Feb.2016 SuMi TREIM Monthly Report Residential Market Monthly ■ Rents are on an upward trend mainly in high ■ The new supply of rental apartments in the 23 wards remains at a low level, and the rent areas, and the NOI also continues to supply-demand balance is favorable. improve. Report

The employment situation in the Tokyo 23 wards is Rents continued to rise in the Prime Area and the Central favorable as many companies based in Tokyo are Business Area, central Tokyo where rents are high as focusing on expanding their workforces. As the trend of there are many tenants able to enjoy a wealth effect.

population inflow continues as a consequence, rental However, their rent-paying capacity has declined demand remains firm. However, given that cost compared with the financial boom time, as demand from consciousness of companies is still strong, their Westerners able to pay high rents before the Lehman

rent-paying capacity has yet to clearly improve. Brothers collapse have been replaced with demand from Meanwhile, rental apartment construction starts have wealthy Japanese in recent years. remained low for the last few years. Total rental Meanwhile, in the Southern Area and the Northern Area,

apartment construction starts in 2015 were about 20,000, where general rental demand plays a central role, the NOI and new rental apartments to be supplied from spring remains stable due to factors such that the occupancy rate 2016 are also expected to be at a low level. is at a high level and that rent fluctuations are small.

Therefore, the supply-demand balance of rental apartments is improving in the Tokyo 23 wards from both Area definitions (Tokyo 23 wards) the demand and supply sides, and the occupancy rate of 【Prime Area】Minato,

J-REIT properties also remains high. 【Central Business Area】Chiyoda, Chuo, , Shinagawa, Toshima 【 Southern Area 】 Bunkyo, Koto, Meguro, Setagaya, Ota, Construction started on condominiums/apartments Nakano, Suginami (Tokyo 23 wards) 【 Northern Area】 Taito, Sumida, Kita, Arakawa, Itabashi, (the number of households) rental apartments Nerima, Adachi, Katsushika, Edogawa 30,000 condominium 25,000

20,000

15,000

10,000

5,000 Topic in residence: The condominium for sale 0 market deteriorated significantly in 2015, which

will become a factor to boost rental demand.

2007 1H 2007 2H 2007 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2012 2H 2012 1H 2013 2H 2013 1H 2014 2H 2014 1H 2015 2H 2015 2011 2H 2011 1H 2011 Source: SMTRI based on J-REIT disclosure The number of condominiums for sale supplied in the Tokyo 23 wards in 2015 was below the level in 2014, Rents for rental apartments when the number of condominiums for sale supplied (Tokyo 23 wards; more than 18 sqm and 30 sqm or less) declined significantly due to the effect of the consumption tax hike. The cause for this appears to be the much slower (yen/month・tsubo) Prime Area 18,000 pace of sales, as condominium prices were high due to the ※tsubo=3.3sqm Central Business Area Southern Area 17,000 effect of rising construction costs, although the base rate Northern Area of housing loans remains low. 16,000 Given that many tenants in rental apartments state the 15,000 purchase of condominium as the reason for vacating 14,000 rental apartments, a strong condominium for sale market 13,000 is linked to a decline in rental demand. In 2015, as the 12,000 condominium for sale market deteriorated, the number of

11,000 tenants vacating rental apartments for condominiums is expected to decline temporarily, which is expected to 10,000 have a positive impact on rental demand in the short term.

2006 2H 2006 1H 2007 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2011 2H 2011 1H 2012 2H 2012 1H 2013 2H 2013 1H 2014 2H 2014 1H 2015 2H 2015 2006 1H 2006 2H 2007

Source: SMTRI Office Market by Area (Chiyoda-ku)

■ There is new supply associated with ■ The rise in rents is expected to accelerate redevelopment. Meanwhile, demand for offices is going forward due to tight supply. strong. The year-on-year rate of increase in the average asking The rental office stock at the end of 2015 was 2,097,000 rent declined slightly, from 4.3% in 2014 to 3.6% in tsubo on a rented floor basis, down slightly from the 2015. However, the rent rise is expected to accelerate previous year. Although the new supply of rental offices going forward, as the vacancy rate fell to as low as 3.2% of a certain size continued even after 2012 when supply at the end of 2015. In the trading market, an SPC in offices of 90,000 tsubo was extensive, this was because which NIPPON REIT Investment Corporation and others many existing buildings were demolished as part of have invested, acquired Homat Horizon Building in redevelopment. In 2016, large buildings such as Otemachi Gobancho, Chiyoda-ku (gross floor area 8,143 m2) from Financial City Grand Cube will be completed, but multiple individuals in December 2015. demand for offices remains strong as occupancy by leading securities firms is expected.

Vacancy rates and Asking rents of Chiyoda-ku Supply and Absorption of Chiyoda-ku Asking rent(yen/month-tsubo) Asking rent Vacancy rate (tsubo=3.3sqm) 24,000 ※ 9% Supply tsubo=3.3sqm Vacancy rate 140,000 ※excluding common service expense Absorption 8% 120,000 23,000 7% 100,000 22,000 80,000 6% 60,000 21,000 5% 40,000 20,000 4% 20,000 3% 0 19,000 -20,000 2% 18,000 -40,000 1% -60,000 17,000 0%

-80,000

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2015 2014 2006 Source : SMTRI based on Miki Shoji Source : SMTRI based on Miki Shoji

Topics by Area (Chiyoda-ku)

■ A base for FinTech venture companies has encourage an open community and creating opportunities been established in . for matching with investors in and overseas. Advice to companies will be given in cooperation with The Marunouchi, Otemachi and Yurakucho area is the FINOVATORS, a group to promote FinTech that consists financial and economic center of Japan, and is home to of financial personnel and legal and accounting experts, the head offices of many leading financial institutions and etc. The space of Fino Lab is 900 m2, and the monthly large companies. Nineteen Fortune 500 companies (500 office usage fee is set at 20,000 – 40,000 yen per seat. large global companies) are based in this area, which is These are developments by which real estate companies on a par with New York, where 18 companies are located. can create new demand in the maturing office market in In an office area centering on such large companies, Tokyo, and Mitsui Fudosan and Heiwa Real Estate are and Information Services proceeding with similar businesses in , around International-Dentsu (ISID) has established Fino Lab, a and Kabutocho, respectively. Competition co-working space for financial technology (FinTech) to acquire and cultivate FinTech venture companies is venture companies, in February 2016. ISID will scout intensifying among different parts of Tokyo. promising start-up companies, providing the environment and resources, giving advice by experts, holding events to

■ Introduction of service apartments to strengthen the function of an international

financial center These moves to establish a base for FinTech venture companies are part of initiatives to develop areas around Tokyo Station into an international financial center as a National Strategic Special Zone, while the introduction of serviced apartments is another. Oakwood Premier Tokyo (123 rooms), the first serviced apartment of Tekko Building in Marunouchi was completed in October 2015 and has opened for business, while Ascott The Residence (129 rooms), B building, scheduled to be completed in Otemachi 1-1 in January 2017, will also start business. In July 2016, Hoshinoya Tokyo, an inn-style accommodation facility, will open a business in Otemachi. These developments are in step with trends of making Tokyo an international financial center and a city of international tourism, and are expected to change the Marunouchi, Otemachi and Yurakucho area from their traditional office roles into composite areas, which should make the area even more lively and active.

SuMi TREIM Market Eye

The negative interest rate policy adopted by the Bank of Japan in February 2016 is expected to have a significant impact on the real estate investment market as well. Although it continues to be necessary to monitor what specific impact it will have in the future, the lower base rate of loans is thought to be a tailwind for investors.

In the rental housing market, the occupancy rate in rental housing is expected to remain firm in the immediate future, as demand is likely to remain strong, while new supply will decline slightly in the medium term. In addition, rents are also expected to rise moderately in some major cities.

In light of these circumstances, the Company will select investment properties carefully after soundly analyzing characteristics of individual housing properties, the existence of an upside potential in revenues, and the possibility of cost reduction, etc.

This material has been prepared only for the provision of information and is not intended to solicit sales of goods or services, including real estate, financial instruments, rights or any other transactions. The information and views included in the material reflect the Company or the writer’s judgment based on information available at the time of the creation of the material, and the Company does not assume responsibility for its accuracy or completeness. The Company does not guarantee the accuracy of forecasts, estimates, or other forward-looking statements included herein. Reproduction, reprint or alteration of the material without the Company’s prior approval is prohibited.

Publisher ：Sumitomo Mitsui Trust Real Estate Investment Management Co., Ltd.

Editor ：Sumitomo Mitsui Trust Research Institute Co., Ltd. ■The next month’s subject is the retail properties market and the market of Chuo-ku.■ For Reference: Overview of Chiyoda-ku Chiyoda-ku is located almost in the center of Tokyo 23 wards and plays a central role in Japan. At the center of the ward is the Imperial Palace. Around the Imperial Palace, there is a concentration of legislative, administrative, and judicial institutions, along with the head offices of large companies and financial institutions. Tokyo Station in the east of the ward is a pivotal station connected with the Tohoku region and western Japan through the Shinkansen. Roughly speaking, the eastern half of Chiyoda-ku is a business district, and in the western half there are both office buildings and residential properties.

Iidabashi, Jinbouchou, Kanda, Relatively close to Tokyo Station, the area is conveniently located, but rents are reasonable. There are rows of medium-sized buildings. In addition to offices, there are number of universities and vocational schools. There are also a number of retail stores associated with music, bookstores, sports stores, and electronics stores.

Marunouchi, Otemachi The area is the financial and economic center of Japan, having a concentration of head offices of major financial institutions and companies. It is a traditional office area that once had many old buildings. However, a number of them have been rebuilt, and now the area features a number of high-grade, high-rise buildings. The land prices and rents are the highest among business districts in Japan. Koujimachi, Hanzoumon This was an upscale residential area , Nagatachou where there were a number of old This area features the prime minister’s samurai residences. Now the area is a office, the Diet building, and central mix of office buildings and residential government offices. Office buildings are properties. There are also traditional occupied by private enterprises and a universities and large urban hotels. number of public enterprises. With a The area has a tranquil atmosphere. prestigious atmosphere, the area is popular among financial institutions, insurance companies, and foreign companies.