JAPAN REAL ESTATE MARKET REPORTJune 2013

【Macroeconomy 】

—Expectation of High Economic Growth Rate—

The Japanese economy recorded a high real GDP growth rate of +4.1%(YoY) over Q1 2013. The high growth was driven by strong householdconsumption (private final consumption expenditure grew by +3.6%)and increased public-sector expenditures (public demand grew by+1.7%).

In response, most economists have revised upward projected growthrates for 2013-2014. Full-fledged public investment is expected toresult from the supplementary budget beginning in April 2013. Inaddition, average compromise figures for summer bonuses agreed to bylabor and management, collected by the Japan Business Federation(Keidanren), show high growth of 7.37% YoY, so that householdconsumption can be expected to continue increasing. For the year 2014,while household consumption is expected to decrease beginning inApril 2014 due to the effects of increased consumption tax, a number ofeconomists expect consumption to be underpinned by factors includingthe assets effects of the devalued yen and high stock markets. Also,many expect exports to increase since overseas economies are expectedto recover fully and the devalued yen will fully impact corporateprofits. Trends in foreign-exchange and equity markets, along withoverseas economic trends, are likely to be risk factors.

【Fig.1】Real GDP Growth Rate & TOPIX

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1Note: GDP outlook is from Bloomberg consensusSource: The Cabinet Office, Bloomberg

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Contents1. Hot Topic

Macro Economic Trends・・・・・1

Rental Office Market・・・・・・・・2

J-REIT Market ・・・・・・・・・・・・・3

Real Estate ・

Investment Market・・・・・・・4

2. Market view

Population Trend in 2012 and Projection in the Future・・・・・・6

3. Real Estate

Investment Market ・・・・・・・・8

3. J-REIT Market・・・・・・・・・・・・・・9

4. Office Market: Tokyo・・・・・・・・10

5. Rental Apartment Market・・・・・11

6. Logistic Facility/

Retail Facility・・・・・・・・・12

http://www.kenedix.com/

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10 years JGB Yield

Yield of J-REIT

Yeild Spread

Impact of Rising Interest Rates

Rising interest rates actually are a main cause of rising costs for J-REITs. For this reason, we attempted toverify the degree of their impact. In H2 2012, the value of assets owned by J-REITs was approximately JPY9trillion, while they held approximately JPY4 trillion in interest-bearing debt, earned about JPY280 billion inrental-business revenues, and had roughly JPY34.5 billion in interest-related costs (total of interest paid,financial costs, and interest paid on investment corporation bonds), paying an average annual interest rate of1.69%. Since the financial crisis, each J-REIT has made progress on lengthening the terms of its borrowing.Accordingly, we assumed an average remaining period on interest-bearing debts of three years, and we assumedthat the properties invested in were office buildings. A rough estimate based on these assumptions shows that anincrease of 30 bp in the base interest rate would result in an increase of approximately JPY4 billion per year ininterest-related costs (total interest-bearing debt * 1/3 * 30 bp, assuming one-third of interest-bearing debt isrefinanced in a year). In such a case, revenues need to increase by 1.46% in order to offset the rise in interest-related costs with an increase in revenue. Assuming a usual lease period of two years for an office building, inany given year opportunities to raise rents would be available for one-half of the properties held, so that actually

Long-Term Interest-Rate Trends and the J-REIT Market

In the equity markets, TOPIX hit a recent peak on May 22 before falling massively by -6.9% on May 23. Sincethen, its tone has remained bearish (as of the end of May). On the other hand, the TSE REIT Index hit its recentpeak earlier, on March 27, experienced some ups and downs after that, and then started to decrease fasteraround early May. A main cause of the decline in the J-REIT market is probably the rapid increase in yields on10-year JGBs. Since the BoJ decided to introduce qualitative and quantitative monetary easing on April 4, theyield on 10-year JGBs has risen rapidly, to 0.857% on May 31 — up roughly 0.4 % points in less than twomonths from its April 4 level of 0.446%.

From a look at past trends, no negative correlation is apparent between J-REIT investment unit prices andyields on 10-year JGBs (fig.2). While there sometimes is a negative correlation in the short term, over themedium to long term there appears to be a positive correlation instead. This is because during an economicexpansion interest rates rise simultaneously with increases in REIT revenues (i.e., rising rents). Comparison ofJ-REITs and 10-year JGBs as investments shows that since an increase in the yields on 10-year JGBs means adecrease in the yield spread, it makes J-REITs less attractive as investments. To avoid this effect, J-REITs needto increase their dividend yields. In other words, either investment unit prices will need to decrease or dividendamounts will need to increase. While investment unit prices fall because it is hard to increase dividend amountsover the short term, the ability to increase dividend amounts is likely to be more important over the medium tolong term.

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2

【Fig.2】TSE REIT Index & Yield on 10 Years JGB

rents would need to increase by 2.92%.Similarly, if the base interest rate has risenby 100 bp rents would need to rise by 9.74%to avoid a decrease in profits. Whether thisseems high or low is likely to depend on therental office market. Since for many REITsroughly 60-90% of their debt has fixedinterest rates, the actual impact of risinginterest rates is likely to be smaller than thisestimate.

【Fig.3】Yeild Spread

Source: Kenedix prepared based on Bloomberg Source: Kenedix prepared based on Bloomberg

【Fig.4】Impact on J-REIT from Rising Interest Rate

Source: Kenedix prepared based on Bloomberg

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30bp 50bp 100bp

liability with interest （trillion yen） 4,088

Total Asset (trillion yen) 9,052

Revenue from rental business (billion yen) 279.93

Interest cost (billion yen) 34.52 38.61 41.33 48.15

Increased cost (billion yen) 4 7 14

Average rate (annual rate) 1.69% 1.89% 2.02% 2.36%

Increasing rate of revenue need to offset increaseing cost 1.46% 2.43% 4.87%

Needed increaseing rate of rental unit cost 2.92% 4.87% 9.74%

H2 2012Result

Range of riging interest rate

【Rental Office Market】

A Rental Office Market in which Rent Increases are Expected

When interest rates rise, attention turns to trends in office rents. When procurement interest rate rises, incomereturns will fall unless rents rise too. Having overcome the massive addition to supply in 2012, the rental officemarket today is on the verge of entering a phase in which rent increases can be expected, as vacancy rates arecurrently in a decreasing trend. In fact, the Rent Index (on an actual rent basis) published jointly by SankoEstate and NLI Research Institute shows an increase in rents (up 15.8% QoQ in Q1 2013 for class-A buildingsin central Tokyo).

Some research institutions publish forecasts on the office market. Most of these seem to expect strongconditions in the office market over the years 2013-2015. The Office Rent Forecast for spring 2013 publishedjointly by the Japan Real Estate Institute and Miki Shoji forecasts a rebound in office rents in 2013 andcontinuing increases in 2014 as well. It forecasts a rate of increase in rents of 3.9% in 2013 and 9.1% in 2014.While it expects a slowing of the rate of increase in rents in 2015-2016, it still forecasts increases in the 3-5%range in those years as well. (These forecasts are for figures as of December each year.) On the other hand, rentforecasts based on the above Rent Index published jointly by Sanko Estate and NLI Research Institute (forclass-A buildings in central Tokyo) predict a high rate of growth in 2014 at +23.9% but a decrease of -2.9% in2015. (These forecasts are for Q1 in each year.) Both of these studies project a more bearish tone in the officemarket in 2016-2017 compared to 2013-2015, due to a dulling of economic growth and an increase in supply.

【J-REIT Market】

An Inflow of Funds Into the J-REIT Market Continues

While REIT unit prices remain in a bearish trend, there is no weakening in J-REITs’ fund-raising appetites. InQ1 2013, the amount of capital increases by J-REITs recorded its highest level ever on a quarterly basis atJPY370 billion. Even since the start of Q2, fund-raising already is planned to be in the JPY300 billion range asseven J-REITs have announced public offerings, including initial public offering of Nomura Real Estate MasterFund through the end of May.

Acquisition of properties by J-REITs is lively too, and in Q1 2013 it also reached a new record high ofJPY801.5 billion. A large increase in acquisitions of large-scale logistic facilities resulting from the listing ofmultiple logistic facility REITs had a major impact on this result. In April 2013, the asset size of J-REITs (totalpurchase price of real estate in their portfolios) reached JPY10 trillion.

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【Fig.5】Outlook of Rental Office Market （2012＝100）

Note: Outlook: after 2013 by Japan Real Estate Institute, after 2014 by NLI-Research Institute

Target Bldg.: Japan Real Estate Institute:100 tsubo and over for standardfloor area (2,650 Bldg. on the end of 2012), NLI-Research: Bldg. selected by them (140 Bldg.)

Source: Kenedix prepared based on Japan Real Estate Institute/Miki Shoji. Co.,Ltd., NLI Research Institute/Sanko Estate Co., Ltd.

Source: Mori Trust

【Fig.6】Office Supply

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【Real-Estate Investment Market】

Investors’ Expected Yields have Entered a Full-Fledged Decreasing Trend

According to the Japanese Real Estate Investor Survey published semiannually by the Japan Real EstateInstitute, the expected yields of real-estate investors in the Marunouchi/Otemachi district of Tokyo has fallenfor the first time in roughly four years, to 4.3%. Also, expected yields on office properties fell in all of the spotssurveyed in Tokyo. While the drop in expected yields on offices has been slower to appear than that forresidential properties, the market for investment in office buildings probably can be said to have fully entered aphase of a decreasing capitalization rate.

Expected yields for residential properties have been in a decreasing trend since H2 2009, and most areascontinued to record decreases in this period as well. For retail facilities, expected yields in Tokyo/Omotesandohave fallen for the first time in four quarters. Capitalization rates in Omotesando show higher volatility than inGinza. While Omotesando’s expected yields were largely at the same levels as those of Ginza from 2004 to2008, they have risen by more than those in Ginza since H2 2008, showing rates up to 30 bp higher than inGinza. The fact that the gap in expected yields with Ginza has shrunken somewhat can be said to be a sign of anapproaching boom in the real estate investment market. In addition, in most areas other than Tokyo investmentyields have fallen by 10-20 bp, in both urban and suburban areas. Expected yields are decreasing in most areasfor logistic facilities as well, by up to 30 bp (in inland areas in the city of Nagoya), so that compared to otherassets these facilities seem to be experiencing decreases in expected yields at a faster rate.

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【Fig.7】Volume of Equity Financing by J-REITs

Company NameAnnounce

DateFinancing Value (JPY in billion)

Daiwa House REIT Mar-13 11.5

Orix JREIT Mar-13 20.0

Japan Hotel REIT Apr-13 20.6

Sekisui House SI Apr-13 10.9

Starts Proceed Apr-13 6.6

Nomura Real Estate Master Fund May-13 175.1

Ichigo Real Estate May-13 6.0

Nippon Prologis REIT May-13 72.0

Hankyu REIT May-13 10.7

【Fig.8】Equity Financing by J-REITs

【Fig.9】Acquisition by J-REITs

Source: Kenedix prepared based on Bloomberg Source: Kenedix prepared based on J-REIT data

Source: Kenedix prepared based on data of J-REITs

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5

A Clear Increase in Land Values

According to “the Land Value LOOK Report” published by the Ministry of Land, Infrastructure, Transport andTourism once each quarter, trends in land values in 150 intensively use districts of leading cities in Q1 2013showed increases in 80 districts, remained unchanged in 51 districts, and decreased in 19 districts, so that thenumber of districts with rising land values accounted for the majority of districts surveyed for the first time inroughly five years, since Q4 2007. The numbers of districts with rising land values increased in particularamong the commercial districts of large metropolitan areas and in residential districts of Tokyo area. In the

Tokyo and Osaka areas, the numbers of districtsin which land values increased exceeded thenumbers of districts in which they remainedunchanged, and in the Osaka and Nagoya areasthere were no districts in which land values fell.

While there is a number of types of statisticalmaterials showing trends in land values, such as“Official Land Values” and “The Urban LandPrice Index”, this “Land Value LOOK Report”is a relatively new study intended to “clarifythose land value trends of intensively useddistricts in major cities on a quarterly basis,which tend to indicate property market trendsleadingly”. For this reason, it can be said thatwhile it cannot be used to look at long-termtrends it can be used to learn land value trendsmore quickly than other studies.

【Office】

【Logistics】【Retail】

【Residential】

【Fig.10】Real Estate Investor’s Expected Cap Rate

Source: Japan real estate institute

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【Fig.11】Land Value (Land Value Look Report)

Source: The Ministry of Land, Infrastructure, Transport and Tourism

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(million people) Jan-12 Jan-13 change

Nationwide 127.7 127.5 -0.16%

Tokyo 23 wards 9.0 9.0 0.41%

Nagoya city 2.3 2.3 0.06%

Osaka city 2.7 2.7 0.26%

Fukuoka city 1.4 1.5 2.68%

Source: respective city

The National Institute of Population and Social Security Research has released its population projections forJapan by region. Based on the 2010 national census, these statistics estimate the future population in five-yearintervals over the 30-year period through 2040, by prefecture and by municipality. The following is an overviewof the movement of population in 2012 and future population estimates on a nationwide level and for the 23wards of Tokyo, an area of high interest.

6

Market View

though on a prefectural level more people are moving outward than inward include the cities of Sapporo,Sendai, Niigata, Okayama, and Hiroshima.

In the 23 wards of Tokyo, 21 wards other than Edogawa and Katsushika are estimated to have increasingpopulations. Chuo Ward had the highest rate of increase at 2.83%, followed by Chiyoda Ward at 2.3%, as therate of increase in population appears to be particularly high in central Tokyo. A breakdown of the populationincrease of 36,000 people in the 23 wards of Tokyo during 2012 shows a population inflow of 44,000, a naturaldecrease (excess of deaths over births) of 300, and a decrease of 7,000 for other reasons, so that inflow ofpopulation was the main cause of the increase. However, in Chiyoda and Chuo wards, where the rate ofpopulation increase was high, natural increases (excesses of births over deaths) occurred simultaneously withthe population inflow.

Market View

【Fig.12】Population in Major City

【Fig.13】Percentage Change from Previous Year by Factor in Tokyo 23 wards

Population Trends in 2012

Japan’s total population as of January 1, 2013 is estimated to be127,460,000. This reflects a decrease of approximately 200,000people, or 0.16%, from the previous year. However, the inflowof population into the three large metropolitan areas continues,and the populations of leading cities are increasing. The totalpopulation of the 23 wards of Tokyo grew by +0.41% YoY,while that of Osaka grew by +0.26%, that of Nagoya by+0.06%, and that of Fukuoka by +2.68%. As the trend towardinflow of population to urban areas continues, the three largemetropolitan areas show a strong tendency toward more peoplemoving inward than outward. Even outside the three largemetropolitan areas, there are many cases of more people movinginward than outward in central cities. Examples of cases of morepeople moving inward than outward in central cities even

Source : Tokyo Metropolitan Government

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【Fig.14】Population Projection in Tokyo23 wards

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Future Population Estimates for the 23 Wards of Tokyo

The population of the 23 wards of Tokyo in 2025 isestimated to be 8.97 million, up approximately 0.3% fromthe 2010 figure. However, the 23 wards’ population isestimated to decrease in 2030. The ward expected to see thelongest continual increase in population is Koto, where thepopulation is projected to grow until 2035. Wards projectedto continue growing in population until 2030 are Chuo,Sumida, and Minato, although the estimated rate of increasein the population of Sumida Ward is low. Shinjuku andNerima wards are projected to see continued populationgrowth until 2025. Both these wards show very similartrends, with estimated rates of population growth in the 3%range over the years 2010-2015 and in the 1% range in2015-2020. In addition, seven wards are projected toexperience population growth until 2020 and five until2015, while five are projected to already experiencepopulation decreases by 2015.

From a look at its movement of population, Koto Ward,which is forecast to see population growth until 2035, canbe described as experiencing a very stable populationincrease, as it has recorded both an excess of populationinflows over outflows and natural increases over the past 16

【Fig.15】Population Index in 2025 (2010=100)

years. Most, but not all, of the five wards projected to see population increases until 2025 also probably can bedescribed as areas where natural increase can be expected, since their birth rates are relatively high, and theyare experiencing continued net population inflows as well.

Market View

Estimates of Future Population

In March 2013, the National Institute of Population and Social Security Research released its estimates offuture population by prefecture and municipality for every five years. While the total population of Japanincreased by 0.2% over the years 2005-2010, over the five-year period 2010-2015 it is projected to decrease by1.1%. The only prefectures expected to see increases in population over the five years 2010-2015 are Saitama,Tokyo, Kanagawa, Aichi, Shiga, and Okinawa. Only Tokyo and Okinawa are projected to have higherpopulations in 2025 than in 2010. However, a look at estimates by municipality shows that of Japan’s 1,859municipalities 219 are projected to have higher populations in 2025 than in 2010. These include the cities ofSendai in Miyagi Prefecture, Chiba in Chiba Prefecture, Saitama in Saitama Prefecture, Yokohama andKawasaki in Kanagawa Prefecture, and Fukuoka and Chikushino in Fukuoka Prefecture.

Source: National Institute of Population and Social SecurityResearch

2015 2020 2025 2030 2035 2040Koto 2.7 1.7 2.3 1.3 0.5 -0.2Chuo 12.9 2.2 1.1 0.2 -0.6 -1.4Sumida 0.8 0.9 0.9 0.1 -0.6 -1.4Minato 5.0 1.9 0.9 0.0 -0.8 -1.6Shinjuku 3.3 1.1 0.3 -0.3 -1.0 -1.7Nerima 3.8 1.3 0.2 -0.7 -1.5 -2.2Shinagawa 2.4 0.6 -0.2 -1.0 -1.6 -2.2Setagaya 2.1 0.5 -0.2 -0.9 -1.5 -2.1Arakawa 2.4 0.5 -0.1 -0.6 -1.0 -1.4Edogawa 1.5 0.2 -0.7 -1.2 -1.6 -2.0Bunkyo 1.8 0.2 -0.6 -1.2 -1.9 -2.5Ota 1.6 0.0 -0.8 -1.4 -1.9 -2.5Chiyoda 6.9 0.0 -0.8 -1.5 -2.2 -2.9Toshima 7.3 -1.1 -1.6 -2.1 -2.9 -3.9Itabashi 0.9 -0.5 -1.3 -2.0 -2.5 -3.0Meguro 0.8 -0.6 -1.4 -2.1 -2.7 -3.3Taito 0.6 -1.1 -1.8 -2.4 -3.0 -3.4Shibuya 0.3 -1.5 -2.2 -2.7 -3.2 -3.8Nakano -0.6 -1.7 -2.3 -2.7 -3.3 -4.0Suginami -0.6 -1.8 -2.6 -3.2 -3.9 -4.6Kita -0.6 -1.8 -2.5 -3.1 -3.5 -3.9Katsushika -1.8 -2.6 -3.4 -4.0 -4.4 -4.8Adachi -2.0 -2.9 -3.8 -4.5 -5.0 -5.3

Source: National Institute of Population and Social Security Research

Real Estate Investment Market

Commercial Property Transaction

Property Transaction by J-REITs

Significant Deals

Source: DTZ

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

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

8

Highest transaction volume ever

Trading in commercial real estate in Q1 2013rose by 135% YoY to the very high level ofapproximately JPY 916 billion (DTZ). Dealsseen during this period that symbolized the movetoward sale by business corporations of large-scale company-owned properties to J-REITs orinvestors included Sony City Osaki and thePanasonic Tokyo Shiodome Bldg.. This periodalso saw active buying by J-REITs. Suchacquisitions are estimated to have accounted forroughly 60% of all transactions. Acquisitions byNippon Building Fund, which bought both SonyCity Osaki and the Panasonic Tokyo ShiodomeBldg. in two of the period’s largest deals, and bythe major IPO Nippon Prologis REIT stood outin particular.

Large-scale logistic facility acquisitions play a part

The total value of property acquisitions by J-REITs in Q1 2013 was JPY801.5 billion, thehighest quarterly figure on record. Since thenumber of properties purchased at 124 was notthe highest ever (a record held by Q2 2006,when there were 179 acquisitions), transactionsin large properties such as office buildings andlogistic facilities appear to have contributed tothis high figure. A look at acquisitions byproperty type shows that purchases of logisticfacilities have increased rapidly in connectionwith the listing of a succession of large logisticfacility REITs, and about 50% of the propertiespurchased by J-REITs this period were logisticfacilities.

Name Asset Type

Buyer PrefecturePrice (¥bn)

GFS （sqm）

Date

Sony City Osaki OfficeNippon Building Fund, Domestic Institutional Investor

Tokyo 111.1 123,604 Feb-13

Panasonic Tokyo Shiodome Bldg. OfficeSumitomo Mitsui Finance and Leasing,Nippon Building Fund

Tokyo 50.7 45,774 Mar-13

Gran Tokyo North Tower Office Mitsui Fudosan Tokyo 35 10,900 Feb-13

Prologis Park Ichikawa 1 Logistics Nippon Prologis REIT Chiba 33.9 138,735 Feb-13

Shibuya Flag Retail Mori Trust Sogo REIT Tokyo 32.0 7,766 Apr-13

Harumi Front Office Japan Real Estate Tokyo 31.3 45,459 Jan-13

Yodobashi Camera Multimedia Kichijoji

Retail United Urban Tokyo 28 37,933 Mar-13

Prologis Park Zama 1 Logistics Nippon Prologis REIT Kanagawa 27.9 118,689 Feb-13

Hirton Tokyo Bay Hotel Hotel Japan Hotel REIT Chiba 26.0 64,932 Apr-13

Prologis Park Kawashima Logistics Nippon Prologis REIT Saitama 25.6 157,721 Feb-13

Prologis Park Osaka 2 Logistics Nippon Prologis REIT Osaka 25 139,212 Feb-13

Celestine Shiba Mitsui Bldg. Office Nippon Building Fund Tokyo 22.5 16,915 May-13

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250

01/10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12 01/13 05/13

TOPIX TSE REIT TOPIX Real Estate index

J-REIT Market

Source: Bloomberg (As of 31 May 2013)

Yield Spread

J-REIT Index & Stock Market Index (2010=100)

J-REIT Index by Asset Class (Feb. 2012=100)

9

Source: Bloomberg (As of 31 May 2013)

Source: Bloomberg (As of 31 May 2013)

Key Country REIT Index (Jan. 2010=100)

Source: Bloomberg (As of 31 May 2013)

A sharp drop after a surge in stock market

While the stock market had been in an upwardtrend since the start of 2013, once the TSE REITIndex began to drop after reaching its most recentpeak of 1,701 points on March 27 the TSE RealEstate Index and Topix also started to fall afterpeaking on April 12 and May 22, respectively.From the start of the year until their peaks, theTSE REIT Index had risen by 52.6%, the TSEReal Estate Index by 69.6%, and Topix by48.4%, while from their peaks to May 31 they fellby 19.6%, 20.6%, and 11.0%, respectively.

A J-REIT market impacted by long-terminterest rates trends

While J-REIT dividend yields (based on the TSEREIT Index) had been in a decreasing trend dueto rising investment unit prices, they began to riseas investment unit prices started to drop. At thesame time, yields on 10-year JGBs have beenrising since a temporary rapid drop on April 4,when the BOJ decided to implement quantitativeand qualitative monetary easing. Although long-term interest rates increased, the rise in J-REITyields was greater, so that the yield spread rose to2.7% as of the end of May 2013.

Strong commercial/logistics, and office indices

A look at performance of the TSE REIT Index byasset type since the start of 2013 shows increasesof 20.6% in the office index, 12.5% in theresidential index, and 24.9% in thecommercial/logistics index. Expectations arestrong for logistic facilities, backed by strongdemand from Internet retailers and a successionof large IPOs. The office index, for whichexpectations of an improving market are rising,also is strong. The low performance of theresidential index, in which there appears to belimited room for rent increases, also can bedescribed as evidence of strong businessconfidence.

The REIT market in a period of adjustmentworldwide

While since 2012 the REIT market has been in anupward trend worldwide, it generally recorded itsmost recent highs in May 2013 and now is in aprocess of adjustment. However, despite themajor drop in the J-REIT market right nowperformance remains high, as performance fromthe start of the year through the end of May was19.9% in Japan, 6.3% in the US, 4.9% in the UK,8.6% in Australia, and 1.4% in Singapore. Theyield gaps in these markets are 2.77%, 1.22%,2.29%, 1.75%, and 2.98%, respectively.

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(thousand yen / tsubo)

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

Office market : Tokyo

Vacancy Rate & Asking Rent Rate for Grade A

Vacancy Rate of Newly Built Bldg & Existing Bldg

Note: Tokyo Business area (chiyoda-ku, chuo-ku, Minato-ku, Shinjuku-ku, Shibuya-ku)Source: Miki Shoji Co., ltd. (Monthly, As of May 2013）

Source: CBRE (Quarterly, As of March 2013)

Note: Tokyo 23 wards, Source: CBRE （Quarterly, As of March 2013)

Vacancy Rate & Asking Rent Rate

YoY % change for Actual Rent Rate by building size

10

Note: Tokyo Business area (chiyoda-ku, chuo-ku, Minato-ku, Shinjuku-ku, Shibuya-ku)Source: Miki Shoji Co., ltd. (Monthly, As of May 2013）

Relocation demand appears to be increasing

The average vacancy rate in the five central wardsof Tokyo at the end of May 2013 was 8.33%, down0.34% from the end of December 2012. While floorspace for lease increased by 60 thousand over thisperiod, new demand totaled approximately 79thousand tsubo (Miki Shoji). It appears that tenantrelocation demand is increasing, due to improvingbusiness sentiment. Newly constructed buildings areparticularly popular, as the vacancy rate in newbuildings has fallen from 29.92% at the end ofDecember 2012 to 11.1% at the end of May 2013.

New supplyexpected tobe at a low level in the future

New floor area supplied in the five central wards ofTokyo in 2013 is 247 thousand tsubo (total floorarea), about 51% of last year’s level (Miki Shoji).The majority of the main large new office buildingsto be completed this year have already entered theoffice supply over the period January through May(including Waterras Tower in Chiyoda Ward with atotal floor area of 39,000 tsubo, Kabukiza Tower inChuo Ward with a total floor area of 28,000 tsubo,and Tokyo Square Garden in Chuo Ward with atotal floor area of 35,000 tsubo. Since pressure fromnew supply will weaken from here on, the vacancyrate seems likely to decrease. While the vacancyrate in existing office buildings has risen by 0.28%since the end of December 2012, this appears toreflect lease terminations in connection withrelocation to new buildings or company-ownedbuildings in addition to the results of a shifting ofvacancies to existing buildings from new buildingscompleted in 2012 with vacancies remaining.

The vacancy rate in grade-A office Bldg. hasbegun to fall

The vacancy rate in grade-A office buildings at theend of March 2013 has fallen by 1.0 % points fromthe end of December 2012, to 7.8%. While thevacancy rate in grade-A office buildings hadincreased in 2012 with a large supply of newlycompleted office buildings, already it has fallen forthree consecutive quarters. In addition, averageassumed achievable rent on grade-A officebuildings has risen for four consecutive quarters toJPY30,100/month per tsubo, exceeding theJPY30,000 for the first time in roughly two yearssince Q1 2011.

The increase in rents in class-A office buildingsis accelerating

A look at the Office Rent Index (from Sanko Estateand NLI Research Institute) based on averageActual rent shows an accelerating rate of increase inaverage actual rent of class-A office buildings incentral Tokyo, which rose by 15.8% QoQ in Q12013 to JPY27,760/month per tsubo. The scope ofrent increases seems to be broadening, as rents inlarge-scale office buildings with standard floor areasof 200 tsubo or more rose by 15.6% QoQ whilethose in office buildings with standard floor areas of100-200 tsubo rose by 9.5% over the same period.

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A Class 200 tsubo or more 100-200 tsubo

Residential Market

Population in Major Cities

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

Note: Occupancy rate＝occupancy area / rentable area, in the greater Tokyo areaSource: Prepared Kenedix based on data of major residential REIT (As of April 2013)

Rent for Rental Apartment (Tokyo)

11

Note: Asking Rent Rate (As of April 2013) Source: Leasing Management Consulting

Mar-12 Dec-12 Mar-13 QoQ YoY

Tokyo 13,178,458 13,228,912 13,218,571 -0.08% 0.30%

Tokyo 23 ward 8,963,812 9,007,407 9,002,217 -0.06% 0.43%

Central 5 wardsin Tokyo

916,250 927,086 927,110 0.00% 1.19%

Nagoya city 2,265,033 2,268,700 2,266,526 -0.10% 0.07%

Osaka city 2,670,330 2,678,579 2,677,780 -0.03% 0.28%

Fukuoka city 1,483,322 1,495,104 1,496,046 0.06% 0.86%

Source: Respective city

Rent for Rental Apartment (Central 5 Ward in Tokyo)

Continued population inflow into central Tokyo

Since March 2013 includes a period of populationoutflows at the end of the fiscal year, some urbanareas show a net outflow of population vs. theprevious month. However, population inflows inApril and May exceeded the outflow in March.For example, while the 23 wards of Tokyo sawan outflow of approximately 5,000 persons overthe period January through March, theyexperienced an inflow of approximately 40,000persons in April and May. Also, all major citieshave recorded YoY population increases. Thepopulation of the 23 wards of Tokyo rose by0.43% YoY, while that of the five central wardsof Tokyo rose by 1.19% over the same period, asthe trend toward concentration of population incentral Tokyo continues. The population inflowinto the city of Fukuoka also remains high, as thatcity’s population rose by 0.86% YoY.

The occupancy rate in rental apartments inthe greater Tokyo area remains high

The occupancy rate at rental apartments in thegreater Tokyo area held in J-REITs was 96.5% asof the end of March 2013. This reflects anincrease of 0.5% points from February and 0.1%points YoY, indicating strong leasing conditions.While the occupancy rate at the end of April fellto 95.7%, this probably can be seen to be due toseasonal factors.

Rents in the 23wards of Tokyo are somewhatweak

According to the Retail Price Survey issued bythe Ministry of Internal Affairs andCommunications, “private housing rents” in May2013 were down 0.82% YoY to JPY8,748/monthper tsubo. Rents seem a little weak, havingrecorded continual decreases in the 0.6%-0.8%range over the period March through May 2013.March is a period of high fiscal year end demand,and April and May are the months after the highseason. These results could be due to flexiblesetting of rents with an eye to concluding leasecontracts.

Average asking key money in the five centralwards of Tokyo are increasing

While rents for investor-owned rental apartmentsin central Tokyo are affected by supply of high-priced properties, overall they appear to be insomething of an improving trend. Rends haveincreased YoY in Shinjuku Ward for 17consecutive months, and in Chiyoda Ward forfive consecutive months. However, the rate ofincrease of rents in Shinjuku Ward is slowingsomewhat. At the same time, average asking keymoney increased in April 2013 in all five centralwards of Tokyo. In particular, the level inChiyoda Ward has risen for seven consecutivemonths.

Source: The Ministry of Internal Affairs and Communications

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Occupancy Rate (LHS) YoY % change (RHS)

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Logistics / Retail

Asking Rent & Vacancy Rate for Logistics

Source: CBRE (Quarterly for Vacancy Rate, Half-yearly for Rent Rate)

Asking Rent Rate for Retail Property (ground floor)

Source: Nikkei Real Estate Market report (Quarterly, As of Q4 2012）

Source: Japan Council of Shopping Centers, Japan Department Stores Association,The Ministry of Economy, Trade and Industry (As of April 2013)

Retail Sales (YOY % change)

Supply-Demand Balance in Tokyo Area for Logistics

Source: Ichigo Real Estate Service Co, Ltd.

12

The vacancy rate sets a new record low

The vacancy rate in large-scale, multi-tenantlogistic facilities in the greater Tokyo area fell by0.9% points from the previous quarter to 2.8% inQ1 2013, setting a new record low (CBRE). Inaddition, rising trends in asking rents on middleand large-sized facilities in Tokyo continue,reaching JPY5,780/month per tsubo. Demand,which is centered on Internet retailers and similarfirms, appears to be spreading as there areapparent cases of demand related tomanufacturers and other firms as well.

While supply remains high, demand is strong too

New supply from February through April 2013was 250 thousand sqm, while new demand was231 thousand sqm. The relatively high level ofsupply is stimulating demand, and the balancebetween supply and demand remains favorable.According to CBRE, new supply over the comingyear is projected to be approximately 400thousand tsubo, roughly 2.7 times the averageover the past five years. Although an extremelyhigh level of supply is planned, inquiries fromprospective tenants also are strong, and pre-leasing activities appear to be going smoothly.While some localized concerns about a relaxationof supply and demand remain, there appears to belittle likelihood of a worsening of the market as awhole.

Rents improve in theGinza andOmotesandoareasA look at asking rents on first-floor retail storesin the leading commercial areas of Tokyo in Q42012 shows an increase in rents in Omotesandofor the first time in four quarters, although theShinjuku and Ikebukuro areas recorded double-digit decreases and rents in Ginza and Shibuyaremained largely unchanged QoQ. Actual rentson main streets in Ginza are more thanJPY100,000, and they can be said largely to havebottomed out. There appears to be wide range oforder in Omotesando, as relatively higher-rentareas are showing signs of recovery.Strong sales of high-priced productsRetail sales have registered YoY decreases forfour consecutive months since January 2013. Atthe same time, department-store sales rose YoYfor three consecutive months from Januarythrough March 2013 (they fell by 0.5% YoY inApril). Strong sales of high-priced merchandisein department stores are probably due to a rush indemand in anticipation of higher prices, sincemajor import brands have announced priceincreases. Generally, these are not conditions inwhich demand can be said to be strong.According to statistics from the Japan BusinessFederation (Keidanren), average compromisefigures for summer bonuses agreed to by laborand management are expected to increase for thefirst time in two years, by 7.37% YoY. It is hopedthat rising household incomes will have a positiveeffect on consumption.

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13

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Japan Real Estate Market Report June 2013 Copyright @ 2013 KENEDIX. All right reserved.

KENEDIX, INC.

Research & Strategy Department

Yuki Hatano

yuki_hatano@kenedix.com