The Japanese Real Estate Investment Market 2018

November 2018

Otemachi Financial City Grand Cube, 1-9-2 Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan Population movements in Japan

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

In 2015, depopulation was observed for the first time in Japan, based on the national census.

 The decline in number of households was not confirmed by the national census in 2015; hence, the rise is expected to continue.  The population of people 65 years or older is expected to level off in 2025 and head downwards from 2040. Population and households in Japan Population Households ← Actual Forecast → (thousand) (thousand) 140,000 70,000

120,000 60,000

100,000 50,000

80,000 40,000 65- 15-64

60,000 30,000 0-14 households

40,000 20,000

20,000 10,000

0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 Source: National Institution of Population and Social Security Research and MIC “Population Census” Note 1: Population forecast is based on the data of population census in 2015. Note 2: The solid line shows the actual households based on the population census and dotted line shows the predicted households based on the population census in 2010. Note 3: Median-fertility (median-mortality) projection is used in population and household forecast. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 2 Population movements in Japan

Compared to the forecast on number of households based on the 2010 National Census, the peak will shift from 2019 to 2023 and number of households will increase by 2.25 million in 2030 (National Institute of Population and Social Security Research)

Forecasted and actual number of households

Households (thousand) 5,500

5,450 5,419

5,400 5,348 5,350 5,333 +43 5,307 5,300 (0.8%) Forecast based on 2015 5,290 National Census 5,250 +225 (Estimated for 2018) (4.4%) 5,200

5,150 5,123

5,100

5,050

5,000 Forecast based on 2010 National Census 4,950 (Estimated for 2013)

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

Single-person households have been holding the major share since 2010 and cross 20 million after 2030. Couple and child households will continue to decrease, whereas couple-only households will continue to increase.

Forecasted and actual number of households (by family type)

Households (thousand) 2,500 Single person (2018 estimate) Couple only (2018 estimate) Couple and child 2,000 (2018 estimate) Others (2018 estimate) Single person (2013 estimate) 1,500 Couple only (2013 estimate) Couple and child (2013 estimate) Others 1,000 (2013 estimate)

500

0 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

The population is increasing only in Greater Tokyo, Aichi prefecture, Fukuoka prefecture and Okinawa prefecture. The same tendency can be seen in the increase/decrease of foreigners population.

 The population of foreigners is drastically increasing in Greater Tokyo and slightly increasing in the Aichi prefectures and prefectures with regional core cities.

Increase/decrease in population of each prefecture from FY 2010 to 2015. Population (thousand) 400 Increase/decrease in population of foreigners 350 Increase/decrease in population of Japanese

300

250

200

150

100

-50

-100

-150 Mie Oita Gifu Aichi Nara Akita Saga Iwate Fukui Shiga Kyoto Chiba Tokyo Ehime Tottori Miyagi Osaka Hyogo Ibaraki Kouchi Niigata Aomori Tochigi Gunma Nagano Kagawa Toyama Saitama Fukuoka Miyazaki Okinawa Ishikawa Shimane Shizuoka Nagasaki Hokkaido Okayama Hiroshima Yamagata Kanagawa Kumamoto Fukushima Tokushima Kagoshima Yamanashi Wakayama Yamaguchi

Source: National Institution of Population and Social Security Research and MIC “Population Census” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 5 Population movements in Greater Tokyo The population and number of households in the Greater Tokyo will continue to rise together, and it is expected that they would reach their peak in 2020 and 2025 respectively.

 It is anticipated that the population in the Greater Tokyo will continue to rise till 2020.  On the other hand, the number of households is projected to increase until 2025.

Population of Greater Tokyo Number of households in Greater Tokyo

Population Households (thousand) ← Actual Forecast → (thousand) ← Actual Forecast →

40,000 18,000

35,000 16,000

30,000 14,000

12,000 25,000 10,000 20,000 8,000 15,000 6,000 10,000 4,000 5,000 2,000

0 0

Tokyo Kanagawa Saitama Chiba Tokyo Kanagawa Saitama Chiba Source: National Institution of Population and Social Security Research and MIC “Population Census” Note 1: Median-fertility (median-mortality) projection is used for population forecast. Note 2: Forecast of population and the number of households are based on the “Population Census” in 2010. However, the data of 2015 is based on the population census in 2015. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 6 Population movements in Japan Although there is no change in the forecast and actual population of the elderly in 2013, young and working age population is rising.

Comparison on age-wise population forecast of the Tokyo area

Households (thousand)

30,000

0-14 (2018) 15-64 (2018) 25,000 Above 65 (2018) 0-14 (2013) 15-64 (2013) Above 65 (2013) 20,000

15,000

10,000

5,000

0 2010 2015 2020 2025 2030 2035 2040 2045

Source: National Institution of Population and Social Security Research and MIC “Population Census” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 7 Population movements in Greater Tokyo

The population of Greater Tokyo area is rising, but a little less than 50% of the increased population is accounted to foreigners. In the future, it seems that the population growth of Greater Tokyo will be supported by the foreigners.

 The foreign population dipped temporarily due to the global financial crisis and aftermath of the 2011 earthquake, but has be en rising in line with economic recovery.  Foreigners accounted for 38.6% of the population growth in this area. Incremental population growth of foreign and Japanese residents in Greater Tokyo

Population (thousand) foreigners (by “Zairyu-Gaikokujin-Tokei”) 260 252 250 241 240 Foreigners (by “Jumin-Kihon-Daicho”) 240 233 Japanese 220 211 207 213 200 191 185 189 180 173 171 168 172 158 160 140 134 59 72 (35.0%) (41.8%) 75 120 40 101 (47.8%) 100 (29.8%) 100 17 80 (16.6%) 23 60 109 94 100 19 84 (65.0%) 82 (70.2%) (58.2%) 40 (83.4%) (52.2%) 20 0 -20 -40 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sources: “Statistics on Foreign national residents” compiled by Ministry of Justice and “Basic resident registers” compiled by Ministry of Internal Affairs and Communications Note 1: The population of foreign national is based on the Statistics on Foreign national residents till 2011. In 2012 and later, population is based on the Basic resident registration. Note 2: The statistics of Foreign nationals used the data as of the end of December. Till 2012, the Basic resident registration used the data as of March 31 of the year. Since 2013, it uses the data of population as on January 1 of the following year. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 8 Population movements in Greater Tokyo Population inflow to Tokyo has been decreasing continuously since 2016, whereas population in the Greater Tokyo area is increasing owing to population inflow to three peripheral prefectures in 2017.

 The number of net inflows in 2017 recovered to the level of 2005 or 2006.  The inflow is projected to continue.

Net inflows of people to Greater Tokyo

Population (thousand) Tokyo Kanagawa 260 Chiba 240 Saitama 220 200 180 155.2 160 95.0 151.7 132.0 140 127.6 125.3 125.5 116.8 119.4 114.7 117.5 116.0 120 76.7 107.9 100.9 96.5 100 43.3 92.8 Net increase 88.0 73.1 67.2 84.2 74.3 80 1.2 76.0 (58.3%) 62.4 65.7 62.8 60 39.7 40 18.3 20

Net decrease 0 -20

-40 -5.0 -60 -16.9 -80 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: MIC “Jyumin Kihon Daichou Jinkou Idou Houkoku” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 9 Population movements in Greater Tokyo Amongst the number of households in Greater Tokyo, the tendency of single-person household to occupy higher ratio is expected to continue in the future.

 However, the number of single-person households is expected to peak out in 2030.  Households of couple with children will reduce from 2020, while the households of only couple or children with single parent will slightly increase. Number of households by family composition in Greater Tokyo

Households ← Actual Forecast → (thousand) 7,000 One-person 6,000 Couple-only Couple-and-child(ren) 5,000 One-parent and child(ren) Other 4,000

3,000

2,000

1,000

0 1995 2000 2005 2010 2015 2020 2025 2030 2035

Source: National Institution of Population and Social Security Research and MIC “Population Census” Note 1: The solid line shows the actual value based on the population census. The dotted line shows the predicted value based on the data of population census in 2010. Note 2: Median-fertility (median-mortality) projection is used for household forecast. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 10 Population movements in central Tokyo Out of the 8 wards among the 23 wards of Tokyo, the population is projected to rise by more than 10% over the next 30 years

 In 2045, only Adachi is expected to have a decrease in population by more than 10% compared to 2015.  It is expected that population will continue to rise over the next 30 years in 18 wards excluding Nakano, Kita, Edogawa, Kats ushika and Adachi. Population growth trends in the 23 wards of Tokyo (assuming the population of each ward is 100 in 2010) ← Actual Forecast → >110 Ward 2010 2015 2020 2025 2030 2035 2040 2045 Chuo 87.0 100.0 110.4 118.7 125.2 129.9 133.1 134.9 105-110 Minato 84.3 100.0 111.0 119.4 125.8 130.2 132.9 134.4 Chiyoda 80.7 100.0 111.3 120.0 126.2 130.0 132.1 132.8 100-105 Koto 92.5 100.0 105.6 109.8 112.9 115.0 116.2 116.7 Taito 88.8 100.0 104.6 108.6 111.9 114.3 115.8 116.4 100 Shinagawa 94.4 100.0 104.5 108.2 110.9 112.8 113.8 114.2 Bunkyo 94.0 100.0 105.1 108.8 111.3 112.9 113.5 113.3 90-100 Nerima 99.2 100.0 103.8 106.5 108.4 109.8 110.3 110.1 <90 Itabashi 95.4 100.0 103.7 106.1 107.8 108.7 109.0 108.6 Shibuya 91.1 100.0 102.6 105.1 107.0 108.2 108.6 108.3 Meguro 96.7 100.0 103.1 105.3 106.9 108.0 108.4 108.2 Arakawa 95.8 100.0 102.8 104.9 106.5 107.5 108.0 107.9 Sumida 96.6 100.0 102.0 103.7 104.8 105.4 105.6 105.4 Suginami 97.4 100.0 101.6 103.3 104.7 105.3 105.2 104.6 Ota 96.7 100.0 102.4 104.1 105.0 105.4 105.2 104.6 Shinjuku 97.8 100.0 102.0 102.9 103.3 103.2 102.5 101.3 Setagaya 97.1 100.0 101.2 101.9 102.5 102.6 102.1 101.2 Toshima 97.8 100.0 100.2 100.6 101.0 101.5 101.5 100.9 Nakano 95.9 100.0 100.2 100.1 100.1 100.2 100.0 99.2 Kita 98.4 100.0 100.7 101.0 100.9 100.4 99.7 98.6 Edogawa 99.7 100.0 99.4 98.0 96.3 94.6 92.9 91.0 Katsushika 99.9 100.0 99.1 97.8 96.2 94.5 92.8 91.0 Adachi 102.0 100.0 98.2 96.0 93.7 91.5 89.5 87.4 Source: National Institution of Population and Social Security Research and MIC “Population Census” Note 1: Forecast of population is based on the data of “Population Census” in 2015. Median-fertility (median-mortality) projection is used for population forecast.

Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 11 Population aging in central Tokyo In 2015, the whole 23 wards of Tokyo had become super-aged society, and in 2040, all the wards will turn into a super-aged society

Population aging by ward

← Actual Forecast→ 1990 1995 1800 2005 2010 2015 2020 2025 2030 2035 2040 2045 >30% 23 wards 11.2% 13.7% 16.4% 18.6% 20.0% 21.8% 22.1% 22.1% 22.9% 24.6% 27.0% 28.6% Super-aged Nerima 9.5% 12.2% 15.4% 20.3% 19.3% 22.1% 23.9% 25.5% 27.7% 30.3% 33.0% 34.9% 21-30% society Suginami 11.8% 14.4% 16.8% 18.8% 23.1% 22.6% 23.6% 24.2% 25.6% 27.7% 30.6% 32.9% Setagaya 11.1% 13.4% 16.1% 17.3% 18.3% 21.5% 22.5% 23.4% 25.2% 27.6% 30.3% 32.2% 17.5-21% Aged society Adachi 9.3% 11.9% 15.9% 19.9% 22.2% 25.1% 25.7% 25.4% 26.0% 27.7% 30.2% 31.4% Katsushika 10.6% 13.2% 16.6% 19.9% 22.0% 24.6% 25.1% 24.9% 25.7% 27.3% 29.5% 30.5% 14-17.5% Shibuya 12.6% 15.2% 16.9% 18.5% 19.6% 20.6% 21.3% 21.7% 23.0% 25.1% 27.8% 29.9% Itabashi 10.0% 12.7% 16.3% 19.3% 21.3% 23.4% 23.9% 23.7% 24.3% 25.6% 27.9% 29.5% 7-14% Aging society Nakano 12.1% 14.6% 16.3% 18.2% 19.9% 21.2% 21.9% 22.3% 23.3% 24.9% 27.1% 28.9% Taito 15.9% 18.8% 21.1% 23.1% 23.6% 23.8% 23.0% 22.0% 22.1% 23.7% 26.5% 28.6% Ota 11.6% 14.1% 16.3% 18.4% 20.4% 22.5% 22.7% 22.5% 23.1% 24.7% 26.9% 28.3% Edogawa 8.1% 9.9% 12.8% 15.4% 18.1% 20.7% 21.1% 20.9% 21.9% 23.9% 26.3% 27.3% Toshima 12.8% 15.7% 18.4% 21.1% 19.3% 20.0% 20.4% 20.5% 21.3% 22.8% 25.1% 26.9% Kita 12.7% 16.0% 19.3% 21.6% 24.0% 25.8% 25.4% 24.2% 23.7% 24.1% 25.6% 26.7% Koto 9.4% 12.2% 15.2% 17.3% 19.1% 21.3% 21.1% 20.4% 20.6% 22.2% 24.9% 26.7% Arakawa 13.7% 16.5% 18.9% 20.8% 21.9% 23.4% 22.8% 21.8% 21.7% 22.6% 24.5% 26.0% Minato 13.7% 16.3% 17.9% 17.8% 17.2% 17.6% 17.2% 17.3% 18.6% 20.8% 23.7% 26.0% Bunkyo 13.9% 16.4% 17.9% 18.3% 18.9% 19.8% 19.5% 19.3% 20.1% 21.7% 24.0% 25.8% Shinagawa 11.6% 14.5% 17.4% 18.0% 19.4% 20.9% 20.5% 19.9% 20.2% 21.6% 24.0% 25.8% Chiyoda 16.6% 20.2% 20.4% 20.2% 19.2% 18.1% 17.4% 17.2% 18.2% 20.2% 23.1% 25.3% Sumida 13.1% 15.5% 18.1% 20.2% 21.4% 22.9% 22.4% 21.3% 21.1% 22.0% 23.9% 25.2% Meguro 12.5% 14.8% 17.4% 18.6% 19.6% 20.0% 19.5% 19.1% 19.8% 21.1% 23.1% 24.7% Shinjuku 12.6% 15.3% 17.1% 18.7% 19.1% 20.1% 19.7% 19.3% 19.7% 20.9% 22.9% 24.4% Chuo 15.4% 17.6% 18.3% 16.3% 15.9% 16.1% 15.4% 15.0% 16.0% 18.1% 21.0% 23.3% Source: National Institution of Population and Social Security Research and MIC “Population Census” Note 1: Forecast of population is based on the data of “Population Census” in 2015. Median-fertility (median-mortality) projection is used for population forecast.

Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 12 Percentage of foreigners in central Tokyo The percentage of foreigners in Tokyo are increasing, and there is a ward where the ratio is over 10%.

 The percentage in Shinjuku (over 10%) is the highest in Tokyo, and the percentages of Toshima and Arakawa are over 8%.  In the other hand, the 23 wards as a whole have foreigners as 4.2% of their total population, indicating that the situation o f each ward is quite different.

Percentage of foreigners in the 23 wards of Tokyo (top 5)

14%

12% Shinjuku Toshima 10% Arakawa 8% Minato Taito 6% 23 wards 4%

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

 Entering the 2020s, Japan will remain at third place globally in nominal GDP, ahead of developing countries such as India.

Nominal GDP of major countries (Billion USD) 30,000 ←Actual Forecast →

25,000 US

China 20,000

15,000

10,000

Japan 5,000 India UK Korea 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Compiled by NRI from IMF “World Economic Outlook Database (2017 Apr.)” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 15 Macro fundamentals of Japan Japan’s economic growth is low compared to other major economies and high growth going forward looks unlikely

 IMF forecasts estimate Japan’s GDP growth rate at around 0.5% for the next 5 years .

Real GDP growth rate of major economies

（％） ←Actual Estimate→ 15.0

10.0 India

5.0 China Korea UK US 0.0 Japan

-5.0

-10.0 200320042005200620072008200920102011201220132014201520162017201820192020202120222023 Source: Compiled by NRI from IMF “World Economic Outlook Database (2017 Apr.)” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 16 Macro fundamentals of Japan

There has been a positive growth for past two years, but most recently it has turned negative.

 Main factor is that domestic demand, including personal consumption, capital investment and housing investment is poor.

Quarterly real GDP growth and contributions to changes (seasonally adjusted series, YoY)

（％） 3.0

2.0

1.0 Private Consumption Private Investment 0.0 Public Demand Exports -1.0 Imports -2.0 Real GDP Growth

-3.0

-4.0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Inflation rate has become stagnant and prices are rising slowly.

 Although the core CPI turned positive from a year earlier, Bank of Japan core CPI excluding the fresh foods and energy contin ues to decline. Most recently, it shifted to negative territory.

Year-on-year comparison for the same month of the consumer price index

（％） 4.0 Core CPI BOJ's Core CPI

3.0

Inflation target 2.0 set by BOJ

1.0

0.0

-1.0

-2.0

-3.0

Sources: Compiled by NRI from Ministry of Internal Affairs and Communications “Consumer Price Index (CPI)” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 18 Macro fundamentals of Japan

The Bank of Japan continues a large-scale qualitative and quantitative accommodating policy.

 However, growth in money supply has slowed and JGB purchases by the BOJ is showing a downward trend.

YoY change of money supply (Average balance) BOJ’s holdings of JGBs

(Trillion Yen) 60% Monetary Base Money Stock 500 50%

40% 400

30% 300 20%

10% 200 0%

-10% 100 -20%

-30% 0

Source: Compiled by NRI from Bank of Japan “Monetary Base” data Source: Compiled by NRI from Bank of Japan “BOJ Accounts” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 19 Macro fundamentals of Japan Although the short-term interest rates are still negative, the long-term interest rates are shifting towards positive territory.

 In continuation of the negative interest rate policy of January 2016, the Bank of Japan introduced a long-term interest rate policy on September 2016 and announced a policy to buy long-term bond that shifts the long-term interest rate to 0%.

Short-term interest rate (unsecured call rate) (Each end of the month) Long-term interest rate (10y-JGB) (Each end of the month)

Source: Compiled by NRI from Bank of Japan “Short-term Money Market Rates” data Source: Compiled by NRI from MOF “JGBs Interest Rate” data

In the middle of 2018, the exchange rate of yen is continuously moving without any sense of direction.

 Recent yen strength reflects mainly fading perceptions of a US rate hike, a risk -off mode by investors, and a Japanese current account surplus Yen-dollar exchange rate (each end of the month)

Trade balance return to its basic profitable tendency and the current account surplus tends to expand.

 Current account surplus continues to be at a high level.

Current account balance

Government debt has plateaued at high level, while a primary fiscal balance surplus is not in sight.

 The government debt to GDP ratio has becoming flat in recent years due to a reduction in the primary balance deficit and rest raint of interest payments due to monetary easing as well as the increase in nominal GDP that is the denominator of the ratio.

Government debt to GDP ratio Primary balance to GDP ratio （％）（％） 300 gross debt Japan US UK 4 Japan United Kingdom United States

net debt Japan US UK 2 250 0 200 -2

150 -4

-6 100 -8 50 -10 ←Actual Estimate → ←Actual Estimate → 0 -12

Tokyo continues to be the world’s largest city in terms of population and GDP.

Population/GDP forecast for 2025 (Top 15 cities in terms of population or GDP)

2025 nominal GDP 2500 by city (in billion USD) New York 2000 Tokyo

1500

1000 Osaka Beijing Shanghai

500 São Paulo Mexico City Chongqing Delhi Karachi Mumbai Lagos Dhaka 2025 population 0 Cairo Kinshasa by city 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 ( in thousands)

*No data for GDP of Dhaka and Kinshasa Source：Compiled by NRI based on UN “World Urbanization Prospects” and Euromonitor data. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 24 Macro fundamentals of Japan

Tokyo has the second largest concentration of world-class enterprises.

Number of HQ of Fortune Global 500 companies by city (2018) Fortune Global 500 companies in Tokyo (within top 200)

Revenue Rank Company Beijing (CHN), 53 (Mil. USD) 30 Honda Motor 138,646 45 Japan Post Holdings 116,616 Tokyo (JPN), 36 55 Nippon Telegraph & Telephone (NTT) 106,500 79 Hitachi 84,559 Paris (FRA), 16 85 Softbank Group 82,665

New York (USA), 16 97 Sony 77,116 99 JXTG Holdings 76,629 London (GBR), 13 129 Mitsubishi 68,301 Seoul (KOR), 13 130 Marubeni 68,057 Others, 313 Hong Kong, 8 145 Dai-ishi Life Holdings 63,522 Shenzhen (CHN), 7 Shanghai (CHN), 7 177 Mitsubishi UFJ Financial Group 54,769 Osaka (JPN), 7 Houston (USA), 6 179 Seven & I Holdings 54,217 Nagoya (JPN), 5 186 Tokyo Electric Power 52,809 192 Sumitomo Mitsui Financial Group 52,026 198 Nippon Steel & Sumitomo Metal 51,164 Source： Compiled by NRI from Fortune “Fortune Global 500 (2018)” data. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 25 Population movements in Japan

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

Acquisitions of securitized real estate decreased in three consecutive years.

 Although it was on a recovery trend after the bankruptcy of Lehman brothers, the complexity level of acquisition was going up along with the rise in prices of real estate, and it seems that it turned to a declining trend.

Acquisitions of securitized real estate billion yen 10,000

Others J-REIT

8,000

6,000

6,242 7,205

5,159 4,000 3,433 3,302 2,510 2,156 4,439 2,934

3,307 1,791 2,000 2,210 2,236 1,549 1,359 2,237 2,080 2,066 2,319 1,772 2,031 1,679 539 1,833 0 1,555 611 676 895 628 604 792 0 305 439 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

Source: Compiled by NRI from MLIT “Real Estate Securitization” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 27 Overview of real estate investment market in Japan Structure in which office, residential, commercial and logistics occupy the 80% of transaction value will continue.

 Because of the sudden increase in the inbound marketing, the hotel investment is also becoming popular as one of the main objectives.

Acquisitions of securitized real estate by asset class Allocation of securitized real estate by asset class billion yen in the past 5 years 8,000 composite Health care, facilities, Office Residential Retail Logistics Hotel Health care composite facilities Others 1.0% 2.3% Hotel, 9.9% Others, 3.9%

6,000

419 1,107 981 662 Office, 4,000 550 790 494 525 Logistics, 38.8% 758 770 15.2% 1,321 746 683 778 835 1,293 1,589 773 784 542 404 615 788 730 808 2,000 161 614 541 267 686 452 603 564 479 Retail, 270 2,503 252 550 Residential, 2,194 2,124 348 309 2,328 15.5% 552 1,728 289 441 1,803 1,785 13.4% 1,611 1,516 235 406 1,501 1,598 891 1,092 710 556 768 512 0 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

Source: Compiled by NRI from MLIT “Survey of the Current State of Real Estate Securitization” data Note: Because the usage of securitizations that require actual TMK is unclear, they have not been included after 2001. Because of this, the yearly totals and amounts will not match up with the documents cited for this entry.

The ratio of Greater Tokyo area was on a declining trend after FY2010. However, it has increased its number after FY2016.

 About the two-third of securitized properties focused on Greater Tokyo in FY 2010. However, it declined to about the one third of it in FY 2015.  Composition ratio of Tokyo reversed in FY 2016 and has gone up by 4%, and the ratio of Tokyo increased in FY 2017 also.

Number of properties securitized by region

Tokyo Greater Tokyo Osaka Nagoya Fukuoka Others

FY2017 39.9% 20.9% 8.7% 5.4% 20.1% FY2016 38.0% 18.1% 12.9% 6.9% 20.8% FY2015 33.8% 17.3% 13.8% 5.1% 26.0% FY2014 45.9% 17.5% 10.2% 5.8% 17.0% FY2013 51.9% 15.8% 10.0%3.7% 15.2% FY2012 47.9% 15.3% 9.5% 5.1% 19.9% FY2011 58.8% 12.0% 8.0%4.0% 14.9% FY2010 66.0% 11.8% 6.9% 12.0% FY2009 53.0% 10.5% 8.4% 6.9% 17.2% FY2008 51.9% 12.7% 8.8% 5.5% 17.4% FY2007 41.9% 12.1% 10.5% 6.4% 23.1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Compiled by NRI from MLIT “Survey of the Current State of Real Estate Securitization” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. Note: Securitization of TMK properties is not included because their use is unknown. 29 Overview of real estate investment market in Japan

Cap rate is continuously declining

Cap rates in Japan for major investment areas

8.0%

7.0%

6.0%

5.0% Office Osaka Logistics Tokyo Multi Residential Tokyo 4.0% Retail Tokyo

Office Tokyo 3.0% Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Office Tokyo CBD Office Osaka CBD Retail Tokyo Residential Tokyo Logistics Tokyo Multi

Source: Compiled by NRI from Japan Real Estate Institute “Japanese Real Estate Investor Survey” data. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 30 Overview of real estate investment market in Japan

Fierce competition among commercial banks continues to help boost prices.

 Banks’ lending attitude toward the real estate industry is the most lenient since 2000 and the standard of the time of the global financial crisis in 2007 is exceeded. Many people in Japan believe there are too many banks, and spreads continue to fall with covenants loosening.  Along with mega-banks and other major banks, regional mid-tier banks are entering the market, so conditions look unlikely to change over the near term.

Financial institutions’ lending attitude DI toward the real estate industry

20 Loose

-10

-20 Tight

-30

-40 Source: Compiled by NRI from BOJ

2000/3 2000/9 2001/3 2001/9 2002/3 2002/9 2003/3 2003/9 2004/3 2004/9 2005/3 2005/9 2006/3 2006/9 2007/3 2007/9 2008/3 2008/9 2009/3 2009/9 2010/3 2010/9 2011/3 2011/9 2012/3 2012/9 2013/3 2013/9 2014/3 2014/9 2015/3 2015/9 2016/3 2016/9 2017/3 2017/9 2018/3 “TANKAN (Figures by Industry)” data.

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

Tokyo area holds 61% of Japan’s office rental market.

 Japan has a stock of around 106 million ㎡ of available office rental space. The Tokyo area holds an overwhelming share of the market at 64 million ㎡, comprising 61% of the total. Office floor space shares by major region

100% 2.0% 1.5% 2.3% (1.69million ㎡) 3.2% (2.25million ㎡) 90% 5.5% (2.55million ㎡) 1.0% (3.58million ㎡) 1.7% (6.18million ㎡) 80% (1.09million ㎡) (1.85million ㎡) 14.3% Osaka Area 70% 1.8% 16.9％ 0.9% (16.01million ㎡) 4.6% (1.99million ㎡) 60% (1.06million ㎡) (5.12million ㎡) 50% 12 major cities 111.92million ㎡ 40% Tokyo Metropolitan Area 30% 61.2% 68.5％ (68.55million ㎡) 20%

10%

0% Tokyo Yokohama Saitama Chiba Osaka Kobe Kyoto Nagoya Fukuoka Sapporo Sendai Hiroshima

Source: JREI “The Annual Japanese Office Buildings Survey” Note: Data is as of January 2016. Note: The survey focuses on the central area of each city. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. Note: Properties less than 3,000 square meters are excluded. 33 Office market

Tokyo’s Central Business District (CBD) is concentrated in five wards

 Tokyo’s CBD has an accumulation of office buildings and is concentrated in an area of 5km square, concentrated in Chiyoda, Chuo, Minato, Shibuya, and Shinjuku wards.

Adachi Itabashi Kita Katsushika Nerima Arakawa Saitama Toshima 7.27 million people Bunkyo Sumida Nakano Taito Tokyo Edogawa 13.52 million people Chiba Suginami Shinjuku 6.22 million people Chiyoda Kanagawa Koto 9.13 million people Shibuya Chuo 30 km Minato Setagaya Meguro Shinagawa

Ohta

Vacancy rates in the Tokyo office market have been improving for more than five consecutive years.

Vacancy rate movement in Tokyo CBD Yearly (1998 - 2017) Monthly (Jan 2013 – May 2018)

14.0% 14.0% 12.0% 12.0% 10.0% 10.0% Chiyoda Chiyoda Chuo 8.0% Chuo 8.0% Minato Minato 6.0% 6.0% Shinjyuku Shinjyuku Shibuya 4.0% Shibuya 4.0% 2.0% 2.0% 0.0% 0.0% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Rents entered an upward phase from around 2013 in all 5 Tokyo wards.

Rent trends in Tokyo CBD (yen/tsubo per month) Yearly (1999 – 2017) Monthly (Jan 2013 – May 2018)

（yen/tsubo）（yen/tsubo） 26,000 26,000

24,000 24,000 22,000 22,000 Chiyoda Chiyoda 20,000 20,000 Chuo Chuo 18,000 Minato 18,000 Minato Shinjuku 16,000 Shinjuku 16,000 Shibuya Shibuya 14,000 14,000 12,000 12,000 10,000 10,000 Jul-15 Jan-13 Jan-18 Jun-13 Oct-16 Apr-14 Sep-14 Feb-15 Dec-15 Aug-17 Nov-13 Mar-17 May-16 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Miki Shoji Co., Ltd. Note: One tsubo is 3.3 square meters. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 36 Office market From 2010 to 2015, the office workers decreased in 23 wards, whereas they slightly increased in 5 or 3 wards

Trend and forecast of office worker numbers in Tokyo

(1,000 people)

400 366.0 346.1 350 324.3 316.8 23 wards区 300

250 202.0 198.8 188.4 189.2Central 5 wards 200 5(Chiyoda,区 Chuo, Minato, Shibuya, Shinjuku) 146.7 147.4 141.5 142.2 150 Central3区 3 wards (Chiyoda, Chuo, Minato) 100

0 2000 2005 2010 2015

Since 2000, Chiyoda and Minato have been increasing their share of office workers.

Trend of office worker share in Tokyo’s CBD (23 wards ＝100%) （％）

30 28.3 28.7 27.5 Chiyoda千代田区 26.8 Minato港区 24.4 27.4 25 26.9 26.0 21.4 20.6 19.9 20 19.1 Chuo中央区 16.2 15.1 14.4 14.6 15 Shinjuku新宿区 11.2 10.8 10.5 10.2 10 Shibuya渋谷区

0 2000 2005 2010 2015

Despite the dwindling number of office workers, new office supply will likely continue to grow.

Office space supply in Tokyo’s 23 wards

Supplied floor area # (1,000 ㎡) of buildings 250 70 Office supply area 216 Number of building supplied 60 200 183 175 168 50 154 146 150 40 125 121 114118 119 119 117 108104 109 100 99 97 99 30 100 92 91 83 86 85 87 74 72 77 65 69 58 20 56 55 52 42 50 36 10 forecast 0 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

The cap rates have continuously been declining since 2012, and it is currently at its lowest level.

Tokyo office market cap rate trend

6.5%

6.0%

5.5%

5.0%

4.5%

4.0% Shinjuku Shinagawa Shibuya 3.5% Minato(Toranomon) Chuo(Nihonbashi) Chiyoda(Marunouchi) 3.0% Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Chiyoda(Marunouchi) Chuo(Nihonbashi) Minato(Toranomon) Shinagawa Shinjuku Shibuya

The vacancy rates have also been recovering in the local office market and the rent has started rising.

Office vacancy trend in ex-Tokyo market Office rent trend in ex-Tokyo market

20.00% Sendai (yen/tsubo) 24,000 18.00% 22,000 16.00% Fukuoka 20,000 14.00% Nagoya Tokyo 12.00% Yokohama 18,000 Sapporo 10.00% Osaka 16,000 8.00% Tokyo 14,000 6.00% 12,000 Osaka 4.00% Yokohama 10,000 Nagoya 2.00% Fukuoka Sendai 0.00% 8,000 Sapporo 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Miki Shoji Co., Ltd. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 41 Office market Liquidity is growing in ex-Tokyo as well as the real estate investment market rises and becomes overheated.

 As property acquisition becomes more difficult in Tokyo, investment money must look to regional markets.

Ex-Tokyo office market cap rate trend

9.0%

8.0%

7.0%

6.0% Sendai Sapporo Fukuoka 5.0% Nagoya Yokohama Osaka 4.0%

3.0% Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Residential market About 20% of all households in Japan are living in non-public rental apartments, and the percentage is trending upwards.

 Households living in non-public rental apartments (excluding wooden apartments; hereafter the same in this section), which numbered 3.34 million in 1988, increased by about 2.6 times to 9.96 million (about 20% of all households) in 2013.

Breakdown of all households by housing type (2013) Number of households by housing type 1988 - 2013 RatioHouseholds of Living in PrivateRental & Company 6,000 25% Housing Public Rental 5,238 2% 4,989 (non Apartment House House 5,000 20% 6% 4,716 4,421 18% 20% 4,097 16% 3,760 Private Rental 4,000 15% Housing, 15% Others 12% 9% 3,000 9% 10% 1,783 1,857 2,000 1,682 1,724 - 1,411 1,578 wood) 879 996 5% 1,000 650 750 Number of Households (unit:10,000) 334 490 Private Rental House, Own House 0 0% Apartment 63% '88 '93 '98 '03 '08 '13 House (non- Households Living in Housing wood) 20% Households Living in Rental Houses Households Living in Private Rental & Apartment Houses (non-wood) Ratio of Households Living in Private Rental & Apartment Houses (non-wood)

Source: MIC “Housing and Land Survey” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 44 Residential market The total number of moving households has decreased, but the ratio of households moving to non- public rental apartments is trending upwards.

 The number of moving households peaked out in 1994-98 and decreased to about 77% of the peak-time level in 2009-13 .  The number of households moving to non-public rental apartments is also on a decreasing trend, although its ratio to the total number of moving households is trending upwards.

Housing choices of moving households 1984 - 2013 Ratio of Households Living in PrivateRental & 1,600 48% 50% 45% 46% 44% 45% 1,400 45% 39% 1,186 1,221 40%

1,200 1,103 1,135 Houses Apartment 1,039 35% 939 1,000 884 868 30% 782 778 800 698 25% 639 557 20% 600 532 502 466 447 427 15% 400 10% 200 5%

Number of Moving Number of Households (Unit:10,000) 0 0% 84-88 89-93 94-98 99-03 04-08 09-13 Number of Moving Households in Past 5 Years Number of Households Moved into Rental Houses Number of Households Moved into Private Rental (Apartment) Houses Ratio of Households Moved into Private Rental (Apartment) Houses Source: MIC “Housing and Land Survey” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 45 Residential market

The majority of households moving to non-public rental apartments moved within the same city.

 Looking at the former locations of households moving into non-public rental apartments in seven major cities, those that moved within the same city were greater in number than those that moved in from outside the city.  Tokyo’s 23 wards and Osaka saw a decline in households moving into non-public rental apartments from outside the city, while major regional cities saw no change.

Location choices of moving households

500 Household moving in a city 450 Household moving out a city 400 350

wood) (Unit:1,000) 300 266 - 250 207 197 200 200 Flow Households Moved in - 150 105 100 86 165 58 54 58 77 73 157 148 137 51 45 47 54 50 46 55 49 50 48 25 24 27 36 37 32 24 56 57 55 55 73 61 53 50 30 28 30 28 31 32 28 27 33 27 27 23 22 47 46 41 48 Breakdown of In 0 Private Rental HousesPrivate Rental (non 98 03 08 13 98 03 08 13 98 03 08 13 98 03 08 13 98 03 08 13 98 03 08 13 98 03 08 13 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - 99 - 04 - 09 - 94 - Sapporo Sendai Tokyo 23 Nagoya Osaka Hiroshima Fukuoka Wards Source: MIC “Housing and Land Survey” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 46 Residential market

The supply of non-public rental apartment units has increased more sharply than total housing stock.

 The growth of rental apartments (public and non-public combined) outpaced the growth of overall housing as well as the more modest rise of rental housing in general.  As a result, the ratio of rental apartments to total rental houses increased from 60 to 70%.

Housing stock by type 1988-2013 Housing growth rates by type

70 140 61 60 58 54 130 130 50 50 44 124 39 120 40 119

30 112 114 112 23 110 20 21 22 18 107 108 20 16 15 16 12 14 103 100 10 100 Housing Stock million) (Unit:1 Growth Rate (1988 = 100)

0 90 Number of Houses '88 '93 '98 '03 '08 '13 Number of RentalHouses Number of Houses Number of Rental & Apartment Houses (non-wood) Number of RentalHouses 80 Number of Rental & Apartment Houses (non-wood) '98 '03 '08 '13

The number of new constructions for rental houses remained high until 2017.

 In 2017, the number of new constructions decreased by 3,000 houses since 2016 and reached to a level of 960 thousand houses.  The number of new constructions for rental houses is 420 thousand, which remained at the same level as in 2016.

New housing supply trend: 1991-2017 Breakdown of new rental housing construction by region 2,000 50% 800 Provincial Region 1,800 45% Kinki Region 700

1,000 ） Chuubu Region

： 1,600 40% Metropolitan Region

Ratio of Rental Houses Rental of Ratio 600 Unit 1,400 35% （

1,200 30% 500 1,000 25% 400 800 20% 600 15% 300 400 10% 200 200 5% Number of ConstructionStarts 0 0% 100 New RentalNew Housing ConstructionRegion(Unit:1,000) by 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Own House Rental House Company House 0

House Built for Sale Ratio of Rental House 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Source: MLIT “Survey of Construction Work Started” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 48 Residential market Since 2015, the vacancy rates in Kanagawa prefecture have gone up suddenly. From the end of 2016, the vacancy rates are rising in Tokyo as well.

 The construction of rental apartment increased for avoiding tax with the basic deduction's of an inheritance tax being reduced from January, 2015.  Because of number increasing in apartment supply due to the factors besides the actual demand, vacancy rates increased suddenly centering on the suburb part with the high apartment ratio occupied in a rental apartment.

Vacancy Rates of Rental Housing (non-wood) in Major Cities Vacancy Rates of Rental Housing in Tokyo Metropolitan Area 25% 18 '98 '03 '08 '13 17

20% 16 15 wood) (Unit:%) - 15% 14 13 12 10% 11 All Tokyo areas 10 23 Tokyo districts 5% Tokyo cities

Rental Housing Vacancy Rate HousingRental (Unit:Rate Vacancy %) 9 Kanagawa

Vacancy Vacancy Rate of Housing Rental (non 8 Jan Jan Jan Jan Jan Jan Jan

0% Sep Sep Sep Sep Sep Sep Sapporo Sendai Tokyo23 Nagoya Osaka Hiroshima Fukuoka May May May May May May Wards 2012 2013 2014 2015 2016 2017 2018 Source: MIC “Housing and Land Survey” Source: TAS Corp. and At Home Co., Ltd. “Report on Rental Housing Market” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 49 Residential market

Rent standard is still on a declining trend.

 The rent level of non-public rental housing rose steadily from 1990, after which it gradually declined since 2000. This trend has continued not even changed recently.

Rents in the private sector (annual average) – nationwide and central Tokyo

110.0

105.0

100.0

95.0

90.0 Japan Tokyo 23 Wards Private (Annual Average) Rent Index (Base Year 2010) Year (Base Rent Index Average) (Annual Private 85.0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

The operating ratio of REIT case housing and the private placement fund has been at the highest level, and the rent standard in downtown 3 ward and Tokyo 23-ku‘s has continue to rise slowly.

 The operating ratio of Nagoya city and Fukuoka city hits the ceiling. The rent standard remains stable or decrease.

Occupancy rates of REIT-owned and private fund-owned properties Monthly rents of REIT-owned and private fund-owned properties

100% 5,000

) 4,500 2 98% 4,000 Yen/m

： 3,500 96% 3,000 2,500 94% 2,000

Tokyo 3 central districts 1,500 Tokyo 3 central districts Tokyo 23 districts Tokyo 23 districts 92% 1,000 Occupancy Rate (Unit:%) Rate Occupancy Nagoya city Nagoya city

Osaka city Monthly Level (Unit Rent 500 Osaka city Fukuoka city Fukuoka city 90% 0 Jul Jan Jan Jun Jun Oct Apr Sep Feb Dec Aug Nov Mar Jan Jan Jan Jan Jan Jan May Sep Sep Sep Sep Sep Sep May May May May May May 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Source: Association for Real Estate Securitization of Japan “ARES Japan Property Index” Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 51 Residential market The rate of housing ownership, which has a negative impact on rental housing demand, has shown a downward trend with the 40-49 age group.

Housing ownership rate in Japan by age group

90%

80%

70%

60% 70+ 60-69 50% 50-59 40% 40-49 30% 30-39 -29 20%

10%

0% 1998 2003 2008 2013

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

The number of locations for large stores has been on a downtrend in recent years.

New retail space supply vs. number of development projects

5,000 Floor Area Number of projects 900 786 4,500 738 731 730 750 738 800 705 669 4,000 654 700 Numberprojects(cases) of 638 620 3,500 584 569 548 560 600 3,000 500 450 500 2,500 4,545 4,369 400 2,000 4,178 3,983 3,729 3,335 300 Floor Area(1000m2) Floor 1,500 2,860 2,824 2,607 2,455 2,351 2,081 2,193 2,098 200 1,000 1,919 1,833 1,833 500 100

0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 （year） Source: METI “Large-scale Retail Chain Site Expansion Report” Note: The reported numbers for the fiscal years 2002 and 2008 include stores without floor space indication. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 54 Retail property market For shopping centers, the total floor area for all stores and the floor area per store are both on the rise.

Overall floor area and per-store floor area for shopping centers

Overall floor area Floor area per SC 2 (in 1 million m ) (in 1000m2/store) 70 Old SC Standard New SC Standard 18 16.3 15.7 15.9 16.1 15.0 15.3 14.8 16 center shopping per area Floor 60 14.1 14.2 14.5 13.6 13.2 51.7 52.5 12.4 12.8 49.8 50.8 14 50 11.8 12.1 46.4 47.9 11.6 44.2 45.7 42.1 42.7 12 38.0 40 36.5 10 33.1 34.6 30.6 30.4 31.5 30 8 Overall floor area Overall 6 20 4 10 2 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (year)

Source: Council of Shopping Centers “SC White Book” Note: In the old SC standard, only shopping malls with more than 10 retail tenants were considered. In the new SC standard, the shopping center must have more than 10 tenants including food stalls, service centers and retail outlets. On the same note, the shopping center must have more than 1,500 m2 retail space. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 55 Retail property market In 2017, the annual sales of existing shopping centers increased by 0.6% compared to the previous year.

YoY comparison of existing shopping centers’ annual sales

(％) 0.6 1 0.3 0.3 0.5 0.0 0.1 0 0 -0.5 -1.1 -1.3 -1 -1.6 -1.7 -1.5 -2.1 -2.0 -2 -2.2

-3 -3.4

-4

-5

-6

-7 -6.8 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Abenomics has not changed consumer outlook dramatically.

Consumer outlook index chart

60 ▼ Dec. 2012 Liberal Democratic Party becomes the ruling party 50 again

0 Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: Consumer outlook index calculation methodology: Consumers are asked to rate their outlook for the next 6 months for the following 4 categories: “Lifestyle”, “Income”, “Job environment” and “Determining when to purchase consumer durables” using a 5-scale index. Each of the 5 scales is assigned a value: +1 for “Will get better,” +0.75 for “Will get somewhat better,” +0.5 for “Won’t change,” +0.25 for “Will get somewhat worse,” and +0 for “Will get worse”. This numerical index is used to provide a component ratio for each of the answers, from which the results are calculated. To illustrate, a value of 50 will be produced if all participants answer “Won’t change” for all available items.

Compared to other areas, rent levels in Ginza and Omotesando are still high.

1st floor rent ranking in 13 principal business areas (yen/month/tsubo)

（yen / month / tsubo） 70,000 Ginza Omotesando Ginza 60,000 Ikebukuro Tokyo Metropolitan Shinjuku 50,000 Omotesando Area Shibuya *2 40,000 Yokohama Shinjuku Shinsaibashi 30,000 Oodori (Sapporo) *1 *3 Sannomiya (Kobe) 20,000 Sendai Provincial Areas 10,000 Tenjin (Fukuoka) Shijokawaramachi (Kyoto) 0 Late Early Late Early Late Early Late Early Late Early Late Early Late Sakae (Nagoya) 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017

Source: Japan Real Estate Institute, BAC Urban Projects, and Attractors Lab “Retail Chain Rental Trends” Note1: Rent in Yokohama is shown to have spiked in the early half of 2012, but this can be attributed to the extremely small sample size Note 2: Rent in Shinjuku is shown to have spiked in the late half of 2012, but this can be attributed to a sample bias toward small, high-rent properties Note 3: Rent in Ikebukuro is shown to have dived in the early half of 2013, but this can be attributed to a sample bias toward low-rent properties in unfavorable locations

Cap rates have been falling from around 2011, and hit a record low in all regions.

Commercial establishment cap rates (expected yield)

8.0%

7.0%

Suburban, Nagoya 6.0% Suburban, Osaka Suburnban, Tokyo 5.0% Metropolitan , Nagoya Metropolitan, Osaka 4.0% Metropolitan , Omotesando Metropolitan , Ginza 3.0%

2.0% Definition: Metropolitan high-class specialty stores: 1.0% Length of time after construction -or- large-scale repair/improvement: less than 5 years Tenants: Mainly retailers of high-class brands. Rent system: Mainly fixed-term, variable rental schemes based on the revenue. 0.0% Areas: Along Chuodoori in Ginza’s Chuo district. Along Omotesando in Shibuya’s Omotesando district. Suburban shopping centers: Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Sales floor area: around 20,000m2 Key tenants: Prominent general merchandise stores (GMS) Rent system: Mainly fixed-term, fixed-charge rental schemes Areas: Along main thoroughfares within about an hour from metropolitan Tokyo. Stores for areas outside Tokyo follow similar locational conditions as above.

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Logistics property market The truck-based transport volume (in tons), which forms the bedrock of Japan’s cargo industry, has continued to decline in recent years.

 Truck-based (automobile) transport is the primary transport method that constitutes a large share of Japan’s freight traffic.  In recent years, the volume of cargo transported via automobile has declined due to the downturn in the quantity of trucks sold for private use.

Cargo quantity by transport method (FY2015) Automobile cargo quantity movement (Unit: 1 million tons) （1 million tons） Domestic aviation 7,000 Coastwise vessels Business Personal 365 1 Railways 6,000 43 5,000

4,000

3,000

Motor vehicles 4,289 2,000

1,000

0 '60 '65 '70 '75 '80 '85 '90 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15

Source: MIC “Transport quantity by transport method” and MLIT “Automobile Transport Statistics Survey” Note: The chronological continuity of data from prior to 2009 could not be guaranteed due to the changes made to the tallying methodology in the middle of 2010. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 61 Logistics property market As the movement to smaller logistics lots progresses, the quantity distributed in such lots appears to be in upward trend based on the number of instances.

 The movement to smaller logistics lots progresses across the whole industry.  The number of home delivery service handled has increased by an average of approximately 3% per year, and reaching 4.2 billion in FY2017.

Industry-wide distribution quantity by lot size Number of home deliveries (million)

Below 0.1t 0.1～0.5t 0.5～1t 1～5t Above 5t 0% 50% 100% 4,251 +2.9% 2000 46.4% 3,526 3,232 2,751 2005 59.2%

2010 72.4%

2015 79.2% （FY） 2002 2007 2012 2017 Source: MLIT “Logistics Census” Source: MLIT “Release of Reports on the Number of home deliveries”

Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 62 Logistics property market Small-lot consignments increase, due partly to the expansion of e-commerce, which is expected to continue growing hereafter.

 Market size of Business-to-Consumer e-Commerce is expected to surpass 20 trillion yen in 2019.

Market size of B-to-C e-Commerce

(trillion JPY) 25.9 24.5 23.1 21.8 20.6 19.3 18.0 16.6 15.4

2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: NRI Note: Business -to-consumer e-commerce: sale of products and services to consumers in general via the Internet Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 63 Logistics property market While new supply has stopped dwindling, facilities are growing larger due to businesses consolidating their logistics capabilities.

 The number of supplied warehouse buildings fell to roughly 23% of the peak level in 1991 (12,000 buildings/year) which has stabilized in recent years.  The number of supplied warehouse buildings for the transport industry is dwindling at a more relaxed pace compared to the rest of the industry (see figure below left), but the floor space per building is on an upward trend (below right).  This explains the increased need for SCM support for generic enterprises and new/large-scale logistics facilities for logistics consolidation.

Nationwide number of supplied warehouses Floor space per warehouse building including warehouses for transport and transport industry share Transport industry Other than transport Transport industry share Entire industry Other than transport Transport industry (Buildings) （㎡） 60,000 25% 2,500

50,000 20% 2,000

40,000 15% 1,500 30,000 10% 1,000 20,000

5% 500 10,000

0 0% 0 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Copyright(C) Nomura Research Institute, Ltd. All rights reserved. Source: MLIT “Construction Statistics” 64 Logistics property market In response to the growing demand of logistics used by e-commerce, the volume of order to build warehouses/logistics facilities has been increasing.

Order volume for construction of warehouses/logistics facilities by ordering industry

(1 billion yen) Real estate industry Transport industry Others 800

700

600

500

400

300

200

100

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: MLIT “Construction Order Trends, Statistics and Survey” Note: Only contracts worth 500 million yen and above are included Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 65 Logistics property market Major foreign-based logistics property players and Japanese real estate developers are gearing up for roadside development ahead of new expressway construction.

No. Project 25 Landport Narashino 0101 PROLOGIS Park hurukawa3 26 DPL Shinnarashino 02 PROLOGIS Park Tsukuba1 27 MCUD IchikawaⅠ 03 ESR KUKI Distribution Center 28 MCUD IchikawaⅡ 04 MFLP Prologis Park Kawakoshi Tohoku EXPWY 29 01 SOSiLA Kawakoshi 05 ESR ICHIKAWA Distribution Center 30 SOSiLA Ebina Kan-etsu 41 06 MFLP KawaguchiⅠ 03 02 Joban EXPWY EXPWY 13 31 SOSiLA Kasukabe 07 GLP Niiza 32 I Missions Park Ichikawashiohama 08 MFLP Haneda 36 31 09 MFLP KawasakiⅠ 04 37 29 40 10 MFLP HunabashiⅡ 06 23 34 22 33 Expressway 19 20 07 11 Tokyo Rail Gate EAST Gaikan EXPWY Expressway (planned) Ken-O 28 32 Narita Airport Chuo 42 New devts 12 GLP Sagamihara Project EXPWY 27 05 10 EXPWY 24 13 DPL Satte 25 18 26 14 14 Chibashi Wakamatutyou Logistics Center 11 38 33 I Missions Park Inzai2 39 12 Haneda 15 Logicross Yokohama Kouhoku 08 34 I Missions Park haku2 21 16 09 Airport 16 Logiport Kawasaki Bay 35 Atsugi ⅡLogistics Center Tomei EXPWY 35 17 15 36 Hasuda Ⅱ Logistics Center 17 Logicross AtsugiⅡ 30 43 37 18 Landport Shinonome Matsubushi Logistics Center 38 19 Landport OumeⅠ PROLOGIS Park Chiba1 39 20 Landport OumeⅡ・Ⅲ PROLOGIS Park Chiba2 40 GLP NagareyamaⅢ 21 Landport Atsugiaikawamachi 41 22 Landport Kawaguchi GLP KenouGoka 42 GLP YachiyoⅡ 23 Landport Koshigaya 43 GLP Twin City PRJ(AtsugiⅢ) 24 Landport Higashinarashino

Source: Compiled by NRI from companies’ respective websites Copyright（C） Nomura Research Institute, Ltd. All rights reserved. 66 # Name of Project Name of Developer Map No. Completion Scale (Total floor area) 1 PROLOGIS Park Hurukawa3 PROLOGIS 1 2018.8 31,256㎡ 2 PROLOGIS Park Tsukuba1 PROLOGIS 2 2018.8 About 70,000 ㎡ 3 I Missions Park Haku2 ITOCHU Corporation 34 2018.8 Unknown 4 Atsugi ⅡLogistics Center ORIX 35 2018.8 32,909㎡ 5 ESR KUKI Distribution Center ESR 3 2018.9 155,853㎡ 6 MFLP Prologis Park Kawakoshi Mitsui Fudosan/PROLOGIS 4 2018.10 About 130,800㎡ 7 GLP KenouGoka GLP 41 2018.10 140,031㎡ 8 Landport OumeⅠ NOMURA REAL ESTATE DEVELOPMENT 19 2018.11 61,121㎡ 9 DPL Shinnarashino Daiwa House Industry 26 2018.11 14,084㎡ 10 ESR ICHIKAWA Distribution Center ESR 5 2019.1 229,715㎡ 11 Hasuda Ⅱ Logistics Center ORIX 36 2019.1 26,073㎡ 12 SOSiLA Kawakoshi SUMITOMO CORPORATION 29 2019.1 21,823㎡ 13 GLP YachiyoⅡ GLP 42 2019.1 About 54,000 ㎡ 14 GLP NagareyamaⅢ GLP 40 2019.2 91,440㎡ 15 I Missions Park Inzai2 ITOCHU Corporation 33 2019.3 Unknown 16 SOSiLA Kasukabe SUMITOMO CORPORATION 31 2019.3 52,900㎡ 17 Matsubushi Logistics Center ORIX 37 2019.3 77,326㎡ 18 GLP Niiza GLP 7 2019 Spring About 31,000 ㎡ 19 MFLP KawaguchiⅠ Mitsui Fudosan 6 2019.4 About 54,100 ㎡ 20 Logiport Kawasaki Bay MITSUBISHI ESTATE 16 2019.5 296,799㎡ 21 MFLP Haneda Mitsui Fudosan 8 2019.6 About 84,400 ㎡ 22 Logicross Yokohama Kouhoku MITSUBISHI ESTATE 15 2019.6 About 16,400 ㎡ 23 Landport Kawaguchi NOMURA REAL ESTATE DEVELOPMENT 22 2019.6 19,742㎡ 24 Landport Higashinarashino NOMURA REAL ESTATE DEVELOPMENT 24 2019.7 74,725㎡ 25 I Missions Park Ichikawashiohama ITOCHU Corporation 32 2019.8 Unknown 26 Logicross AtsugiⅡ MITSUBISHI ESTATE 17 2019 Summer About 34,700 ㎡ 27 MFLP KawasakiⅠ Mitsui Fudosan 9 2019.9 About 41,500 ㎡ 28 PROLOGIS Park Chiba1 PROLOGIS 38 2019.9 146,805㎡ 29 MFLP HunabashiⅡ Mitsui Fudosan 10 2019.10 About 225,000㎡ 30 GLP Twin City PRJ (AtsugiⅢ) GLP 43 2019.10 About 42,000 ㎡ 31 Landport Shinonome NOMURA REAL ESTATE DEVELOPMENT 18 2019.12 Unknown 32 PROLOGIS Park Chiba2 PROLOGIS 39 2019 About 66,000 ㎡ 33 Landport Narashino NOMURA REAL ESTATE DEVELOPMENT 25 2020.1 142,742㎡ 34 SOSiLA Ebina SUMITOMO CORPORATION 30 2020.2 76,568㎡ 35 Landport Atsugiaikawamachi NOMURA REAL ESTATE DEVELOPMENT 21 2020.3 93,428㎡ 36 Landport OumeⅡ・Ⅲ NOMURA REAL ESTATE DEVELOPMENT 20 2020.6 Unknown 37 Landport Koshigaya NOMURA REAL ESTATE DEVELOPMENT 23 2020.6 31,981㎡ 38 Tokyo Rail Gate EAST Mitsui Fudosan 11 2021.10 About 161,000㎡ 39 GLP Sagamihara Project GLP 12 From 2022 655000㎡ 40 DPL Satte Daiwa House Industry 13 Unknown 115,600㎡** 41 Chibashi Wakamatutyou Logistics Center ITOCHU Corporation 14 Unknown About 10,478 ㎡ 42 MCUD IchikawaⅠ Mitsubishi Corporation Urban Development, Inc. 27 Unknown About 17,300 ㎡** 43 MCUD IchikawaⅡ Mitsubishi Corporation Urban Development, Inc. 28 Unknown About 3,300 ㎡** Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Source: Compiled by NRI from companies’ respective websites Note) * Total leasable area, ** Site area 67 Logistics property market While the supply of logistics properties is increasing, vacancy rates are rising since 2016. On the other hand monthly rent offers are also rising in Greater Tokyo.

Monthly rent offers and vacancy rates of logistics properties

(yen / month / Tokyo area Osaka area tsubo) 4,500 Apr-18

Apr-17

Apr-15 Apr-16 Apr-12 4,000 Apr-14

Apr-11 Rent offer Apr-13 Apr-15 3,500 Apr-16 Apr-17 Apr-12 Apr-18 Apr-14 Apr-11 Apr-13 3,000 Vacancy rates 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Source: Ichigo Real Estate Information Service “Survey on the Logistics Facilities Rental Market” Note: Logistics facilities which have a total lot area or total floor area of 10,000m2 Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 68 Logistics property market

Cap rates have been falling since 2012, with Tokyo hitting all-time low.

Single tenant Multi-tenant 7.5% 7.5%

7.0% 7.0%

6.5% 6.5%

6.0% 6.0%

5.5% 5.5% Chiba Chiba (inland) (inland) 5.0% 5.0% Tokyo Tokyo (inland) (inland) 4.5% Tokyo 4.5% Tokyo (bay) (bay) 4.0% 4.0% Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Source: Japan Real Estate Institute “Real Estate Investor’s Survey” Note: Single tenant: 2-3 floors; total floor area of around 10,000m2 Multi-tenant: 3-4 floors; total floor area of around 50,000m2 Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 69 Population movements in Japan

Macro fundamentals of Japan

Overview of real estate investment market in Japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Hotel market Domestic travel expenditure in 2017 was the largest in the last 7 years, driven by an increased number of foreigner travelers to Japan.

 Foreign travelers in 2017 accounted for 17% of total domestic travel expenditure

Trends in domestic travel expenditure ＋：the number of ＋：foreign travelers ＋ (trillion yen) -:Great East Japan :depreciation of -Consumption tax ＋：”Silver Week”national holidays Increase earthquake yen progress increase Start is the most significantly 30.0 25.5 23.9 24.7 25.0 21.6 21.6 4.4 20.6 20.5 20.4 3.5 3.7 20.0 1.1 0.8 1.1 1.4 2.0 4.9 5.0 5.1 5.0 4.4 4.8 4.6 15.0 4.5

10.0 15.4 14.8 15.0 15.4 13.9 15.8 16.0 16.1 5.0

0.0 '10 '11 '12 '13 '14 '15 '16 '17

Japanese Stay Travel Japanese Day Trip Foreigners Travel

Sources: Compiled by NRI from Japan Tourism Agency “Ryokou・Kankou Sho-hi Doukou Chosa” and “Consumption Trend Survey for Foreigners Visiting Japan” daｔa Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 71 Hotel market

The number of travelers among Japanese residents has edged sideways.

Cumulative domestic traveler numbers Cumulative domestic traveler numbers (Overnight Travel/Day Trip) (by trip objective)

(Million) (Million)

700 632 631 641 648 613 613 605 700 632 631 641 648 595 613 613 595 605 600 600 107 111 118 117 108 107 109 500 112 314 311 315 324 500 299 297 298 292 144 143 143 145 138 141 130 400 400 134

300 300 200 200 372 368 383 365 385 386 318 314 316 320 297 313 326 323 360 349 100 100

0 0 '10 '11 '12 '13 '14 '15 '16 '17 '10 '11 '12 '13 '14 '15 '16 '17 Sightseeing/Recreations Homecoming/Friend Visit Stay Travel Day Trip Business Trip

Source: Compiled by NRI from Japan Tourism Agency “Ryokou ・Kankou Sho-hi Doukou Chosa” data Note: Cumulative domestic traveler numbers do not include foreign travelers to Japan.

Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 72 Hotel market Conversely, the number of travelers to Japan increased rapidly and reached about 28.7 million, thanks to the weak yen and relaxed visa criteria. It accounts for approximately 75% of the four neighbouring Asian countries/regions.

 Measured by departure country, Chinese visitors will account for about 53% of the total in 2030.

No. of foreigner travelers to Japan by departure country No. of foreigner travelers to Japan (2016)

* Assumes the base scenario below (Million) (Ten thousand visitors) 35.0 ←Actual Forecast→ 28.7 30.0 24.0 25.0 U.S., 137, 19.7 5% Others, China, 20.0 504, 17% 736, 26% Thailand, 13.4 15.0 99, 3% 2,870 Ten 10.4 thousand 8.6 Hong 10.0 7.3 8.3 8.4 8.4 6.7 6.8 6.2 Kong, 223, Korea, 8% 5.0 Taiwan, 714, 25% 456, 16% 0.0 Four neighboring countries in Asia account for about 75%. '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Sources: Compiled by NRI from (Actual numbers) JNTO Source: Compiled by NRI from JNTO data

The ratio of foreign nationals to the number of accommodation is rising and was 15.7% in 2017.

 Viewed by facility type, the rise in foreign travelers is impacting growth in business hotels.

Domestic accommodation (Domestic/Foreign) Domestic stays (by accommodation type)

(Million) 600 (Million) 504 494 498 600 466 474 500 439 504 494 498 417 66 466 474 33 45 71 78 500 439 18 26 417 26 24 28 9 400 10 80 78 80 400 8 9 73 75 62 67 300 300 211 207 170 184 194 212 417 413 432 429 438 423 420 160 200 200 61 65 69 68 72 74 72 100 100 106 106 106 103 106 103 98 0 0 '11 '12 '13 '14 '15 '16 '17 '11 '12 '13 '14 '15 '16 '17 Japanese-Style Hotel Resort Hotel Domestic Customer Foreign Customer Business Hotel City Hotel Lodging House Company/Group Loidging *Business Hotel：Budget Hotel Source: Compiled by NRI from Japan Tourism Agency “Syukuhaku Ryokou Toukei” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 74 Hotel market The total number of the accommodation facilities remains stable. By type, however, the proportion of hotels continues to rise

Trend in number of guest rooms

(Thousand rooms) 1,800 1,579 1,588 1,590 1,568 1,576 1,556 1,562 1,545 1,548 1,562 1,600 1,400 1,200 823 808 792 764 761 741 735 710 702 692 1,000 800 600 400 756 781 798 803 814 815 827 835 846 870 200 0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 (Fiscal year)

Japanese-style Hotel Hotel Source: Compiled by NRI from MHLW “Report of Health Administration and Services” data

Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 75 Hotel market The number of accommodation facilities and area of floor space continues to expand owing to a stable economic environment and growing demand for accommodations.

 Floor space per building is 1.25 times higher than 2011, as large buildings are being built

Accommodation facilities* No of buildings and floor space Accommodation facilities * Floor space per building ㎡ (Buildings) ( ) (thousand ㎡) 1,400 3,500 2,400 2,224 2,222 1,205 2,100 1,200 3,000 1,800 1,639 2,678 1,550 1,000 2,500 1,467 819 1,500 1,298 800 2,000 1,202 1,822 1,200 600 547 1,500 419 412 900 848 400 327 345 1,000 615 675 600 393 448 200 500 300

0 0 0 '11 '12 '13 '14 '15 '16 '17 '11 '12 '13 '14 '15 '16 '17 *Accommodations assume a hotel. Number of Ridge(Left Axis) Surveyed buildings are those built with steel framed reinforced concrete, ferroconcrete and steel frame Floor Space(Right Axis) Source: Compiled by NRI from MLIT “Statistics on Construction Undertaken” data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 76 Hotel market

c13,000 rooms are expected to open in Tokyo over the next 3 years

Main new hotel development projects in Tokyo* 1/2

Opening Number of Opening Number of Operator Area Operator Area year rooms year rooms APA Group Shintomicho 2018 141 JR East Japan Railway Shinkiba 189 Shinjuku 2018 176 Company Akihabara 2019 196 Akasaka 2018 306 Gotanda 2020 166 Nihonbashi-Bakurocho 2018 193 Takeshiba 2020 200-300 Ayase 2019 170 JR West Japan Railway Iidabashi 2018 295 Ueno 2019 129 Company Nihonbashi 2019 240 Otuska 2019 613 Daiwa Royal Shinbashi 2018 undecided Komagome 2019 184 Ariake 2018 undecided Shinjuku 2019 166 Kyobashi 2019 about 200 Shinjuku 2019 217 Daiwa House Industry Toyosu 2019 330 Nagatacho 2019 500 Tokyu Hotels Shibuya 2018 180 Nihonbashi-Bakurocho 2019 281 Toyoko Inn Shinjuku-Gyoen 2018 undecided Roppongi 2019 875 Inagi 2018 263 Higashi-Shinjuku 2020 565 Akabane 2019 220 Nihonbashi-Bakurocho 2020 281 Hankyu Hanshin Hotels Kyobashi 2019 270 Ryogoku 2020 1111 Ginza 2019 238 Roppongi undecided 670 Four Seasons Hotels and Otemachi 2020 190 Kyoritsu Maintenance Ginza 2019 undecided Resorts Keikyu EX Inn Hamamatsucho 2019 111 Fujita Kanko Asakusa 2018 125 Nihonbashi-Kayabacho 2020 142 Hamamatsucho 2019 190 JR Kyushu Railway Shinbashi 2019 267 Asakusa 2020 undecided Company

Source: Compiled by NRI from Ohta Publications Co., Ltd. ”Weekly HOTERES” data Note: A hotel development project is chosen as the area where weekly HOTERES investigated. Copyright(C) Nomura Research Institute, Ltd. All rights reserved. 77 Hotel market

c13,000 rooms are expected to open in Tokyo over the next 3 years

Main new hotel development projects in Tokyo* 2/2

Opening Number of Operator Area year rooms Prince Hotels Ebisu 2020 82 Shiomi 2020 605 Hotel Keihan Tsukiji 2018 300 Ginza 2019 undecided Hotel Livemax Ueno 2018 - Takadanobaba 2018 - Asakusabashi 2018 - Okachimachi 2018 - Akabane 2018 - Shintomicho 2018 - Ayase 2019 - Marriott International Yaesu 2022 98 Mitsui Fudosan Hotel Kanda 2018 191 Management Gotanda 2018 370 Nihonbashi-muromachi 2018 260 Ginza 2019 338 Mitsui Fudosan Kasumigaokamachi 2019 undecided Roppongi 2019 260 Toyosu 2020 200 Otemachi 2020 190 Yaesu 2022 98 Resorttrust Nihonbashi-hamacho 2019 223

Over 6,000 rooms are expected to open in Osaka as well over the next 3 years

Main new hotel development projects planned in Osaka prefecture*

Opening Number of Opening Number of Operator Area Operator Area year rooms year rooms

APA Group Osaka 2018 193 Toyoko Inn Osaka 2018 undecided Osaka 2019 917 Osaka 2018 542 Osaka 2019 161 Hankyu Hanshin Hotels Osaka 2019 250 Suita 2019 119 Hotel Keihan Osaka undecided undecided AB Hotel Osaka 2019 168 Hotel Monterey Group Osaka 2018 345 Sakai 2019 125 Unizo Holdings Osaka 2019 291 Osaka 2021 487 Candeo Hospitality Management Global Suita 2018 111 Hotel Livemax Osaka 2019 undecided Headquarter Osaka 2019 undecided Kuretakeso Osaka 2018 141 Marriott International Osaka 2020 288 Sakai 2018 122 Osaka 2021 337 JR West Japan Railway Osaka 2018 400 Route Inn Japan Kishiwada 2019 210 Company Osaka 2018 88 Osaka 2019 220 Sotetsu Inn Osaka 2018 176 Osaka 2018 276 Daiwa Royal Hotel City Osaka 2019 undecided

Daiwa House Industry Osaka 2019 undecided Source: Compiled by NRI from Ohta Publications Co., Ltd. ”Weekly HOTERES” data Tokyu Hotels Osaka 2019 360 Note: A hotel development project is chosen as the area where weekly HOTERES investigated.

Guest room occupancy rates vary widely by prefecture

 Occupancy rates at hotels in Osaka and Tokyo have risen to c80% are approaching full capacity.

Average occupancy rate by prefecture

(%) 100 90 8380 80 7372 6868 66 66 66 66 70 6464 62 62 5858 58 58 58 58 58 56 60 5655 55 55 55 55 54 53 5252 52 51 51 50 49 49 49 4847 47 45 50 4342 41 38 40 30 20 10 0 Mie Gifu Oita Saga Nara Aichi Akita Shiga Fukui Kochi Iwate Chiba Kyoto Tokyo Osaka Ehime Hyogo Miyagi Ibaraki Tottori Niigata Tochigi Aomori Nagano Kagawa Toyama Gumma Saitama Fukuoka Shimane Ishikawa Okinawa Miyazaki Shizuoka Nagasaki Okayama Hokkaido Yamagata Kanagawa Hiroshima Fukushima Yamanashi Tokushima Yamaguchi Kagoshima Wakayama Kumamoto

Source: Compiled by NRI from Japan Tourism Agency “Syukuhaku Ryokou Toukei” data

Looking at the type of accommodation in the top 5 prefectures, the occupancy rates in hotels often exceeds 70%. On the other hand, the occupancy rates of Japanese-style inns is less than 50% excluding the Tokyo area.

Average occupancy rate in top 5 prefectures (by type of accommodation)

(%) 100 91 89 85 85 84 84 90 83 79 79 80 80 80 73 74 70 58 57 61 60 56 50 40 31 31 31 30 20 10 0 City Hotel City Hotel City Hotel City Hotel City Hotel Resort Hotel Resort Hotel Resort Hotel Resort Hotel Resort Hotel Business Hotel Business Hotel Business Hotel Business Hotel Business Hotel Japanese-Style Hotel Japanese-Style Hotel Japanese-Style Hotel Japanese-Style Hotel Japanese-Style Japanese-Style Hotel Japanese-Style Osaka Tokyo Fukuoka Aichi Chiba

Source: Compiled by NRI from Japan Tourism Agency “Syukuhaku Ryokou Toukei” data

Besides Tokyo, Osaka and Kyoto, we are capturing foreign demand in Hokkaido and Okinawa, which are tourist spots. In Oita, Gifu and Chiba, it is expected that there would be demand seeping in from large cities.

Room occupancy rate by prefectures and share of foreigners in total number of guests (2017)

90%

Osaka 80% Tokyo

Fukuoka Aichi

70% Kanagawa Chiba Saitama Hiroshima Okinawa Kyoto Occupancy rate Miyagi Ishikawa Kumamoto Hokkaido Okayama Saga Shimane Ibaraki 60% Ehime Hyogo Nagasaki Kagawa Aomori Shizuoka Shiga Oita Yamaguchi Iwate Kagoshima Gumma Miyazaki Tochigi Tottori 50% Toyama Gifu Yamagata Mie Tokushima Nara

Fukushima Wakayama Akita Yamanashi 40% Fukui Kochi Nagano

Niigata

30% 0% 5% 10% 15% 20% 25% 30% 35% 40% Share of foreigners

Hotel REIT earnings are expanding due to high occupancy rates

Rents at hotel REITs

18,000 16,000 14,000 12,000 10,000 8,000 6,000

Unit: yen/tsubo※ Unit: 4,000 Monthly rent rent standard Monthly 2,000 0 月月月月月月月月月月月月月月月月月月月月月月月月 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9

10年 11年 12年 13年 14年 15年 16年 17年

23 wards of Tokyo Nationwide

Macro fundamentals of Japan

Overview of real estate investment market in japan

Office market

Residential market

Retail property market

Logistics property market

Hotel market

Real estate investment products

 Unlisted open-ended private REITs were offered in November 2010, and the size of the private REITs market is growing rapidly.

Overview of real estate investment instruments in Japan and AUM

(¥tn) 20 16.5 16.7 16 13.4

4 2.6

0 Listed REIT Private Fund Private REIT RMBS CMBS

Equity type Debt type

Listed Unlisted Residential Commercial mortgage mortgage Close-ended Open-ended

Sources: Compiled by NRI from Association for Real Estate Securitization, Sumitomo Mitsui Trust Research Institute Co., Ltd., and the Japan Securities Dealers Association data Note: Listed REIT figure is updated as of end of Dec 2017, private fund figure is updated as on end of Dec 2017, private REIT figure is updated as of end of Mar 2018, RMBS/CMBS figure is updated as of end of Mar 2018 Copyright（C） Nomura Research Institute, Ltd. All rights reserved. 85 Real estate investment products Launched in September 2001, J-REIT market capitalization has reached approximately 13 trillion yen.

 J-REITs began trading on the stock market in September 2001 with two companies and a market capitalization of 250 billion yen.  As of end of August 2018, there were 59 J-REITs traded worth approximately 12.6 trillion yen.

J-REIT market cap and number of J-REITs

(¥bn) (No. of J-REITs) 14,000 70

12,000 60

10,000 50

8,000 40

6,000 30

4,000 20

2,000 10

0 0 2001/9 2003/1 2004/5 2005/9 2007/1 2008/5 2009/9 2011/1 2012/5 2013/9 2015/1 2016/5 2017/9 Market Capitalization No. of J-REITs － Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Source: Compiled by NRI from ARES “ARES J REIT Databook” data. 86 Real estate investment products c73% of J-REIT assets are located in the Tokyo metropolitan area and 43% are portfolios of office properties.

 c73% of real estate owned by J-REITs is in the Tokyo metropolitan area.  In recent years, J-REITs have become more diversified in type of property owned, and a healthcare REIT was launched in November 2014.

Asset mix of J-REITs by area and asset class

Other Others 1.7% Areas Logistics 9.2% 14.7% 5 Central Kinki Area Wards of 14.1% Tokyo Hotel 33.4% 7.1% Office 42.8% Chubu Approx. Approx. Area 16.2 16.2 trillion yen trillion yen 4.6%

Retail 18.4% Kanto Area 23 Wards 22.0% of Tokyo 16.7% Residential Greater Tokyo Area 15.3%

73.0% Source: Compiled by NRI from ARES data Copyright(C) Nomura Research Institute, Ltd. All rights reserved. Note: As of the end of June 2018 87 Real estate investment products The TSE REIT index surged in late 2012 and remain firm.

 The TSE REIT index dropped sharply from its peak in May 2007, but has recovered rapidly from late 2012.

TSE REIT Index, TOPIX, and the TOPIX Real Estate Sector Index

3,000

2,500

2,000

1,500

1,000

500

0 2003/3 2004/6 2005/9 2006/12 2008/3 2009/6 2010/9 2011/12 2013/3 2014/6 2015/9 2016/12 2018/3

TSE REIT Index TOPIX TOPIX Real Estate Sector Index Source: Compiled by NRI from Thomson Reuters data Copyright（C） Nomura Research Institute, Ltd. All rights reserved. 88 Real estate investment products J-REIT dividend yields rapidly increased to around 8%, but are currently down to around 4%.

 Yield spreads are currently around 4%

J-REIT dividend yield and JGB 10-year yield

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0% 2002/1 2003/1 2004/1 2005/1 2006/1 2007/1 2008/1 2009/1 2010/1 2011/1 2012/1 2013/1 2014/1 2015/1 2016/1 2017/1 2018/1 -1.0%

Spread J-REITs Dividend Yield JGB 10-Year-Yield Copyright（C） Nomura Research Institute, Ltd. All rights reserved. Sources: Compiled by NRI from Thomson Reuters and MoF data 89 Real estate investment products Capital return is firm.

 According to the index based on actual performance of core funds invested in domestic real estate, the performance of real estate investments in Japan recovered to positive territory in terms of capital return and has been firm since.

ARES Japan Property Index (AJPI) and ARES Japan Fund Index (AJFI)

25% AJPI: Income Return 25% AJPI: Total Return AJFI: Income Return 20% 20% AJFI: Total Return AJPI: Capital Return 15% AJFI: Capital Return 15% 10% 10%

5% 5%

0% 0%

-5% -5%

-10% -10%

-15% -15%

-20% -20%

-25% -25% 2002/12 2005/8 2008/4 2010/12 2013/8 2016/4 2002/12 2005/8 2008/4 2010/12 2013/8 2016/4

Sources: Compiled by NRI from ARES “ARES Japan Property Index” and “ARES Japan Fund Index” data. Copyright（C） Nomura Research Institute, Ltd. All rights reserved. 90 Real estate investment products CMBS issuance has decreased drastically since 2008, and at present only RMBS are issued on a ongoing basis.

 Most recently, about 64% of residential mortgage-backed securities were originated by the Japan Housing Finance Agency.

Asset backed securities breakdown by type of backing and RMBS breakdown by originator

(¥100m) 0% 20% 40% 60% 80% 100% 60,000 2004FY 1H 2004FY 2H 2005FY 1H 2005FY 2H 2006FY 1H 2006FY 2H 2007FY 1H 2007FY 2H 2008FY 1H 50,000 2008FY 2H 2009FY 1H 2009FY 2H 2010FY 1H 2010FY 2H 2011FY 1H 2011FY 2H 2012FY 1H 2012FY 2H 40,000 2013FY 1H 2013FY 2H 2014FY 1H 2014FY 2H 2015FY 1H 4,234 7,418 2015FY 2H 2016FY 1H 2016FY 2H 2017FY 1H 30,000 2017FY 2H Housing Finance Agency Banks/Trust Banks Regional Banks Non-bank Others 7,352

9,879 20,000 6,937 8,755 0 1,994 32,447 30,260 563 4 0 0 1,964 0 10 0 3,470 980 258 140 21,282 5 0 10,000 0 0 1,303 45 17,834 16,935 16,276 16,811 138 0 15,423 14,815 15,064 13,614 14,782 14,670 12,217 12,030 13,562 9,743 11,113 11,287 11,148 9,894 10,760 10,425 7,935 8,787 8,341 9,465 8,235

0 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half Half RMBS CMBS CDO Lease Consumer Loan Shopping Credit Accounts receivable/Commercial Bills Others Copyright(C) Nomura Research Institute, Ltd. All rights reserved. Source: Compiled by NRI from Japan Securities Dealers Association data 91 Authors

荒木康行大道亮溝口卓也 Yasuyuki ARAKI Akira DAIDO Takuya MIZOGUCHI Senior Consultant Consultant Consultant Section in Charge Section in Charge Section in Charge Macro fundamentals of Japan Overview of real estate investment Hotel market Expertise market in Japan, Residential market, Expertise Real estate development, investment Logistics Property market Tourism, MICE and hotel business and TECH/DX business strategy Expertise strategy and research. In addition, planning and research. In addition, Residential, real estate and energy supporting area development. international market entry support. business strategy and research.

亀井敬太沼田悠佑大西直彌 Keita KAMEI Yusuke NUMATA Naoya ONISHI Consultant Consultant Consultant Section in Charge Section in Charge Section in Charge Office market, Retail property market, Population movements in Japan Real estate investment products Expertise Expertise Expertise Real estate, residential loan and Real estate and energy business Real estate, energy and logistics infrastructure business strategy and strategy and research. In addition, business strategy and research. research. industrial policy planning and monitoring.

Contact： Nomura Research Institute, Ltd. Consulting Division [email protected]