / 2013 Dec / 2013 Asset Yodobashi Camera Multimedia Kichijoji Shibuya Flag Tiffany Ginza Building Kawasaki Le FRONT Times Square Property type Retail Retail and office Retail Retail Retail Area Kichijoji (Tokyo) Shibuya (Tokyo) Ginza (Tokyo) Kawasaki (Kanagawa) Shinjuku (Tokyo) Seller Buyer Transaction amount Kichijoji YCM Funding United Urban Investment Corporation Prudential Real Estate Investors Japan Mori Trust Sogo Reit, Inc Asia Pacific Land MJ Retail Investments One Tokyu Fudosan Holdongs Individual Japan Retail Fund Investment Corporation Takashimaya 28 billion JPY 32 billion JPY 32 billion JPY 30 billion JPY 105 billion JPY Floor area Total floor area : 37,900m2 Notes Total floor area : 7,800m2 Rental floor area : 6,000m2 Total floor area : 5,700m2 Total floor area : 92,000m2 Total floor area : 174,000m2 97% ownership Building ownership rate: 60% Source: NRI based on respective company webpages 71

Retail Property Market Cap rates have been falling since 2011. In the Tokyo Metropolitan Area, cap rates are approaching the all-time low. Ginza and Omotesando posted cap rates of 4.4% and 4.5% respectively in October 2013. These rates are close to the low of 4.0% registered in 2007. 8.0% Commercial establishment cap rates (expected yield) 7.0% 6.0% 5.0% 4.0% Suburban, Nagoya Suburban, Osaka Suburban, Tokyo Metropolitan, Nagoya Metropolitan, Osaka Metropolitan, Omotesando Metropolitan, Ginza 3.0% 2.0% 1.0% 0.0% NB: Metropolitan high-class specialty stores: Length of time after construction -or- large-scale repair/improvement: less than 5 years Tenants: Mainly retailers of high-class brands. Rent system: Mainly fixed-term, variable rental schemes based on the revenue. Areas: Along Chuodoori in Ginza s Chuo district. Along Omotesando in Omotesando s Shibuya district. Suburban shopping centers: Sales floor area: around 20,000m 2 Key tenants: Prominent general merchandise stores (GMS) Rent system: Mainly fixed-term, fixed-charge rental schemes Areas: 1-hour Shinkansen ride along key stations to Tokyo s Metropolitan District Stores for areas outside Tokyo follow similar locational conditions as above. Source: NRI based on the Japan Real Estate Institute s Real Estate Investor s Survey 72

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 73

Logistics Property Market The truck-based transport volume (in tons), which forms the bedrock of Japan s cargo industry, has continued to decline in recent years. Truck-based (automobile) transport is the primary transport method that constitutes a large share of Japan s freight traffic. In recent years, the volume of cargo transported via automobile has declined due to the downturn in the quantity of trucks sold for private use. Cargo quantity by transport method (FY2011) (Unit: 1 million tons) (1 million tons) Automobile cargo quantity movement Business Personal Railway Coastwise vessels 361, 7% Domestic aviation 1, 0% 7,000 6,000 40, 1% 5,000 4,000 3,000 Mortor vehicle 4,497, 92% 2,000 1,000 0 '60 '65 '70 '75 '80 '85 '90 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 出 NB: The chronological continuity of data from prior to 2009 could not be guaranteed due to the changes made to the in tallying methodology in the middle of 2010. Source: NRI based on the Ministry of Affairs Transport quantity by transport method and the Ministry of Land, Infrastructure, Transport and Tourism s Automobile Transport Statistics Survey 74

Logistics Property Market As the movement to smaller logistics lots progresses, the quantity distributed in such lots appears to be in upward trend based on the number of instances. As the movement to smaller logistics lots progresses across the whole industry, the quantity distributed has increased to a yearly rate of 4.0% based on the number of reported instances. The increased quantity of distribution in warehouses is remarkably high. This increase is propelled by the increase in distribution quantity using small lots that are less than 0.1 tons. Industry-wide (except warehousing) distribution quantity by lot size (unit: number of instances) Warehousing distribution quantity per lot size (number of instances) Below 0.1t 未 0.1t 満 0.1~0.5t 0.5~1t 1~5t 5t Above 以 上 5t 0.1t Below 未 0.1t 満 0.1~0.5t 0.5~1t 1~5t 5t Above 以 上 5t (instances) (instances) 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 0 500,000 1,000,000 1,500,000 2,000,000 2000 64.4% 2000 46.4% CAGR 4.5% CAGR 7.3% 2005 69.2% 2005 59.2% CAGR 3.7% CAGR 12.6% 2010 75.3% 2010 72.4% Source: NRI based on the Ministry of Land, Infrastructure, Transport and Tourism s Logistics Census 75

Logistics Property Market Small-lot consignments increase, due partly to the expansion of e-commerce, which is expected to continue growing hereafter. The market size exceeded 10 trillion yen in 2012 and is projected to top 20 trillion yen in 2018. SG Holdings (Sagawa), a transport company, reportedly lost its contract with Amazon when it raised its rates recently. Another major freight company, Yamato Transport, also announced a rate hike in March 2014. Accordingly, the logistics costs of online retailers such as Amazon may increase hereafter. If the increase is passed on to consumers, they may feel less inclined to use online shopping, slowing the growth of e- commerce, which has been the primary factor boosting logistics demand. (trillion ( 兆 JPY) 円 ) 25 Market Size of Business-to-Consumer e-commerce 20 15 10 5 0 2012 2013 2014 2015 2016 2017 2018 NB: Business to-consumer e-commerce: sale of products and services to consumers in general via the Internet Source: NRI 76

Logistics Property Market While new supply has stopped dwindling, facilities are growing larger due to businesses consolidating their logistics capabilities The number of supplied warehouse buildings fell to roughly 23% of the peak level in 1991 (12,000 buildings/year) which has stabilized in recent years. The number of supplied warehouse buildings for the transport industry is dwindling at a more relaxed pace compared to the rest of the industry (see figure below left), but the floor space per building is on an upward trend (below right). This explains the increased need for SCM support for generic enterprises and new/large-scale logistics facilities for logistics consolidation. Nationwide number of supplied warehouses including warehouses for transport and transport industry share Floor space per warehouse building (Buildings) 60,000 Transport industry Other than transport Transport industry share 25% (m2) 2,000 Entire industry Other than transport Transport industry 50,000 40,000 20% 15% 1,500 30,000 1,000 20,000 10% 10,000 5% 500 0 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 0% 0 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: NRI based on Ministry of Land, Infrastructure, Transport and Tourism s Construction Statistics 77

Logistics Property Market Development of logistics real estate, which had been shrinking since the Lehman shock, is now back in full swing Order volume for construction of warehouses/logistics facilities by ordering industry (1 billion yen) Real estate industry Transport industry Others 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Only contracts worth 5 billion yen above are included Source: NRI based on Ministry of Land, Infrastructure, Transport and Tourism s Construction Order Trends, Statistics and Survey 78

Logistics Property Market Major foreign-based logistics property players and Japanese real estate developers are gearing up for roadside development ahead of new expressway construction. Expressway Expressway (Planned) New developments Newly operational Prologis Park Kawajima 2 Developer : Prologis Completion : Mar 2014 Rental floor area 46,000m2 Logi-Port Hashimoto Developer : LaSalle, Mitsubishi Estate Completion : Autumn 2014 Total floor area 162,000m2 Logi-Port Sagamihara Developer : LaSalle, Mitsubishi Estate Completed : Aug 2013 Total floor area 210,000m2 DPL Sagamihara Developer : Daiwa House Industry Completed : Dec 2013 Rental floor area 81,000m2 Chuo GLP Atsugi Expressway Developer:GLP Completed : Dec 2013 Total floor area 107,000m2 GLP Zama Developer:GLP Completion : Jun 2015 Total floor area 132,000m2 GLP Ayase Developer:GLP Completion : Apr 2015 Total floor area 69,000m2 Prologis Park Kitamoto Developer : Prologis Completion : Mar 2014 Total floor area 74,000m2 Tomei Expressway Ken-O Expressway DPL Yokohama Ooguro Developer:Daiwa House Industry Completion : Mar 2014 Rental floor area 118,000m2 MFLP Kuki Developer : Mitsui Fudosan Completion : Jul 2014 Total floor area 75,000m2 Goodman Mizue Developer : Goodman Japan Completion : Dec 2014 Rental floor area 59,000m2 Joban Expressway Haneda Airport Gaikan Expressway Narita Airport Source: NRI based on respective company webpages Tokorozawa Logistics Center Developer : Orix Real Estate Completed: Apr 2013 Rental floor area 68,000m2 DPL Misato Developer : Daiwa House Industry Completed : Aug 2013 Rental floor area 56,000m2 MFLP Yashio Developer : Mitsui Fudosan Completion : Mar 2014 Total floor area 42,000m2 GLP Misato 3 Developer : GLP Completed : May 2013 Total floor area 95,000m2 Prologis Park Ichikawa 3 Developer:Prologis Completion : Oct 2015 Total floor area 60,000m2 Goodman Ichikawa Developer : Goodman Japan Completion : Mar 2015 Rental floor area 64,000m2 Prologis Park Narashino 4 Developer : Prologis Completed Aug 2013 Total floor area108,000m2 Ichikawa Shiohama Logistics Center Developer : Mitsubishi Corporation Completed Oct 2013 Total floor area 57,000m2 GLP MFLP Ichikawa Shiohama Developer : GLP, Mitsui Fudosan Completed Jan 2014 Total floor area 122,000m2 79

Logistics Property Market Sourcing turns increasingly competitive due to market entries by Mitsubishi Estate, Mitsui Fudosan and Sumitomo Corporation and to IPOs of J-REITs. SHOSHA Foreign capital company Independent company General developer ITOCHU Corporation Mitsubishi Corporation MITSUI & CO., LTD Sumitomo Corporation GLP Prologis LaSalle Goodman Kenedix ORIX Real Estate Daiwa House Nomura Real Estate Mitsubishi Estate Actions of Major Logistics Property Developers 2010 2014 Establishment of a logistics property fund with Mapletree (Jan. 2010) Development of 4 logistics properties in Saitama etc. at a cost of 30 billion yen (Begin: May. 2012) Entry into the logistics property market in partnership with Mitsui & Co. (Begin: Apr. 2011) Entry into the logistics property market in Mitsui Fudosan partnership with GLP (Begin: Sep. 2012) Development of a logistics property with Kenedix (total floor area: 44,000m2) (Begin: Apr. 2013) Development of a logistics property in Ichikawa, Chiba (total floor area: 57,000 m2) (Completion: Oct. 2013) Acquisition of Urayasu Logistics Center by a private offering fund managed by Mitsui & Co Realty (Sep. 2013) IPO of GLP J-REIT (Dec. 2012) Acquisition of 51% ownership of SG Realty Yokohama (logistics property) for 6.3 billion yen through a fund established with institutional investors (Apr. 2013) Disposition of Saitama Logistics Property to Askul by 15 billion yen (Jan. 2013) IPO of Nippon Prologis REIT, Inc (Feb. 2013) Sale of 7 logistics properties for 18 billion yen to Mapletree (Apr. 2012) IPO of Daiwa House REIT Investment Corporation (REIT of logistics and retail properties) (Nov. 2012) IPO of Nomura Real Estate Master Fund (REIT of logistics and retail property) (Jun. 2013) The Industrial and Infrastructure Fund holds five logistics properties acquired at a price of 72 billion yen (as of Mar. 2014) Acquisition of Zama Logistics Center by the private offering fund managed by Mitsui & Co Realty (Mar. 2014) Cooperation agreement with Kokyo Tatemono for the development of logistics properties and establishment & management of private offering funds. Sumitomo aims to develop 20 billion yen s worth of logistics properties per year (Mar. 2014) Development of 2 logistics properties in Hidaka, Saitama at a cost of 19 billion yen (Begin: Aug. 2014) Acquisition of a 36,000m2 site for logistics property in Ichikawa, Chiba for 6.6 billion yen (Dec. 2013) The first solo project in Fukuoka (Begin: Dec. 2013) Development of logistics property in Osaka (total floor area: 187,000m2) (Begin: 2015) Sale of 6 logistics properties by a LaSalle-managed fund for 74 billion yen. The buyer is a fund established by domestic financial institutes, Tosei and other investors (Oct.2013) Development of a logistics property in Mizue, Kanagawa (rental floor area: 59,000m2) (Completion: Dec. 2014) Source: NRI based on respective company webpages 80

Logistics Property Market Vacancy rate has recovered, allowing rental rates to recover in the future Vacancy rates for large-scale rental logistics facilities have improved to 2.0%. While rent levels have fallen consistently since 2008, there are signs of recovery in the Tokyo area. Monthly rent offers and vacancy rates of logistics real estate (yen / month / tsubo) Tokyo area Osaka area 5,000 4,500 Jul. 2008 Rent offer 4,000 Jan. 2014 Jul. 2010 Jul. 2008 Oct. 2012 3,500 Jul. 2010 Oct. 2012 Jan. 2014 3,000 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Vacancy rates NB: Logistics facilities which have a total lot area or total floor area of 10,000m2 Source: NRI based on data from Ichigo Real Estate Information Service s Survey on the Logistics Facilities Rental Market 81

Logistics Property Market J-REITs have made several aggressive acquisitions of logistics properties. Major transactions of logistics properties Transaction month / year Oct. / 2013 Dec. / 2013 Mar. / 2014 Apr. / 2014 Asset 7 properties such as GLP Hamura 4 properties such as Prologis Park Osaka 4 GLP Urayasu Ⅲ GLP Komaki 6 properties such as D Project Kuki Ⅱ Property type Logistics Logistics Logistics Logistics Area Hamura (Tokyo) etc. Osaka-City etc. Urayasu (Chiba) Komaki (Aichi) Kuki (Saitama) etc. Seller CIC GLP CBRE Prologis GLP Daiwa House Buyer GLP J-REIT Nippon Prologis REIT GLP J-REIT Daiwa House REIT Transaction amount Total 27.5 billion JPY Total 54 billion yen Total 28.5 billion yen Total 25.1 billion yen Floor area Total floor area : 40,000m2 (GLP Hamura) Total floor area : 120,000m2 (Prologis Park Osaka 4) Total floor area : 67,000m2 (GLP Urayasu Ⅲ) Total floor area : 50,000m2 (D Project KukiⅡ) Notes The highest amount was for GLP Hamura at 7.8 billion yen The highest amount was for Prologis Park Osaka 4 at 21 billion yen The amount for GLP Urayasu Ⅲ was18.2 billion yen The highest amount iwas for D Project Kuki Ⅱ at 7.2billion yen Source: NRI based on respective company webpages 82

Logistics Property Market Cap rates have been falling since 2012. In Tokyo, cap rates are approaching the alltime low. Logistics real estate cap rate (expected yield) Single tenant Multi-tenant 7.5% 7.5% 7.0% 7.0% 6.5% Chiba (inland) 6.5% Chiba (inland) 6.0% Tokyo (inland) 6.0% Tokyo (inland) 5.5% Tokyo (bay) 5.5% Tokyo (bay) 5.0% 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 5.0% 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 NB: Single tenant: 2-3 floors; total floor area of around 10,000m2 NB: Multi-tenant: 3-4 floors; total floor area of around 50,000m2 Source: NRI based on Japan Real Estate Institute s Real Estate Investor s Survey 83

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 84

2000 1-2Q 2000 3-4Q 2001 1-2Q 2001 3-4Q 2002 1-2Q 2002 3-4Q 2003 1-2Q 2003 3-4Q 2004 1-2Q 2004 3-4Q 2005 1-2Q 2005 3-4Q 2006 1-2Q 2006 3-4Q 2007 1-2Q 2007 3-4Q 2008 1-2Q 2008 3-4Q 2009 1-2Q 2009 3-4Q 2010 1-2Q 2010 3-4Q 2011 1-2Q 2011 3-4Q 2012 1-2Q 2012 3-4Q 2013 1-2Q 2013 3-4Q Number of New Hotel Rooms (Planned, Thounsand) Number of New Hotel (Planned) Hotel Market The number of new/planned guest rooms across the country is on an upward trend. Looking at the changes in the number of new/additional planned hotel rooms from the downward trend of 2009, an upward trend starting from the latter half of 2012 has been continuing in 2013. Number of new/additional planned guest rooms 50 45 40 35 30 25 20 15 10 5 0 247 226 215 29 184 33 172 159 157 161 176 26 27 136 26 24 23 23 21 20 15 226 38 324 308 308 315 286 293 297 254 43 42 42 262 269 255 37 38 39 234 37 224 209 214 34 32 31 179 193 29 30 25 26 23 25 # of New Hotel Room(Planned, Thousand) # of New Hotel(Planned) 350 300 250 200 150 100 50 0 Source: NRI based on Ohta Publications Weekly Hotel and Restaurants: Dec 7, 2012 Issue 85

FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 Number of Hotel Rooms: Thousand Number of Hotels Hotel Market The number of guest rooms for hotels across the country is still on an upward trend In terms of the changes in the number of existing hotel guest rooms and establishments, we see that although there has been no change in the current upward trend in the number of guest rooms, the number of establishments is slowing increasing. 900 800 700 600 500 400 Number of existing hotels and guest rooms 583 596 613 622 638 649 664 681 698 722 756 781 798 802 814 815 7,769 7,944 8,110 8,220 8,363 8,518 8,686 8,811 8,990 9,180 9,442 9,603 9,688 9,710 9,863 9,796 12,000 10,000 8,000 6,000 300 200 100 0 # of Rooms(Thousand) # of Hotels 4,000 2,000 0 Note: These are year-end values Source: NRI based on data from the Ministry of Health, Labor and Welfare s Health Administration Reports 86

Number of Hotel Guests: Million Hotel Market The number of guest rooms for hotels across the country is still on an upward trend Changes in domestic lodging demand reveal that the demand for the whole of 2012 exceeded that of the previous years, indicating that domestic demand is on an uptrend. Tourist arrivals have also recovered and exceeded their pre-2011 earth quake levels. 160 Number of domestic lodging guests in recent years 140 120 100 92.4 90.9 126.2 107.7 98.8 103.2 127.0 110.6 101.4 106.2 133.4 115.0 80 60 40 20 0 5.4 2.5 4.9 5.6 5.7 6.9 7.0 6.7 6.6 8.8 9.2 8.7 2011 1Q 2011 2Q 2011 3Q 2011 4Q 2012 1Q 2012 2Q 2012 3Q 2012 4Q # of Hotel Guests # of Foreign Hotel Guests 2013 1Q 2013 2Q 2013 3Q 2013 4Q Note: Only establishments with more than 10 employees were counted Source: NRI based on the Japan Tourism Agency s Lodging and Travel Statistics Survey 87

Occupancy Rate Hotel Market The occupancy rate of guest rooms nationwide is on an upward trend All establishments are observing an upward trend when looking at changes in guest room utilization rates. Occupancy rate of guest rooms per establishment in recent years 90 80 70 60 50 40 30 20 10 0 2008 1Q Resort Hotel Business Hotel City Hotel 2008 3Q 2009 1Q 2009 3Q 2010 1Q 2010 3Q 2011 1Q 2011 3Q 2012 1Q 2012 3Q 2013 1Q 2013 3Q Notes: Figures from the 2 nd quarter of 2010 count establishments with less than 9 employees Source: NRI based on the Japan Tourism Agency s Lodging and Travel Statistics Survey 88

Room Charge: USD Hotel Market Rates for a single night s stay are on the rise. Since 2011, An uptrend is observable when looking at the rates for a single night s stay. 175 Room Charge for a single night stay for recent years 170 165 160 155 150 145 140 135 130 125 Room Charge(Weekday) Room Charge(Weekend) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: The question until 2011 was Private hotel: rate for a single night s stay with breakfast for 1 person. For 2012, it was rate for a single night s stay with breakfast for 1 person. Source: NRI based on data from the Ministry of Internal Affair s Retail Commodity Statistics Survey. 89

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 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Occupancy Rate Hotel Market The occupancy rate for high-grade hotels in Tokyo and Osaka is on the rise. Looking at the guest room occupancy rates, we see a large dip in 2011 after the 2011 Earthquake. This has since resurged and has been climbing steadily since 2012. 120 Occupancy rate of high-grade hotels in Tokyo and Osaka 100 80 60 40 20 0 2011 Tohoku Earthquake Tokyo 19 hotels Osaka 15 hotels 2011 2012 2013 Source: NRI based on The Nikkei 90

Hotel Market Hotel transactions over 100 million USD have been increasing. Transaction Month/Year May, 2013 Aug, 2013 Nov, 2013 Mar, 2014 Mar, 2014 Asset Hilton Tokyo Bay Sheraton Grande Tokyo Bay Hotel LOISIR HOTEL & SPA TOWER NAHA Hyatt Regency Osaka Mercure Tokyo Ginza Property Type Hotel Hotel Hotel Hotel Hotel Area Chiba Chiba Okinawa Osaka Tokyo, Chuo, Ginza Seller MGS Diamond Morgan Stanley and others Lone Star Obayashi NA Buyer Japan Hotel Reit Fortress Investment Group Morgan Stanley Gaw Capital Partners (Hong Kong) Huric Transaction Amount Gross Floor Area 261million USD 420million USD 85 million USD NA NA 64,932m2 107,147m2 45,731m2 76,458m2 13,279m2 Notes In terms of asset value, the greatest asset in the portfolio for Japan Hotel Reit. Acquired by Morgan Stanley in 2007, and had been defaulted since 2009. Loan Star acquired this asset in 2005 and sold it 8 years later The first investment in Japan for Gaw Capital Partners A hotel acquired and converted by Mitsui Fudosan Group in 2004 91

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 92

Real Estate Investment Products An overall perspective of the Japanese real estate market Japan s first unlisted open-end private REIT investment was offered in November 2010, expanding the available selections in the Japanese real estate investment market. The size of Japan s private REIT market is growing rapidly. ( tn) 20 Market scale and overview of the Real Estate Investment Products in Japan 16 16.1 14.7 12 11.5 8 4 0 0.7 Listed REIT Private Fund Private REIT RMBS CMBS 0.8 Equity Type Debt Type Listed Close-ended Unlisted Open-ended Home Mortgage Commercial Mortgage NB: Listed REIT figure is updated as of end of Feb 2014, private fund figure is updated as of end of Dec 2013, unlisted REIT is an estimated figure as of end of Mar 2014, RMBS/CMBS figure is updated as of end of Sept 2013. Source: NRI based on the Association for Real Estate Securitization, Sumitomo Mitsui Trust Research Institute Co., Ltd., and the Japan Securities Dealers Association 93

Real Estate Investment Products The J-REIT market capitalization which started in Sept 2001 has recovered to approximately 7.5 trillion yen. The J-REIT market began trading on the stock market in Sept 2001 with 2 companies traded and a market capitalization of 2.5 trillion yen. Today, there are 45 companies traded worth approximately 7.5 trillion yen. ( bn) 9,000 J-REIT Market Capitalization and Number of Companies Traded (No. of J-REITs) 50 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2001/9 2002/8 2003/7 2004/6 2005/5 2006/4 2007/3 2008/2 2009/1 2009/12 2010/11 2011/10 2012/9 2013/8 45 40 35 30 25 20 15 10 5 0 Market Capitalization No. of J-REITs Source: Bloomberg 94

Real Estate Investment Products Approximately 80% of J-REITs assets are located in the Tokyo Metropolitan Area, and approximately 50% of J-REITs assets are office properties. Approximately 80% of real estate owned by J-REITs is in the Tokyo Metropolitan Area. In recent years, J-REITs have become more diversified in their real estate holdings in terms of type of property. Asset Mix of J-REITs by Area and Asset Class Kinki Area 11.3% Other Areas 7.7% Logistics 9.6% Hotel 2.8% Others 3.3% Chubu Area 4.0% Kanto Area 14.7% Approximately 11.5 trillion yen 5 Central Wards of Tokyo 44.2% Retail 19.2% Approximately 11.5 trillion yen Office 47.4% 23 Wards of Tokyo 18.2% Greater Tokyo Area 77.1% Residential 17.5% * As of the end of November of 2012 Source: NRI based on ARES 95

Real Estate Investment Products The Tokyo Stock Exchange (TSE) REIT Indices have recovered from 2013. The TSE REIT Indices has dropped sharply from its peak in May 2007, and has recovered rapidly from 2013. 3,000 TSE REIT Index, TOPIX, and the Listed Real Estate Industry Index 2,500 2,000 1,500 1,000 500 0 2003/3 2004/1 2004/11 2005/9 2006/7 2007/5 2008/3 2009/1 2009/11 2010/9 2011/7 2012/5 2013/3 2014/1 TSE REIT Index TOPIX TOPIX Real Estate Sector Index Source: NRI based on Bloomberg 96

Real Estate Investment Products J-REIT dividend yields rapidly increased to around 8%, but are currently down to around 3.5%. The yield spread is at roughly 3% level. 9.0% J-REIT dividend yield and Japanese Government Bond 10-year yield 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2002/1 2002/11 2003/9 2004/7 2005/5 2006/3 2007/1 2007/11 2008/9 2009/7 2010/5 2011/3 2012/1 2012/11 2013/9 Spread J-REITs Dividend Yield JGB 10-Year-Yield Source: NRI based on Bloomberg, TSE. 97

Real Estate Investment Products The leveraged performance of core funds recovered to positive in the capital return. According to the index based on actual performance of core funds invested in domestic real estate, the leveraged property index (ARES Japan Fund Index) recovered to positive in the capital return. ARES Japan Property Index (AJPI) and ARES Japan Fund Index (AJFI) 25% 20% AJPI: Income Return AJFI: Income Return 25% 20% AJPI: Total Return AJFI: Total Return 15% AJPI: Capital Return 15% 10% AJFI: Capital Return 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% -20% -20% -25% 2002/12 2004/7 2006/2 2007/9 2009/4 2010/11 2012/6-25% 2002/12 2004/7 2006/2 2007/9 2009/4 2010/11 2012/6 Source: NRI based on The Association for Real Estate Securitization (ARES) ARES Japan Property Index and ARES Japan Fund Index Source: NRI based on data from The Association for Real Estate Securitization 98

Real Estate Investment Products CMBS issuance has decreased drastically since 2008, and at present only RMBS is issued at a constant pace. Most recently, about 80% of residential mortgage-backed securities were originated by the Japan Housing Finance Agency. ( 100m) 60,000 50,000 40,000 Backed Securities Breakdown by Type of Backing and RMBS Breakdown by Originator 0% 20% 40% 60% 80% 100% 2004FY 1H 2005FY 1H 2006FY 1H 2007FY 1H 2008FY 1H 2009FY 1H 4,370 7,418 2010FY 1H 30,000 2011FY 1H 2012FY 1H 20,000 6,937 7,679 8,755 10,338 2013FY 1H Housing Finance Agency Banks/Trust Banks Regional Banks Non-bank Others 10,000 3,511 9,702 1,994 14,815 16,935 32,311 30,260 20,955 16,276 16,352 2,038 12,143 1,701 7,537 980 11,113 341 138 8,491 8,341 413 11,132 563 15,064 1,288 140 10,742 11,148 153 5 9,741 10,760 0 2004 1st Half 2004 2nd Half 2005 1st Half 2005 2nd Half 2006 1st Half 2006 2nd Half 2007 1st Half 2007 2nd Half 2008 1st Half 2008 2nd Half 2009 1st Half 2009 2nd Half 2010 1st Half 2010 2nd Half 2011 1st Half 2011 2nd Half 2012 1st Half 2012 2nd Half 2013 1st Half RMBS CMBS CDO Lease Consumer Loan Shopping Credit Accounts receivable/commercial Bills Others Source: NRI based on Japan Securities Dealers Association 99

Authors SungYun(Sonny) KIM Lead Author of Japan Kim has been engaged in real estate related consulting projects and research for years. His current interest in real estate investment market includes behavioral investment, market cycle theory, demographic impact on real estate market, real estate securitization, global real estate investment, and financial crisis. Tomohiko TANIYAMA, Ph.D. Author of Real Estate Investment Products Taniyama is engaged in consulting and research projects. His resent research theme is the analysis of alternative investment market including real estates and infrastructures, and the development of new financial instruments and new real estate economic models. Tomoki KITAZAKI, Ph.D. Author of Hotel Market Kitazaki is engaged in consulting and research projects such as urban and real estate development, business planning. Yasuyuki ARAKI Author of Macro fundamentals of Japan Araki is engaged in consulting and research projects such as investment environment analysis in real estate and infrastructure market, and planning the business strategies and overseas market strategy. Akira DAIDO Author of Population movements in Japan and Residential Market Daido is engaged in consulting and research projects such as real estate and housing, electric industry, and planning the business strategies. Keita KAMEI Author of Retail Property Market and Logistics Property Market Kamei is engaged in consulting and research projects such as real estate/infrastructure-related survey/research, and planning the business strategies. Contact: Nomura Research Institute, Ltd. Consulting Division 100