Japanese Real Estate Investment Market 2011 · The value of the Japanese real estate investment...

Japanese Real Estate Investment Market 2011p

Nomura Research Institute

January, 2011

Nomura Research InstituteConsulting Division

Marunouchi-Kitaguchi Bldg.1-6-5 Marunouchi, Chiyoda-kuTokyo 100-0005, Japan

To create a transparent real estate investment market in JapanTo 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.

Copyright（C） 2011 Nomura Research Institute, Ltd. All rights reserved. 1

Nomura Research Institute (NRI) Viewpointsfor Real Estate Investment Market

Macro FundamentalsGDP growth, Business performance, Demographic movement…

Financial and Capital MarketPolicy interest rates, Financial policy, Stock market…

Rental market

②Supply

How many spaces will be provided?

①Demand

What is the key driver of demand?h b l d h k

Trading Market

⑥Renders ⑦Sell side⑤Buy side

What kind of appetite do What is the condition Who would sell?Are there demolitions?

…What business lead the market?

Which areas have strong demand?…

③Vacancy

What kind of appetite do Investors have?

What are the strategy of investors?

⑧Liquidity

What is the condition of renders for loan?How much gearing

is possible?

Who would sell?Why investors sell?

When the fire sale begin?

④Rent and NOI

Increase? or Decrease?

Increase? or Decrease?

⑨Cap RateIncrease? or Decrease?

Whether transactions come off or not?

Times New Roman size 8 color: Dark Gray

Asset Value go up or down?


Times New Roman, size 8, color: Dark Gray

Ex) Source: NRI based on IMFAsset Price Estimation

1 Macro fundamentals of Japan

2 Overview of Japanese real estate market

3 Office market

4 Residential market

5 Retail property market5 Retail property market

6 Logistics property market

7 Hotel market


8 J-REIT market



3 Office market




7 Hotel market


8 J-REIT market


Japan’s population is aging and shrinking due to fewer children.

Total population peaked out in 2005. Number of households is increasing for now, but it is projected to decrease after 2015.Total population peaked out in 2005. Number of households is increasing for now, but it is projected to decrease after 2015.

Population and Households in Japan

FA lPopulation(thousand)

Households(thousand)

60,000

70,000

120,000

140,000

Forecast →← Actual(thousand) (thousand)

40,000

50,000

80,000

100,000

20,000

30,000

40,000

60,000

0

10,000

0

20,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Copyright（C） 2011 Nomura Research Institute, Ltd. All rights reserved.

65歳以上人口 15～64歳人口 0～14歳人口世帯数

5

15-64 YRS Households

Source: NRI based on National Institution of Population and Social Security Research

Over 65 YRS 0-14 YRS


Economic growth is weak and is expected to remain so for the foreseeable future.

15 0(%)

Real GDP growth rate of major countries

10.0

15.0

China

Forecast →←Result

5.0 Japan

United States

India

UKUS

0.0

United Kingdom

China

India

Japan

‐5.0


‐10.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

6

Source: NRI based on IMF


Despite the weak growth, Japan remains one of the largest economies in the world.

While Japan has fallen to third place after the US and China, it is expected to remain ahead of high-growth countries including India, Brazil and While Japan has fallen to third place after the US and China, it is expected to remain ahead of high growth countries including India, Brazil and Russia up to at least 2020.

Nominal GDP of major countries(Billion USD)

20,000

25,000

USForecast →←Result

15,000 Japan

U it d St t

China

10,000

United States

United Kingdom

China

IndiaJapan

5,000 UK

IndiaNote:


0

2005 2010 2015 2020

7

Figures up to 2015 are IMF forecasts and those up to 2020 are calculated with the assumption that the CAGR from 2015 to 2020 will be maintained.

Source: NRI based on IMF


Japanese companies have noticeably improved their business performance.

Listed companies’ ordinary profits returned to positive growth in fiscal 2009. Their sales are also expected to return to positive growth in fiscal 2010.Ordinary profits in the first quarter of fiscal 2010 rebounded to about 90 percent of the pre-Lehman shock level (first quarter of fiscal 2008).Corporate performance may weaken again if the yen remains persistently high.

Ordinary income of listed companiesSales and ordinary income growth

60

売上高増減率（前期比）経常損益増減率（前期比）

120.0

Ordinary income of listed companies

(Index:1Q08=100）(%)

Growth rate of sales（YoY）

Growth rate of ordinary income （YoY）

of listed companies

Forcast →←Result

20

40

60.0

80.0

100.0

‐20

0

0.0

20.0

40.0

‐60

‐40

60 0

‐40.0

‐20.0


‐80

FY2007 FY2008 FY2009 FY2010e

‐60.0

1Q FY08

2Q FY08

3Q FY08

4Q FY08

1Q FY09

2Q FY09

3Q FY09

4Q FY09

1Q FY10

8

Note: 767 companies chosen from listed companies by NikkeiSource: NRI based on Nikkei

Note: 559 companies chosen from listed companies by NikkeiSource: NRI based on Nikkei

There are concerns about Japan’s huge fiscal deficit, which may drive up interest rates 1 Macro fundamentals of Japan

in the future.

Currently Japan keeps its interest rates at a lower level than that of countries rated higher than Japan. If the irrational gap between the interest rate Currently Japan keeps its interest rates 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 jump to the level of AAA rated countries or the higher level of other developed countries.

Ratio of government debt to GDP Long term interest rates and sovereign ratings

250

300(%) (%)Forecast →←Result

6.00

7.00

UK

200

Japan

4.00

5.00 AAA/Negative/A-1+

100

150

US

UK2.00

3.00 USAAA/Stable/A-1+

GermanyAAA/Stable/A-1+

0

50

Germany

0.00

1.00 JapanAA/Negative/A-1+


Source: NRI based on IMF Note: Ratings are as of Sep. 2010.Source: NRI based on IMF and S&P

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Financial collapse is unlikely as long as domestic capital remains in Japan and 1 Macro fundamentals of Japan

continues to circulate.

Personal financial assets, which had been decreasing since 2006, posted an increase in 2009 for the first time in three years.Personal financial assets, which had been decreasing since 2006, posted an increase in 2009 for the first time in three years.Japan has enjoyed a current account surplus for many years, and its foreign currency reserves have expanded enormously since the early 2000s owing to currency market interventions.While the entire amount of this capital is not invested in government bonds, financial collapse will not result from any withdrawal of capital by foreign investors.

1,200

gJapan’s current account and foreign currency reserves

(Billion dollar)2,000

(Ten Billion dollar)

Personal financial assets in Japan

800

1,000

1,500

400

6001,000

0

200

0

500


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

経常収支外貨準備高

10

Source: NRI based MOF and IMFSource: NRI based BOJ

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Current Account Foreign Currency Reserves


Tokyo will remain the world’s top metropolis in terms of population and GDP.

Population and GDP in 2020 by city

GDP size in 2020(Billion USD) Tokyo

1,800

TokyoNew York

1,400

1,600

Los Angeles1,000

1,200

London

Chicago ParisMexico City

Osaka/KobeBuenos Aires

Sao Paulo400

600

800

Population in 2020

Buenos AiresShanghai

Mumbai

0

200

400


Source: NRI based on PricewaterhouseCoopers and UN

Population in 2020 (thousand)0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000


Tokyo is the most popular headquarters location for Fortune Global 500 companies.

Number of Fortune Global 500 companies by city (2010） Fortune Global 500 Companies in Tokyo ranking among the top 200

Japan Post Group 6

Tokyo, 49

Beijing, 30

NTT Group 31Hitachi 47Honda 51Sony 69Toshiba 89

Paris, 25

New York, 19

Toshiba 89Dai-Ichi Life 119SEVEN & I Holdings 124Mitsubishi UFJ Financial Group 126Tokyo Electric Power Company 128JX Holdings 136,

London, 18

Seoul, 9Osaka, 8T 7

JX Holdings 136Fujitsu 138Mitsubishi Corporation 146Meiji Yasuda Life 158MITSUI & CO 164

Toronto, 7Others, 335 NEC 185

Tokyo Marine Holdings 186Nippon Steel Corporation 191KDDI 193


Note: Numbers indicate Global 500 ranks.

Source: NRI based on Fortune Global 500 2010


Population continues to increase in Greater Tokyo while declining in Japan overall.

The growth of Tokyo’s population and households is expected to continue over the long term on the strength of both natural and social increases. The growth of Tokyo s population and households is expected to continue over the long term on the strength of both natural and social increases.

Net population inflow into Greater Tokyo

150,000

200,000 Kanagawa Tokyo Chiba Saitama total

50,000

100,000

Inflow

‐50,000

0

O tfl

‐100,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Outflow


Source: NRI based on Basic Resident Register Population Migration Report



3 Office market




7 Hotel market


8 J-REIT market


The Japanese market, of which Tokyo represents 70%, is the third largest in the world.

The value of the Japanese real estate investment market is the third largest in the world after the US and China. Compared to the US and China, h J hi h h i t bl ti th th USD 2 t illi h h ll l d Th f t f th tihowever, Japan, which has investable properties worth more than USD 2 trillion, has a much smaller land area. Therefore, most of the properties are concentrated in a few cities. In fact, the Tokyo region alone accounts for 70% of the total value of investable properties in Japan.

Capital Value of Real Estate Market in the World and JapanUS billion $

5 000

6,000

7,000

6,9003,000

4,000

5,000

4,255

1,662 1,390 1,221 1,1952,195

964

724349

158

1,000

2,000

0

USA

China

Germany

India

UK

France

Japan

Tokyo CB

D

yo Satellite

and Nagoya

Other Cities


Toky

Osaka a O

15

Source: NRI based on DTZ, EPRA, JPMorgan Asset Management


Total return has recovered since 2009.

Capital return in Japan headed sharply downwards in early 2008 . However, it reversed trends upwards in the second quarter of 2009 and has Capital return in Japan headed sharply downwards in early 2008 . However, it reversed trends upwards in the second quarter of 2009 and has followed a recovery path since then. On the other hand, the income return in Japan keeps the stable level.

Performance Trend in JapanPerformance Trend in Japan

15.0

20.0

Total Return

Income Return

%

5.0

10.0

Income Return

Capital Return

‐5.0

0.0

‐15.0

‐10.0

r‐05 ‐05

‐05

c‐05

r‐06 ‐06

‐06

c‐06

r‐07 ‐07

‐07

c‐07

r‐08 ‐08

‐08

c‐08

r‐09 ‐09

‐09

c‐09

r‐10


Source: NRI based on IPD

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar


Cap rates have returned to the 2005 level.

By the end of the second quarter of 2008, the cap rate had decreased sharply. However, after the 2008 financial crisis, it increased approximately By the end of the second quarter of 2008, the cap rate had decreased sharply. However, after the 2008 financial crisis, it increased approximately 100～150 basis points. At present, it maintains a stable movement, and this trend is expected to continue for a while. The biggest factor that can affect the stable trend is the fire sales by major Japanese banks seeking to dispose of their non-performing assets. The spread among regions and asset classes are also stable in Japan. While the cap rate of residential properties in Tokyo decreased recently, this was due to investing by numerous small investors who had been waiting for an increase in the cap rate.

Cap Rate Trend in Japan

8.0%

6.0%

7.0%

Office Tokyo CBD

Office Osaka CBD

5.0%

Retail Tokyo

Residential Tokyo

3.0%

4.0%

03 04 04 04 05 05 05 06 06 06 07 07 07 08 08 08 09 09 09 10Copyright（C） 2011 Nomura Research Institute, Ltd. All rights reserved. 17

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐0

Jun‐0

Oct‐0

Feb‐1

Source: NRI based JREI


The presence of US and European players has declined.

Until 2008, most of the major property acquisitions in Japan were made by US or European investors. Since then, however, only La Salle Investment and a few German open-ended funds have shown strong appetite for investing in Japanese properties Big spenders in 2003-2008 such asInvestment and a few German open-ended funds have shown strong appetite for investing in Japanese properties. Big spenders in 2003-2008 such as Morgan Stanley and Goldman Sachs are likely to switch to sell-side activity in the near future.

Major Acquisitions by US or European Investors

2007 2008

Pacific Century Place Building1.4 billion USD

S C

Nasu Garden Outlet MoleNA

S

2009 2010

13 ANA Hotel buildings 2.8 billion USD

S

Tennozu Citi Group Center 480 million USD C G S Da Vinci→Secured Capital Japan Domestic owner→LaSalle Investment

Grass City ShibuyaNADa Vinci→LaSalle Investment

Logi-Port NagareyamaNADomestic owner→LaSalle Investment

All Nippon Airways → Morgan Stanley

Hotel Nikko Naha & others NAJapan Airlines → Lone Star

Citi Group → Morgan Stanley

Shinsei Bank HQ building 1.18 billion USD Shinsei Bank → Morgan Stanley

Yanagi-Bashi First BuildingNADomestic owner→CLSA

Tiffany Ginza HQ building 380 million USD Tiffany → Goldman Sachs

Da Vinci Kamiyacho170 million USDDA Office Investment → CommerzReal

Simplex Investment Advisors5 billion USDNikko Cordial → Goldman Sachs, AETOS

Shibuya Duplex Tower160 million USDDomestic owner → Union Investment

Copyright（C） 2011 Nomura Research Institute, Ltd. All rights reserved. 18Source: NRI based on various sources

Mansion QizHiroo100 million USDMorimoto →GE Real Estate


On the other hand, Asian investors are rushing into Japan.

Before the 2008 financial crisis, GIC of Singapore was the only institutional investor purchasing Japan properties. Since the crisis, many institutional investors from other Asian countries such as Korea, Taiwan, Malaysia and Kuwait, have entered the Japanese market.institutional investors from other Asian countries such as Korea, Taiwan, Malaysia and Kuwait, have entered the Japanese market.So far, the investment amount of Asian investors is smaller than that of US or European investors who had invested heavily a few years ago. Therefore, it is not sure at present whether Asian investors’ will push down Japan’s cap rate hereafter.

Major Acquititions by Asian Investors

Westin Hotel Tokyo 770 illi USD

KDX Toyosu Grand Square350 illi

Head Quarter Building of Ezai100 illi USD

Hawks Town1 billi USD

j q y

2007 2008 2009 2010

770 million USDMorgan Stanley → GIC Real Estate

350 million yen Kennedix → NPS(Korea Pension)

100 million USDNA→NPS and other Korean Pensions

LIETOCOURT ARX TOWER130 million USD

Logi Partners Kashiwa Center43 million USD

1 billion USD Colony Capital → GIC Real Estate

Da Vinci →Martins(Kuwait) NA→Mapletree(Singapore)

Logistics Centers in Chiba and Saitama130 million USDNA→Mapletree(Singapore)

Care house for seniors30 million USDKenedix→Parkway Life REIT(Singapore)


Niseco Villege (Hotel)60 million USDNA→YTL Corporation(Malaysia)

Source: NRI based on various sources


Japanese institutional investors remain cautious.

Traditionally, Japanese pension funds have been passive about investing in real estate. Generally, their allocation to real estate is less than 1 percent of their overall investment portfolio. One of the biggest issues to invest in real estate for Japanese pension funds is the size of funds. Most of of their overall investment portfolio. One of the biggest issues to invest in real estate for Japanese pension funds is the size of funds. Most of pension funds in Japan manage hundreds of millions of USD. Japanese pension funds changed their attitude at one time in 2007 due to a bullish market, but they have become reluctant again since the 2008 financial crisis.Financial institutions such as major banks, regional banks and small banks have preferred investment in J-REIT. At present, they are not active in j , g p p , yreal estate investment market.

Appetite of Japanese Institutional Investors for Real Estate Investment

100%

6 5% 4 8%

58.0%64.8%

55.0%63.9%

71 8%

33.1% 35.5%

70%

80%

90%

No Plan of Investment

60.4% 59.7%25.2%23.6%

12.8%

6.5% 4.8%71.8%

30%

40%

50%

60%

Planning

Investing

16.8% 17.0% 21.4% 23.3% 19.4%

59.7%25.2%18.2%

12.8%8.7%

0%

10%

20%

2005 Pension 2006 Pension 2007 Pension 2008 Pension 2009 Pension 2008 Financial 2009 Financial

Investing


Source: NRI based on Daiwa Fund Consulting

2005 Pension 2006 Pension 2007 Pension 2008 Pension 2009 Pension 2008 Financial Institution

2009 Financial Institution


Lenders’ attitude has improved but remains weak.

Real estate players are feeling that financial institutions are changing attitude for real estate roan. In fact, there are many condominium developers Real estate players are feeling that financial institutions are changing attitude for real estate roan. In fact, there are many condominium developers which procure new loans and acquired new land for development.However, foreign based financial institutions, which provided mezzanine financing prior to the 2008 financial crisis. and enabled real estates’ players high gearing such as 90 percent, have withdrawn the financial crisis withdrew from Japan. There is no easy money any more to finance opportunistic investment.

Financial institutions’ loan extending attitude toward real estate industry

30

40

0

10

20

30

LooseLarge Enterprises

Small Enterprises

Total

‐30

‐20

‐10

0

Tight

Small Enterprises

‐40

2006

.1Q

2006

.2Q

2006

.3Q

2006

.4Q

2007

.1Q

2007

.2Q

2007

.3Q

2007

.4Q

2008

.1Q

2008

.2Q

2008

.3Q

2008

.4Q

2009

.1Q

2009

.2Q

2009

.3Q

2009

.4Q

2010

.1Q


Source: NRI based on Bank of Japan

Total Large enterprises Small enterprises


Smaller equity and tightened lending prevent cap rates from dropping.

The Significant Gap Between Before and After Crisis Conditions in Japan

2009～2011

L d S ll idB id

2003～2007

L d S ll idB id

The Significant Gap Between Before and After Crisis Conditions in Japan

Lenders Sell sideBuy sideLenders Sell sideBuy side

Major domestic banks were not so strict about providing loans.

R i l b k j i d

There were lots of companies and financial institutions which had to dispose non performing assets for restructuring

Domestic PlayersJ-REITs acquire only the properties of sponsors.

Major domestic banks are passive about lending.

R i l b k d

There were few investors just after the financial crisis.

Aft th 3 d t f

Number of Domestic PlayersJ-REITs 40Major developers 8Middle size players 50Boutique AM firms 10 Regional banks joined

loan syndicates aggressively.

Foreign institutions provided mezzanine fi i i l

assets for restructuring until 2004.

After 2005, Real estate players sold their asset to realize capital return.

Major developers are forced to focus sorely on existing investments.

Foreign Players

Regional banks and foreign banks have withdrawn from the real estate market.

The CMBS market is at f ll d ill

After the 3rd quarter of 2010, financial institutions may start fire sales.

In addition, investors h d

Boutique AM firms 10

Number of Foreign PlayersInvestment banks 5US AM firms 50European AM firms 20A i I 5

LiquidityLiquidity

financing actively.

Many CMBS were issued .

However, there were not enough sell-side players.

Only Asian investors and a few US investors such as LaSalle and Elliott are active.

a full standstill.

Maximum LTV has dropped to 60%.

such as MESREF and MS P2 Value Fund will dispose of their assets as well.

Asian Investors 5Foreign REITs 5

Cap RateThe cap rate has risen by about 100～150BP and can increases further more

q yIn most case, there is enough liquidity, and there are some deals.

However, the failure of JT’s 3 Shinagawa offices disposition, the biggest deal in 2010,indicate that there is a significant gap between sell side and buy side

Cap RateThe cap rate fell quickly from 2003 to 2007

q yFinding investors and dealing was easy for all parties.

After 2005, it became difficult to find sell-side players in major cities.


The cap rate has risen by about 100 150BP and can increases further more.Especially, hundreds of million of USD big properties.

22

Source: NRI

The cap rate fell quickly from 2003 to 2007



3 Office market




7 Hotel market


8 J-REIT market

3 Office market

There are five sub sectors in Tokyo’s CBD area.

Tokyo’s office markets are mainly located in the five central wards: Chiyoda, Minato, Chuo, Shinjuku and Shibuya. This small area contains most f th S l d A l b ildi d th 33 illi l h li i T k d it t llit iti th t thi CBD C f t blof the S class and A class buildings, and the 33 million people who live in Tokyo and its satellite cities gather to this CBD area. Comfortable

residential areas in the suburbs and highly developed transportation systems enable the Tokyo Metropolitan Area to function as a single mega city.

ItabashiKita

Adachi

KatsushikaArakawa

Edogawa

Koto

SumidaTaito

ToshimaBunkyo

ShinjukuChiyoda

NakanoTokyo13.0

Kanagawa

Saitama7.1 million

people

Chiba6.2

SetagayaMInato

KotoShibuya Chuo

Meguro

30 km

Kanagawa9.0

Shinagawa

Ohta


30 km

3 Office market

Tokyo accounts for 56% of Japan’s office market.

There are approximately 88 million square meters of rentable office floor space in Japan. In addition, there are countless small buildings that are not There are approximately 88 million square meters of rentable office floor space in Japan. In addition, there are countless small buildings that are not suitable for leasing.Tokyo has approximately 49 million square meters of office floor space, which represents 56 percent of the overall Japanese market. Rent in Tokyo is much higher than in other cities. Accordingly, Tokyo accounts for 64 percent of overall office rents in Japan

Office Floor Space Shares by Major City

1.2% 2.1% 1.9% 3.9%2.8% 2.4%

80 0%

90.0%

100.0%

1 7 il ㎡3.5 mil ㎡

2.43 mil ㎡2.1 mil ㎡

5.0% 1.2% 2.2%5.9%

15.3%

50 0%

60.0%

70.0%

80.0%

Grater Osaka18.6%

4 4 il ㎡1.0 mil ㎡

1.9 mil ㎡5.1 mil ㎡

13.4 mil ㎡

1.0 mil ㎡ 1.8 mil ㎡1.7 mil ㎡

56.1%20.0%

30.0%

40.0%

50.0%

Grater Tokyo64.5%

49 46 mil ㎡

4.4 mil ㎡ Total of 12 major cities

88 mil ㎡

0.0%

10.0%

Tokyo Yokohama Saitama Chiba Nagoya Osaka Kyoto Kobe Hiroshima Fukuoka Sapporo Sendai

49.46 mil ㎡


Source: NRI based on JREIAs of Dec .2009The investigation focus on central area of each city.In Tokyo, Osaka and Nagoya buildings which are smaller than 5000 square meter are excludedIn other nine cities buildings which are smaller than 3000 square meter are excluded

3 Office market

Office vacancy rates in Tokyo are at a 20-year high.

The so-called “Year 2003 Problem” of offices in Tokyo, i.e. that the market will be hit by excess supply in 2003, turned out to be a false scare, and The so called Year 2003 Problem of offices in Tokyo, i.e. that the market will be hit by excess supply in 2003, turned out to be a false scare, and office vacancy in Tokyo decreased significantly from 2005 to 2007. However, the financial crisis in 2008 changed the circumstance absolutely. At present, office vacancy rates in Tokyo are at the highest level in 20 years.

Office Vacancy in Tokyo CBD

10.0%

12.0%

10.0%

12.0%

Office Vacancy in Tokyo CBD

MinatoShibuya Minato

Shinjuku

6.0%

8.0%

6.0%

8.0%

Shibuya

Chuo

Chiyoda

Shinjuku ShibuyaChuo

Chiyoda

2.0%

4.0%

2.0%

4.0%

0.0%

Dec‐09 Jan‐10 Feb‐10 Mar‐10 Apr‐10 May‐10 Jun‐10 Jul‐10 Aug‐10 Sep‐10

0.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: NRI based on Miki Shoji


3 Office market

Rent has declined gradually due to the high vacancy rates.

Office rents are at the lowest level in ten years, and there are no signs that the decrease will stop anytime soon.Office rents are at the lowest level in ten years, and there are no signs that the decrease will stop anytime soon.

Office Rents in Tokyo CBD

70 0

75.0

80.0

70 0

75.0

80.0

Office Rents in Tokyo CBD

55.0

60.0

65.0

70.0

55.0

60.0

65.0

70.0

MinatoShibuya

Chuo

ChiyodaMinatoShibuya

Chuo

Chiyoda

35.0

40.0

45.0

50.0

35.0

40.0

45.0

50.0 Chuo

Shinjuku

Shinjuku

30.0

Dec‐09 Jan‐10 Feb‐10 Mar‐10 Apr‐10 May‐10 Jun‐10 Jul‐10 Aug‐10 Sep‐10

30.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: NRI based on Miki Shoji


3 Office market

Huge supply in the CBD will worsen market conditions.

There are 126 large-scale office buildings (total floor space of 10,000 square meters or larger) slated for completion between 2010 and 2015. The There are 126 large scale office buildings (total floor space of 10,000 square meters or larger) slated for completion between 2010 and 2015. The buildings will provide 7.6 million square meters of new office space combined. This means that new supply will be equivalent to more than 10 percent of Tokyo’s current office stock.In 2012, when new supply will be at peak, there will be 28 completed buildings and 2.4 million square meters of new office space in Marunouchi, Otemachi, Nakano, Odaiba and so on.

Office Space Supply in Tokyo

703,000

（1000 ㎡）

2,160

1,620

2,440

40

50

60

2,000

2,500Office supply area

Number of building supplied

1,0801,030

570

890870

10

20

30

500

1,000

1,500

0

10

0

500

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

～


Source: NRI based on Mori Building and Nikkei BP

3 Office market

At present 40% of top-tier Japanese companies still use B-class or C-class offices.

A factor that may absorb the huge supply of office space in the future is relocations by top-tier companies housed in B-class or C-class buildings at A factor that may absorb the huge supply of office space in the future is relocations by top tier companies housed in B class or C class buildings at present. Many companies in Tokyo are concerned about the risk of earthquakes, poor security and inferior IT infrastructure. New office buildings that resolve these issues may attract such companies.The chart below shows that companies in blue zones are housed in B-class or C-class buildings.

200～ personin one floor

100～200 personin one floor

50～100 personin one floor

～50 personin one floor

Breakdown of Office buildings used by Listed Companies in Tokyo

21～ floors building 14.8% 6.8% 2.8% 0.0%

11～20 floors building 4.9% 8.8% 6.8% 1.7%

6～10 floors building 5.3% 6.2% 11.3% 5.3%g 5.3% 6.2% 11.3% 5.3%

～5 floors building 4.5% 4.7% 6.0% 10.2%

39.1%


Source: NRI

3 Office market

Cap rates have risen but still remains below 5%

Cap rates of office buildings in Tokyo fell steeply from 2000. The drop was driven by the participation of many foreign and domestic investors in Cap rates of office buildings in Tokyo fell steeply from 2000. The drop was driven by the participation of many foreign and domestic investors in the Tokyo market and the ease with which investors could procure cheap loans and high LTV. From 2006 to 2008, the cap rate in Marunouchi ran at less than 4 percent. This means that there were not enough investable buildings. Cap rates rose approximately 100 basis points after the financial crisis. However, they remain at less than 5 percent, which is not very attractive for investors.

8.0%

Cap Rate Trend of Tokyo Office Market

6.0%

7.0%

Marunouchi

Nihonbashi

R i

4.0%

5.0%

Roppongi

Shinagawa

Shinjuku

3.0%

ct‐03

eb‐04

un‐04

ct‐04

eb‐05

un‐05

ct‐05

eb‐06

un‐06

ct‐06

eb‐07

un‐07

ct‐07

eb‐08

un‐08

ct‐08

eb‐09

un‐09

ct‐09

eb‐10


O Fe Ju O Fe Ju O F e Ju O Fe Ju O Fe Ju O Fe Ju O Fe30

Source: NRI based on JREI

Haneda Airport’s expansion will contribute to the competitiveness of southern 3 Office market

Tokyo.

⑨U①Ik b k N

Fundamentals in each subsector

Toshima⑩AkihabaraMay be negatively affected if vacancy and rent

⑨UenoThere is no significant factor for change.

②ShinjukuMitsubishi’s mega project will increase the office stock

①IkebukuroNThere is no significant factor for change. GoodBad Intermediate

SumidaTaito

Toshima

BunkyoNakano

May be negatively affected if vacancy and rent conditions worsen in Marunouchi and Otemachi.

③Akasaka / ToranomonForeign companies, the main tenants of this subsector, are experiencing weakened business performance.

Mitsubishi s mega project will increase the office stock significantly.

⑪Marunouchi / OtemachiThere will be a huge supply from 2001 to 2013.Vacancy is likely to increase significantly.Shinjuku

Koto④RoppongiThe function of Tokyo as a business location for foreign companies has declined.

⑫NihonbashiMitsui’s projects may contribute to this area’s competitiveness. However, too much supply may depress the market.

Shibuya

Chiyoda

Chuo

Meguro⑭Toyosu / Ariake / HarumiPoor transportation system causes low

⑬Yurakucho / ShinbashiMay be negatively affected if vacancy and rent conditions worsen in Marunouchi and Otemachi.

⑥OsakiMitsui’s big supply in 2013 may affect vacancy rates

⑤ShibuyaIT and retail firms, the main tenants of this subsector. still struggle with their businesses.

MInato

Shinagawa

⑮Hamamatsucho / TamachiThis area will be the gateway to Haneda.

Poor transportation system causes low competitiveness.

⑦Shinagawa / TennouzuAlthough vacancy was quite high for the last 3 years, Haneda’s expansion will have a positive impact.

Mitsui s big supply in 2013 may affect vacancy rates.


⑧KamataIn terms of transportation, Kamata is a key zone for access to Haneda.

⑯OdaibaPoor transportation system causes low competitiveness.

Haneda Airport

Since October. 2010, Haneda increased access to Asian markets significantly.

3 Office market

Osaka struggles with constitutional weakness.

Huge supplies in 2008 and 2009 have boosted vacancy to over 10 percent. Supply may remain large in the coming years, causing vacancy to rise Huge supplies in 2008 and 2009 have boosted vacancy to over 10 percent. Supply may remain large in the coming years, causing vacancy to rise still further.Office workers and sales workers in Osaka have decreased since 1996. This movement is different from other cities in Japan. Market observers predict that the increase of vacancy and decrease of rent will continue over the medium to long term.

15.0%400

Office Space Supply and Vacancy in Osaka Number of Office Workers and Sales Workers by Major CityVacancy

Total Area of office supply

(1000 ㎡)1600

1000 people

241

343

9.0%

11.0%

13.0%

250

300

350

10.3%

1000

1200

1400

1986

1991

1996

83

135

182

76 3.0%

5.0%

7.0%

100

150

200

400

600

8001996

2001

2006

201176

‐1.0%

1.0%

0

50

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

200

Sapporo Sendai Yokohama Nagoya Osaka Fukuoka

2016


Source：NLI ResearchSource：NLI Research

Forecast

3 Office market

Outside of Tokyo, large supply pulls down the office market.

The considerable inflow of money from 2004 to 2007 resulted in many buildings being planned in regional metropolises such as Sapporo, Sendai The considerable inflow of money from 2004 to 2007 resulted in many buildings being planned in regional metropolises such as Sapporo, Sendai and Fukuoka.The large gap between demand and supply has pulled down office rents sharply.

Office Stock and Flow in Major Cities

19.36.3%

Total Area of New Office Supply→

Ratio of Supply→

(2009～2011)pp y

Total Area of New Office Stock→

307

9 119 4%

9.2%

41.0 31.064.0

99.055

2.1 4.5

12.4

9.1

5.25.1%

14.5%

19.4%9.4%


Source: NRI based on NLI Research

Sappro Sendai Yokohama Nagoya Osaka Fukuoka

3 Office market

Cap rates in regional cities continue to rise.

In Tokyo, cap rates have remained at the same level since 2009. By contrast, cap rates in regional cities such as Sapporo, Nagoya and Osaka have In Tokyo, cap rates have remained at the same level since 2009. By contrast, cap rates in regional cities such as Sapporo, Nagoya and Osaka have risen continuously. The regional economies’ weak fundamentals are inhibiting investors’ buying appetite.

7 0%

8.0%

Office Cap Rates in Major Regional Cities

6.0%

7.0%

Sapporo

Sendai

Nagoya

4.0%

5.0%Osaka

Fukuoka

3.0%

Oct‐03

eb‐04

un‐04

Oct‐04

eb‐05

un‐05

Oct‐05

eb‐06

un‐06

Oct‐06

eb‐07

un‐07

Oct‐07

eb‐08

un‐08

Oct‐08

eb‐09

un‐09

Oct‐09

eb‐10


O Fe J O Fe J O Fe J O Fe J O Fe J O Fe J O Fe34




3 Office market




7 Hotel market


8 J-REIT market

Vacancy rates of rental housing are trending downwards in local cities Residential Market

but it’s still rising in Tokyo.

In Tokyo, the vacancy rate had been running at a moderate 6% or so up to the Lehman shock but has subsequently risen to 8-10%.In Tokyo, the vacancy rate had been running at a moderate 6% or so up to the Lehman shock but has subsequently risen to 8 10%.Before the Lehman Shock, the vacancy rate in local cities was generally higher than in Tokyo. The situation has reversed since the start of 2010, with Tokyo having a higher vacancy rate than local cities.

Vacancy Rates of Residential REITs (By Region)


Source: NRI based on ARES

※Definite value：-Dec,2009 Quasi-definite value:Jan,2010, Quick Estimation:Feb-May,2010

Even among REITs with many quality assets, Residential Market

some are suffering from a higher vacancy rate.

Vacancy Rates of Leading Residential REITs

※Japan Residential Investment Corporation※Japan Residential Investment Corporation and Advance Residence Investment Corporation were merged in March of 2010 .

Source: NRI based on each corporation’s documents


The rental housing market is doing fairly well compared to the highly sluggish Residential Market

market for condominiums.

Condominium Sales and Rental Housing Starts in Tokyo Metropolitan Area

(units）


Source: NRI based on Real Estate Economic Institute Co., Ltd.

and Ministry of Land, Infrastructure , Transport and Tourism

Rental housing starts

The recent decline in personal incomes has boosted demand for rental housing Residential Market

while suppressing consumers’ home purchases.

Average Monthly Real Income Per Household Construction

首都圏における分譲マンションの供給数推移2000～2008

Average Monthly Real Income Per Household and Annual Rental Housing StartsReal income

（yen）

Construction starts

(number)


Source: NRI based on Statistics Bureau, Director-General for Policy Planning and Statistical Research and Training Institute


Many Japanese still strongly think it ideal to be a homeowner, Residential Market

y p g ybut an increasing number are opting for rented accommodations.

There is a gap between ideal and reality.There is a gap between ideal and reality.

Ideal (Owned) vs. Realistic (Rented)(%）

A major reason why rented accommodations are viewed favorably is the lower cost burden (home ownership entails

t t i iti l t t ti l l d tmortgage payments, initial costs, potential losses due to natural disasters, etc.)

Another reason is that relocating is easier, allowing flexible responses to troubles with neighbors, changes in family

Notes:

p g , g ycomposition, job changes, and the like.

The data for “Ideal Home” was extracted from a questionnaire survey asking respondents to choose their ideal home from multiple choices (single answer). Those who responded “others” were disregarded.

The data for “Realistic Home” was extracted from a questionnaire survey targeting people planning to relocate. The respondents were asked to choose the home they thought they were likely to move to from multiple choices (single answer).. Those who responded “others” were Ideal Home（N=1,866） Realistic Home （N=851）


disregarded.

Source: NRI “Questionnaire research about the choice of houses”(Jun,2009)

Residential Market

Housing starts in all local cities have trended downwards since 2006.

While Tokyo, Japan’s most densely populated city, surpasses all other cities by far in terms of the absolute number of housing starts, it has While Tokyo, Japan s most densely populated city, surpasses all other cities by far in terms of the absolute number of housing starts, it has experienced the same trends as all other cities in terms of the rise and fall of housing starts.

Number of New House Starts by Prefecture(units）


Source: NRI based on Ministry of Land,

Infrastructure , Transport and Tourism

The transaction market is relatively active, and high liquidity is one of its Residential Market

characteristics.

Regardless of other conditions, investors will join the market if the cap rate rises and there is a broad investor base.Regardless of other conditions, investors will join the market if the cap rate rises and there is a broad investor base.

Number of Transactions（Number）

(Trading Volume)



Residential Market

Cap rates have fluctuated moderately within the 4.5% - 7% range.

Residential Cap Rates in Tokyo

8 0%

6.5%

7.0%

7.5%

8.0%

1ルーム(城南)Tokyo South Studio

5.0%

5.5%

6.0%1ルーム(城東)

ファミリー(城南)

Studio

Tokyo East Studio

Tokyo South N St di

3.5%

4.0%

4.5%ァミリ (城南)

ファミリー向け(城東)

Non-Studio

Tokyo East Non-Studio

3.0%

Oct‐03

Jan‐04

Apr‐04

Jul‐0

4

Oct‐04

Jan‐05

Apr‐05

Jul‐0

5

Oct‐05

Jan‐06

Apr‐06

Jul‐0

6

Oct‐06

Jan‐07

Apr‐07

Jul‐0

7

Oct‐07

Jan‐08

Apr‐08

Jul‐0

8

Oct‐08

Jan‐09

Apr‐09

Jul‐0

9

Oct‐09

Jan‐10

Apr‐10






3 Office market

5 Retail property market




7 Hotel market


8 J-REIT market

Retail Property Market

The retail market has been mired in the doldrums since the Lehman shock.

Department store sales have declined steadily in recent years. The drop has been particularly severe after the Lehman shock.

(十億円)

Annual Sales of Department StoresSales

(billion yen)YOY change

（%）

(十億円)


Source: NRI based on Japan Department Stores Association


Consumer sentiment remains persistently low.

The consumer confidence index which indicates the degree of optimism consumers feel about the future including their livelihood has worsenedThe consumer confidence index, which indicates the degree of optimism consumers feel about the future including their livelihood, has worsened significantly since 2007.The index has been following a recovery path since the spring of 2010, but the rise since summer has been very sluggish, indicating that consumer confidence remains persistently weak.

C C fid I dConsumer Confidence Index


Source: NRI based on Cabinet Office, Government of Japan

Consumers are concentrating their spending on a few selected areas rather than Retail Property Market

suppressing spending altogether.

While the overall trend of personal consumption is unfavorable, there appears to be an emerging tendency for consumers to spend money in those While the overall trend of personal consumption is unfavorable, there appears to be an emerging tendency for consumers to spend money in those areas that are important to their lifestyles or offer superior functions/performance, rather than opting for cheap goods and services across the board.

Basic Sense of Values about Consumption


(%)Source: NRI Questionnaire Research to 10,000 Consumers (2000,2003,2006,2009)

Japan is considered to be in a structural deflation, caused primarily by the decline of Retail Property Market

durable goods

No deflationary trends can be seen in goods for daily consumption and other non-durables.No deflationary trends can be seen in goods for daily consumption and other non durables.

CPI (100 = 2005)

Source: NRI based on Statistics Bureau, Director-General for Policy Planning and Statistical Research and Training Institute



The sharp rise in tourists from China is anticipated to help reactivate Japan’s retailRetail Property Market

The sharp rise in tourists from China is anticipated to help reactivate Japan s retail market.

Tourists from China have increased steeply in recent years. They general spend more money in Japan than visitors from other countries, and the t th d h i i

Tourists from China(persons) (thousandyen)

Per-Capita Spending by Overseas Visitors to Japan

amount they spend on shopping is enormous.


Source: NRI based on JNTO Source: NRI based on Japan Tourism Agency

• Spending in component sectors was calculated by multiplying purchase rate by purchase price. The total obtained by adding the sector averages is marginally different from the overall average for overseas visitor spending due to differences in computation methods.

Tokyo has the highest level of rent nationwide, with large differences from district to Retail Property Market

district inside the metropolis.

Within Tokyo, rent is especially high in three districts: Ginza, Omotesando and Shinjuku. Outside of Tokyo, rent is conspicuously high in the Shi ib hi di t i t f O k hi h i J ’ d l t i l h bShinsaibashi district of Osaka, which is Japan’s second largest commercial hub.

250,000

Market Rates of Rent for Space in Prime Buildings in 2008（Including 1st floor and 2nd or 3rd floors）

Note: Vertical bars represent range between highest and lowest rent

(Yen per tsubo*)*tsubo≒3.31 ㎡

200,000

Note: Vertical bars represent range between highest and lowest rent.

150,000

50,000

100,000

0

50,000

Ginza Omotesando Shinjuku Shibuya Ikebukuro Umeda Shinsaibashi Kyoto Kobe


j y yHarajyuku Aoyama

Tokyo Osaka Kyoto, KobeSource: NRI based on CBRE


The cap rate continues to rise.

The cap rate is higher for suburban shopping centers than for inner-city specialized stores. Of Japan’s three largest cities, Nagoya has the highest The cap rate is higher for suburban shopping centers than for inner city specialized stores. Of Japan s three largest cities, Nagoya has the highest cap rate and Tokyo the lowest.

Cap Rates for Suburban Shopping CentersCap Rates for Inner-City Specialty Stores

7.0%

8.0%

東京7.0%

8.0%

東京（銀座、Tokyo (GinzaTokyo

5 0%

6.0%

名古屋

5 0%

6.0%

（

高級専門店）

名古屋

Tokyo (Ginza, upscale specialty store)

NagoyaNagoya

4.0%

5.0%

大阪4.0%

5.0%

大阪OsakaOsaka

3.0%

Oct‐03

May‐04

Dec‐04

Jul‐0

5

Feb‐06

Sep‐06

Apr‐07

Nov

‐07

Jun‐08

Jan‐09

Aug

‐09

Mar‐10

3.0%

Oct‐03

May‐04

Dec‐04

Jul‐0

5

Feb‐06

Sep‐06

Apr‐07

Nov

‐07

Jun‐08

Jan‐09

Aug

‐09

Mar‐10




Vacancy rates have risen since the beginning of 2010 but is still low at 1%.

The overall vacancy rate for Retail Property REITs is low thanks to long-term contracts with such core tenants as AEON and Ito-Yokado. The rate The overall vacancy rate for Retail Property REITs is low thanks to long term contracts with such core tenants as AEON and Ito Yokado. The rate requires closing watching, however, as market withdrawals by large supermarkets and lease terminations by small tenants have been increasing recently.

Vacancy Rate for Retail Property REITs(%)



The transaction market still sees big deals from time to time although at a lower Retail Property Market

frequency than before, and liquidity remains intact.

Transactions Worth 10 Billion Yen or More

PropertyTransaction valueSeller

Ginza Toshiba Building16 1 billi

Over 100 billion

YEBISU GARDEN PLACE50 billi

50 – 100 billion

Tiffany Ginza Building38 billi

BIC CAMERA Ikebukuro29 billi

10 – 50 billionTransaction Value (Yen)

Year

Transactions Worth 10 Billion Yen or More Buyer

2007Hawks Town100 billionColony Capital (US)

16.1 billionToshibaTokyu Land Corporation

50 billionYEBISU GARDEN PLACEMorgan Stanley Group

Diamond City Leafa29.9 billionCampania Flore Ltd

Diamond City Terrace20.3 billioneyecity

38 billionTiffanyGoldman Sachs

29 billionSPC composed by BIC CAMERABIC CAMERA

Colony Capital (US)GIC Real Estate

Mitsukoshi Ikebukuro75 billionMitsukoshiSimplex REIT Partners

Campania Flore Ltd.Japan Retail Fund Investment Corp.

eyecityJapan Retail Fund Investment Corp.

Shibuya DUPLEX to16 billionSky Line Ltd.Union Investment

Kids park21.6 billionOsaka CityKansai Telecasting Corp

2008Simplex REIT PartnersUnion Investment

Ario19 billionIto-YokadoJapan Retail Fund Investment Corp. .

Kansai Telecasting Corp.

2009Ito-Yokado Higashiyamato City11.6 billionMikanohara Beta Three Ltd.Frontier Real Estate Investment Corp.

LaForet Harajyuku LaLaport IWATA

Copyright（C） 2011 Nomura Research Institute, Ltd. All rights reserved.53

2010(Jan-Sep)

LaForet Harajyuku21.8 billionMori BuildingMori Hills REIT Investment Corp.

LaLaport IWATA15.2 billionMitsui FudosanFrontier Real Estate Investment Corp.

Source: NRI based on Nikkei Real Estate Market Report



3 Office market





7 Hotel market


8 J-REIT market

The volume of motor freight has peaked out, and the domestic transportation market 6 Logistics property market

is shrinking.

The volume of motor freight transportation is on a declining trend, especially private motor freight in recent years.The volume of motor freight transportation is on a declining trend, especially private motor freight in recent years.Commercial motor freight had increased steadily until it reached a peak in around 2000.

Volume of motor freight transportation in Japan(Million Ton)

6,000

7,000

Private Commercial

(Million Ton)

4,000

5,000

2,000

3,000

0

1,000


0

FY50

FY55

FY60

FY65

FY70

FY75

FY80

FY83

FY84

FY85

FY86

FY87

FY88

FY89

FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

Source: NRI based Ministry of Land, Infrastructure, Transport and Tourism

New supply is smaller, while the size of individual properties is larger due a rising 6 Logistics property market

tendency for companies to consolidate their logistics functions.

While the number of newly developed warehouses has decreased in recent years, gross floor area per warehouse has expanded.While the number of newly developed warehouses has decreased in recent years, gross floor area per warehouse has expanded.The increasing size of warehouses is due to manufacturers’ requirement for larger, more high-performance warehouses in conjunction with their adoption of supply chain management and consolidation measures to reduce costs.As very few new warehouses have been supplied since the Lehman shock, there is currently a sense of shortage in new and large warehouses.

Number of warehouses and gross floor area per warehouse

60060,000

(Units) (Sq. meters)

400

500

40,000

50,000

200

300

20,000

30,000

0

100

0

10,000

Y88

Y89

Y90

Y91

Y92

Y93

Y94

Y95

Y96

Y97

Y98

Y99

Y00

Y01

Y02

Y03

Y04

Y05

Y06

Y07

Y08

Y09


FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY

Warehouse Gross floor space per sq. mtGross floor area per a warehouse Number Source: NRI based Ministry of Land, Infrastructure, Transport and Tourism

The overall vacancy rate remains stalled at a high level, but newly-developed large-6 Logistics property market

scale warehouses are enjoying higher occupancy rates.

Vacancy rates have been stalled at a high level since the first half of 2008, when a large number of new facilities became available in the Tokyo Vacancy rates have been stalled at a high level since the first half of 2008, when a large number of new facilities became available in the Tokyo Bay area.On the other hand, newly-developed warehouses have achieved comparatively high occupancy due to manufacturers’ demand for high-spec, large-scale facilities in conjunction with their adoption of consolidation and supply chain management measures.

Average vacancy rate of warehouses in Greater Tokyo

25.0%

15.0%

20.0%

10.0%

Notes:0 0%

5.0%


Notes:Area: Greater Tokyo including Tokyo, Kanagawa, Saitama and Chiba.Asset: Large multi-tenant properties whose total floor area is over 33,000 sq. meters

Source: NRI based on CBRE

0.0%

Mar‐04

Jun‐04

Sep‐04

Dec

‐04

Mar‐05

Jun‐05

Sep‐05

Dec

‐05

Mar‐06

Jun‐06

Sep‐06

Dec

‐06

Mar‐07

Jun‐07

Sep‐07

Dec

‐07

Mar‐08

Jun‐08

Sep‐08

Dec

‐08

Mar‐09

Jun‐09

Sep‐09

Dec

‐09

Mar‐10

Jun‐10

Asking rent for warehouses other than large properties has been decreasing since 6 Logistics property market

2008, when vacancy soared.

Rents in Chiba reversed trends upwards recently. Asking rent in the overall market remains low, however, and a full-scale recovery in rent levels Rents in Chiba reversed trends upwards recently. Asking rent in the overall market remains low, however, and a full scale recovery in rent levels has yet to be realized.Rents for new and large warehouses have held steady thanks to strong demand.

Asking monthly rents for warehouses in Greater TokyoAsking monthly rents for warehouses in Greater Tokyo（USD/sq. meter）

6,000

4,000

5,000

東京都

2,000

3,000東京都

神奈川県

埼玉県

千葉県

Tokyo

Kanagawa

Saitama

Chiba

0

1,000

Notes:


Notes:Area: Greater Tokyo including Tokyo, Kanagawa, Saitama and Chiba.Asset: Total floor area of over 3,300 sq. meters

Source: NRI based on CBRE

Transactions are recovering, especially acquisitions and development by foreign 6 Logistics property market

investors.

Logistics property transactions fell after the Lehman shock but rebounded in the first half of 2009. Acquisitions by foreign investors have shown particularly steep increases since the start of 2010.particularly steep increases since the start of 2010.Among investors from abroad, Asian investors such as Mapletree Investment have increased their presence, joining the ranks of the long-active European and US investors such as LaSalle.Prologis is concentrating on development rather than acquisitions in Japan. The investor has doubled the number of development projects in 2010 compared to 2009, and 50% of its global development budget is allocated to Japan. p , g p g p

Acquisitions by foreign investors in 2010

18

20

Transactions in logistics properties by buyer category

Mapletree InvestmentKashiwa II logistics center 44.6 Million USDSendai logistics center 14.9 Million USDIwatsuki logistics center 48.0 Million USD12

14

16

18

Iwatsuki logistics center 48.0 Million USDIruma logistics center 34.0 Million USDNoda logistics center 48.0 Million USD

LaSalle Investment Management6

8

10

12

LaSalle Investment ManagementThree warehouses in Tokyo Bay area N.A.

0

2

4

6


2008_1H 2008_2H 2009_1H 2009_2H 2010_1H 2010_2H

外資系国内

(As of Aug.)

Foreign Investors

Domestic Investors Source: NRI based on NilleiBP

Cap rates, which had been rising steadily since mid-2008, has leveled off since the 6 Logistics property market

start of 2010.

8 00%

Cap rates for logistics properties

6 00%

7.00%

8.00%

4 00%

5.00%

6.00%東京・シングルテナント

東京・マルチテナント

Single-tenant warehouses in Tokyo

Multi-tenant warehouses in Tokyo

2 00%

3.00%

4.00%

千葉・シングルテナント

千葉・マルチテナント

Single-tenant warehouses in Chiba

Multi-tenant warehouses in Chiba

0 00%

1.00%

2.00%

Notes:


0.00%


Notes:Single-tenant warehouses: Total floor area of approx. 10,000 sq. meters with two or three floors.Multi-tenant warehouses: Total floor area of 30,000 sq. meters with three or four floors.



3 Office market





7 Hotel market


8 J-REIT market

7 Hotel market

Hotel demand shrinks only slightly despite financial crisis and new influenza virus.

In 2009, guest nights in Japanese hotels decreased only 2.7 percent from 2008 despite a sharp decline in business activity (fewer business trips) following the 2008 financial crisis and the new influenza virus. Demand from overseas visitors decreased a steep 17.8 percent, while demand from domestic travelers decreased a small 1.5 percent.

350

Hotel Guests in Japan (Guest-Nights)

309 310 301+0.1% -2.7%

（millions）

23 22 18

200

250

300 309 310 301

-1.8% -17.8%

287 287 283

100

150

200

系列1

系列2Domestic guest nights

Overseas guest nights+0.3% -1.5%

0

50

2007年 2008年 2009年2007 2008 2009


年年年

62

Source: NRI based on Japan Tourism Agency

7 Hotel market

Hotel demand is currently set to recover to the 2007 level.

Hotel demand from domestic guests has remained stable even after the financial crisis. Overseas guests, which decreased from the third quarter of 2008 to the fourth quarter of 2009, recovered to the pre-crisis level in the first quarter of 2010.

Domestic Guest Nights in Japanese Hotels Overseas Guest Nights in Japanese Hotels

80

90

6

7

（millions）（million s）

40

50

60

70

2007

20083

4

5

2007

2008

10

20

302009

2010

1

2

32009

2010

Impacts of financial crisis and new influenza virus

0

1Q 2Q 3Q 4Q

0

1Q 2Q 3Q 4Q



The Japanese government is promoting travel to Japan, and visitors from abroad 7 Hotel market

are anticipated to increase hereafter.

The Japanese government sees the tourism industry as a strategic driver of economic growth and has initiated a program to promote Japan as a The Japanese government sees the tourism industry as a strategic driver of economic growth and has initiated a program to promote Japan as a travel destination. The government target is 25 million visitors from abroad by 2020, up three times from 2010.

Visitors from Abroad

2,5002 500

3,000

Gov’t Target（2010～）Results（～2009）（thousand persons）

30,000

25 000

25,000

1,500

2,000

1 500

2,000

2,50025,000

20,000

15 000

20,000

15,000

679

1,0001,000

1,50015,000

10,00010,000

679

0

500

90 95 000

005

010

013

016

019

50,000

0

6,790


19 19 20 20 20 20 20 20


7 Hotel market

There is enormous potential to increase visitors from China.

More than 12.7 million Chinese travelers visited Japan in 2009, surpassing the number of visitors from South Korea (12.0 million) and Taiwan (8.5 million). There is still considerable room for growth, as the ratio of outbound travelers to total population in China is only about 1 percent, which is much lower than that of other countries.

Outbound Travelers by Major Country

140%

160%

70,000

80,000 系列2 系列1Number of outbound travelers (left scale)

Ratio of outbound travelers to national population(right scale) （thousand persons）

80%

100%

120%

40,000

50,000

60,000

,

20%

40%

60%

10,000

20,000

30,000

0%0

Ger

man

y

ed K

ingd

om

nite

d S

tate

s

Rus

sia

Italy

Can

ada

Fran

ce

Net

herla

nd

Japa

n

Mex

ico

Chi

na

Sout

h K

orea

Spa

in

Indi

a

Taiw

an

Sing

apor

e

Hon

g K

ong

Aus

tralia

Indo

nesi

a

Thai

land


Uni

te Un S

Source: NRI based on JNTO

7 Hotel market

Visitors from China has risen consistently both before and after the financial crisis.

Travelers from South Korea and the United States decreased significantly over the past three years, while visitors from ChinaTravelers from South Korea and the United States decreased significantly over the past three years, while visitors from Chinacontinued to increase in the same period.

Overseas Visitors to Japan by Country of Origin（million persons）

4

5

2

3系列1

系列2

系列3

South Korea

China

1

2 系列3

系列4

系列5

Hong Kong

Taiwan

United States

0

2007年 2008年 2009年2007 2008 2009



A key factor boosting travel from China is the Japanese government’s easing of visa 7 Hotel market

restrictions.

In July 2010 the Japanese government eased restrictions on travel from China, deciding to grant visas to middle-income single travelers in addition

Japanese Governments Policy on Travelers from China

to group and family travelers and affluent single travelers. Soon after, visitors from China increased sharply. Chinese travelers arriving in Narita airport, the biggest international airport in and around Tokyo, increased 80 percent year-on-year in July-August 2010.

p y

Sep. 2000 Started granting travel visas to group travelers from the 3 highest developed regions

Sep. 2004 Started granting travel visas to group travelers from 4 other developed regions

July 2005 Started granting travel visas to group travelers from all regions

Mar. 2008 Started granting travel visas to family members traveling together

July 2009Started granting travel visas to affluent single travelers

（ l i f th 35 000 USD）

Less than100 million

（annual income of more than 35,000 USD）

July 2010Started granting travel visas to middle-income single

travelers （annual income of more than 8 000 USD）

400million


travelers （annual income of more than 8,000 USD） people

7 Hotel market

In addition, the Haneda Airport expanded its international access significantly.

Haneda Airport, the closest airport to the Tokyo metropolitan area, was originally primarily a domestic airport with limited international service. Haneda Airport, the closest airport to the Tokyo metropolitan area, was originally primarily a domestic airport with limited international service. There are currently plans to expand Haneda’s international access by nine times compared to 2009. The airport opened a new international terminal and a runway in October 2010. Haneda will eventually rank second in Japan in terms of the number of international flights processed. In addition, access from Haneda to the Tokyo metropolitan area has improved greatly.

17

15

20 200

150

170

（1000 flights）

Number of Inbound and Outbound International Flights Haneda’s International Network

BeijingSeoul

ShanghaiHong Kong

Haneda

LondonParis

VancouverSan Francisco

LA

NY

9 7

6

3 2

5

10

15 150

100

50

90

70 60

30 20 Hong KongBangkok

Kuala LumpurSingapore

Kota Kinabalu

TaipeiHonolulu

2 1

0

国際

空港

年度

～）

国際

空港

年度

～）

国際

空港

福岡

空港

10年

度）

0

2010

kyo

Nar

ita

eda

2014

Osa

ka

eda

2011

Nag

oya

Fuku

oka

eda

2010

Black : Current International LinerBlue: New International routes launched in 2010

成田

国

羽田

空港

（2014

年

関西

国

羽田

空港

（2011

年

中部

国福

羽田

空港(～

201

Tok

Toky

o H

ane

Toky

o H

ane

Toky

o H

ane


羽羽


7 Hotel market

Tokyo is anticipated to benefit the most from increased international tourists.

Tokyo is one of Japan’s most popular travel destinations for international travelers. There are many places to visit such as ancient temples, huge

Travel Destinations of Visitors from Abroad by Country of Origin (2009)

Tokyo is one of Japan s most popular travel destinations for international travelers. There are many places to visit such as ancient temples, huge shopping centers and diverse fancy restaurants. Kanagawa and Chiba are located next to Tokyo. Kanagawa is the location of Japan’s second largest city: Yokohama. Chiba has the biggest international airport: Narita. Kyoto is the ancient capital of Japan and boasts numerous cultural properties and historical sites. Osaka is the biggest city in western Japan.

Region to go

Country From 1st 2nd 3rd 4th 5th

y y g ( )

South Korea（N=3,716）

Tokyo（45.0%）

Osaka（21.6%）

Fukuoka（20.3%）

Kyoto（11.1%）

Kanagawa（9.7%）

Taiwan（N=2,286）

Tokyo（44.3%）

Osaka（23.7%）

Kyoto（15.8%）

Chiba（15.8%）

Kanagawa（15.0%）

China（N=2,068）

Tokyo（70.8%）

Osaka（41.6%）

Kanagawa（30.1%）

Kyoto（29.4%）

Chiba（23.1%）

Hong Kong（N 1 100)

Tokyo（53 7%）

Osaka（19 6% ）

Hokkaido（17 3%）

Chiba（13 9%）

Kyoto（10 2%）（N=1,100) （53.7%）（19.6% ）（17.3%）（13.9%）（10.2%）

United States（N=1,516）

Tokyo（66.5%）

Kyoto（20.4%）

Kanagawa（20.3%）

Osaka（17.2%）

Chiba（11.2%）

Foreign Travelers Total Tokyo Osaka Kyoto Kanagawa Chiba


Foreign Travelers Total（N=15,355）

Tokyo（58.8%）

Osaka（24.4%）

Kyoto（20.6%）

Kanagawa（16.7%）

Chiba（12.7%）

69

Source: NRI based on JNTO

7 Hotel market

Occupancy rates have recovered to the pre-crisis level.

Hotel occupancy rates in 2010 have been running at a higher level than in 2009, although not as high as in 2007 and 2008. A look at hotel

Hotel Occupancy Rates Hotel Occupancy Rates in Tokyo and Osaka

Hotel occupancy rates in 2010 have been running at a higher level than in 2009, although not as high as in 2007 and 2008. A look at hotel occupancy rates by region shows that Tokyo has the highest rate. The rate of improvement in occupancy rates is also the highest in Tokyo.

(%) Hotel Occupancy Rates Hotel Occupancy Rates in Tokyo and Osaka

80

100Area July 2010 July 2009 Rise and Fall

T k 80 7％ 76 2% 4 5% t

(%)

40

60 2007年

2008年

2009年

Tokyo 80.7％ 76.2% 4.5%pt

Osaka 56.1% 59.7% -3.6%pt2009

2007

2008

0

202010年

Japan 65.0% 60.8% 4.2%pt

2010

1月 2月 3月 4月 5月 6月 7月 8月 9月 10月11月12月 Source: NRI based on Zen Nihon City Hotel Renemei Jan Feb Mar Apr May Jun Jul Aug SepOct Nov Dec


7 Hotel market

Hotel development has slackened since the financial crisis.

Hotel construction or expansion plans decreased sharply from over 40,000 rooms in June 2006 to 30,000 rooms in June 2010. Hotel construction or expansion plans decreased sharply from over 40,000 rooms in June 2006 to 30,000 rooms in June 2010. Hotel development activity is concentrated mostly in Tokyo, Kinki (including Osaka and Kobe), and Okinawa.

43,242

37 502

50,000

5,662 90%

100%

Hotel Construction and Expansion Plans by Region(number of rooms planned in June 2010; total 31,357 rooms)

Hotel Construction or Expansion Plans(number of rooms)(rooms)

23,467

37,502

31,357

20 000

30,000

40,000

4,696

1,755 568

2,594

5,66

60%

70%

80%

90%

15,194

0

10,000

20,000

6,389

1,727 3,286

20%

30%

40%

50%

0

02/06

04/06

06/06

08/06

10/06

601 1,273 2,806

0%

10%

okka

ido

Toho

ku

Kan

to

Toky

o

Chu

bu

kina

wa

hine

tsu

Kin

ki

Chi

na

Shik

oku

Kyus

yu

June2002

June2004

June2006

June2008

June2002


Ho T

Toka

i Ok

Kos

h S K

Source: NRI based on HOTERES

7 Hotel market

If the government goal is realized, Tokyo will require a considerable volume of new supply.

（1000 t ）

Comparison of Available Supply and New Demand(All Japan)

Comparison of Available Supply and New Demand(Tokyo)

（1000 t ）

17,000

100 000

150,000

15,000

20,000

Newly Supplied Rooms in 2010

（1000 stays）（1000 stays）

123,000 50,000

100,000

14,400

3,500 10,000 Vacant Rooms

44,000

0

1 2

9,000

0

5,000

1 2New Supply New Demand New Supply New Demande Supp y& Vacant

Source: NRI based on Japan Tourism Agency HOTERES

2010～2019e Supp y& Vacant 2010～2019


Source: NRI based on Japan Tourism Agency, HOTERES

7 Hotel market

After the Financial Crisis, there have been no major hotel deals.

The hotel sector is one of the asset classes that have increased liquidity over the last ten years. There were several big deals including Morgan

Major Hotel Transactions in Japan in Recent Years

The hotel sector is one of the asset classes that have increased liquidity over the last ten years. There were several big deals including Morgan Stanley’s 2.8 billion acquisition of 13 ANA Hotels. However, not many people have been investing in hotels recently.

Date Hotel Properties Asset Price Sell Side Buy Side

Apr. 2002 Hotel Okura Kobe 165 million USD Hotel Okura AIG

Feb. 2004 Shin-Kobe Oriental Hotel 125 million USD Daiei Morgan Stanley

Nov. 2004 Westin Hotel Tokyo 500 million USD Sapporo Holdings Morgan Stanley

Jan, 2006 Hotel Nikko Aribira 197 million USD Frank Forton Investment Japan Hotel and Resort Inc

Feb. 2006 Makuhari Prince Hotel 132 million USD Seibu Railway APA group

Apr; 2006 Royal Hotel 150 million USD Royal Hotel Mori Trust

Sep. 2006 Hotel Okura Kobe 190 million USD Rumda Properties Japan Inc Mori Trust REIT

Feb. 2007 Roppongi Prince Hotel 407 million USD Seibu Railway Sumitomo Fudosan

Mar. 2007 Hotel President Aoyama 164 million USD Chuo Bussan Da Vinci Advisers

Apr. 2007 ANA Hotels (13 hotels) 2,800 million USD All Nippon Airway Morgan Stanley

Feb. 2008 Westin Hotel Tokyo 770 million USD Morgan Stanley GIC Real Estate


y g y

Dec, 2008 Hotel Gracery Tamachi 41 million USD NA Hankyu REIT

7 Hotel market

Cap rates are increasing gradually.

Hotel cap rates have increased approximately 100 BP since the Financial Crisis.Hotel cap rates have increased approximately 100 BP since the Financial Crisis.

Cap Rate Trend of Hotelsp

7.0%

8.0%

系列1

系列2

Tokyo

Sapporo

4.0%

5.0%

6.0% 系列2

系列3

系列4

Sapporo

Nagoya

Osaka

1 0%

2.0%

3.0% 系列5Fukuoka

0.0%

1.0%

ct‐05

eb‐06

un‐06

ct‐06

eb‐07

un‐07

ct‐07

eb‐08

un‐08

ct‐08

eb‐09

un‐09

ct‐09

eb‐10


Oc

Fe Ju Oc

Fe Ju Oc

Fe Ju Oc

Fe Ju Oc

FeSource: NRI based on various sources



3 Office market





7 Hotel market


8 J-REIT market

Introduced in the year 2000, the J-REIT market has shrunk by half from the peak, 8 J-REIT market

with capitalization at approximately 3.0 trillion yen as of October 2010.

The J-REIT market started In September 2001 with 2 listings and a market capitalization of approximately 25 billion yen.The J REIT market started In September 2001 with 2 listings and a market capitalization of approximately 25 billion yen.Currently, there are 36 listed J-REITs with a total share value of approximately 3.0 trillion yen as of October 2010.

J-REIT market capitalization


Source: NRI based on Bloomberg

The Tokyo Stock Exchange (TSE) REIT Index has moved more or less in tandem 8 J-REIT market

with TOPIX and has been less volatile than the listed Real Estate Industry Index.

The TSE REIT Index has been more stable than the TSE Stock Price Index by Real Estate Industry but has dropped sharply from its peak in May The TSE REIT Index has been more stable than the TSE Stock Price Index by Real Estate Industry but has dropped sharply from its peak in May 2007.

TSE REIT Index, TOPIX, and TSE Stock Price Index by Real Estate Industry


Note: March 2003 = 1,000.


The average dividend yield of J-REITs has remained in the 3.0% - 6.0% range 8 J-REIT market

except during the global financial crisis period.

The dividend yield of J-REITs rose steeply in September 2008 but has fallen back to around 6% at present. The dividend yield of J REITs rose steeply in September 2008 but has fallen back to around 6% at present.

Expected Dividend Yield of J-REIT



The investment attitudes toward J-REITs of both local individuals and foreign 8 J-REIT market

investors changed dramatically after the global financial crisis.

Around the time of the global financial crisis, foreign investors changed their investment behavior toward J-REITs, switching from net buying to Around the time of the global financial crisis, foreign investors changed their investment behavior toward J REITs, switching from net buying to net selling.

J-REIT Trading Volume by Investor Type

Net B

uyingN

et Sellinng


Source: NRI based on Tokyo Stock Exchange

8 J-REIT market

M&A activity has increased in the J-REIT market since November 2008.

Listed J-REITs as of October 2008 Listed J-REITs as of October 2010

NO. Code REIT Sector1 8951 Nippon Building Fund Office2 8952 Japan Real Estate Office3 8953 Japan Retail Fund Retail4 8954 ORIX JREIT Diversified5 8955 Japan Prime Realty Diversified6 8956 P i Di ifi d

NO. Code REIT Sector1 8951 Nippon Building Fund Office2 8952 Japan Real Estate Office3 8953 Japan Retail Fund Retail4 8954 ORIX JREIT Diversified5 8955 Japan Prime Realty Diversified6 8956 Premier Diversified 6 8956 Premier Diversified

7 8957 TOKYO REIT Diversified8 8958 Global One Real Estate Office9 8959 Nomura Real Estate Office Fund Office

10 8960 United Urban Diversified11 8961 MORI TRUST Sogo REIT Diversified12 8963 Invincible Diversified13 8964 Frontier Real Estate Retail14 8966 CRESCEND Di ersified

6 8956 Premier Diversified7 8957 TOKYO REIT Diversified8 8958 Global One Real Estate Office9 8959 Nomura Real Estate Office Fund Office

10 8960 United Urban Diversified11 8961 MORI TRUST Sogo REIT Diversified12 8962 Nippon Residential Residential13 8963 Invincible Diversified14 8964 Frontier Real Estate Retail 14 8966 CRESCEND Diversified

15 8967 Japan Logistics Fund Industrial16 8968 Fukuoka REIT Diversified17 8972 Kenedix Realty Diversified18 8973 Sekisui House SI Diversified19 8975 FC Residential Diversified20 8976 Daiwa Office Office21 8977 Hankyu REIT Diversified22 8979 Starts Proceed Diversified

14 8964 Frontier Real Estate Retail15 8965 New City Residence Residential16 8966 CRESCEND Diversified17 8967 Japan Logistics Fund Industrial18 8968 Fukuoka REIT Diversified19 8969 Prospect REIT Diversified20 8970 Japan Single Residence Diversified21 8972 Kenedix Realty Diversified22 8973 Sekisui House SI Diversified 22 8979 Starts Proceed Diversified

23 8981 Japan Hotel and Resort Hotel24 8982 TOP REIT Diversified25 8983 JAPAN Office Office26 8984 B Life Diversified27 8985 Nippon Hotel Fund Hotel28 8986 Japan Rental Housing Residential29 8987 Japan Excellent Diversified30 3226 Nippon Accommodations Fund Residential

22 8973 Sekisui House SI Diversified23 8974 LaSalle Japan Diversified24 8975 FC Residential Diversified25 8976 Daiwa Office Office26 8977 Hankyu REIT Diversified27 8978 Advance Residence Residential28 8979 Starts Proceed Diversified29 8980 LCP Diversified30 8981 Japan Hotel and Resort Hotel 30 3226 Nippon Accommodations Fund Residential

31 3227 MID REIT Diversified32 3229 Nippon Commercial Diversified33 3234 MORI HILLS REIT Diversified34 3240 NOMURA REAL ESTATE RESIDENTIAL Residential35 3249 Industrial & Infrastructure Fund Industrial36 3269 Advance Residence Residential

30 8981 Japan Hotel and Resort Hotel31 8982 TOP REIT Diversified32 8983 JAPAN Office Office33 8984 B Life Diversified34 8985 Nippon Hotel Fund Hotel35 8986 Japan Rental Housing Residential36 8987 Japan Excellent Diversified37 3226 Nippon Accommodations Fund Residential38 3227 MID REIT Diversified


38 3227 MID REIT Diversified39 3229 Nippon Commercial Diversified40 3234 MORI HILLS REIT Diversified41 3240 NOMURA REAL ESTATE RESIDENTIAL Residential42 3249 Industrial & Infrastructure Fund Industrial

8 J-REIT market

J-REITs more than doubled their acquisitions in 2010 on a year-over-year basis.

Acquisitions by J-REITs have picked up slightly since the start of 2010, following a downturn in the third quarter of 2009.Acquisitions by J REITs have picked up slightly since the start of 2010, following a downturn in the third quarter of 2009.

図表題フォント：MSPゴシックサイズ：14 色：黒

J-REIT Acquisition Volume

図表題フォント：MSPゴシックサイズ：14 色：黒例)Tokyoオフィス市場の賃料推移


Note: 2010 3Q is up to August


Authors

SungYoon [email protected]

Lead author and author of

Tomohiko [email protected]

Lead author and author of 4 R id ti l k tLead author and author of

2 Overview of Japanese real estate market3 Office market

4 Residential market8 J-REIT market

Daisuke ISHIHARA Atsushi KOGUCHIa koguchi@nri co [email protected]

Author of 7 Hotel market

[email protected]

Author of 6 Logistics property market

Shoko [email protected]

Yasuyuki [email protected]

Author of 4 Residential market5 Retail property market

Author of 1 Macro fundamentals of Japan6 Logistics property market


Japanese Real Estate Investment Market 2011 · The value of the Japanese real estate investment...

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