2006 Annual Report
JAPAN OPPORTUNITIES FUND II LIMITED
Japan Opportunities Fund II Limited c/o 8/F Hong Kong Diamond Exchange Bldg 8 Duddell Street, Central, Hong Kong Tel: (852) 2522 6122 Fax: (852) 2522 6992 Email: [email protected] CONTENTS
PROFILE 1 CORPORATE INFORMATION 2 DIRECTORS’ REPORT 3 MANAGER’S REPORT 4 INDEPENDENT AUDITORS’ REPORT 7 FINANCIAL STATEMENTS 8
APPENDIX PORTFOLIO HIGHLIGHTS 32 PROFILE
Japan Opportunities Fund II Limited (the “Company”) was incorporated in the Cayman Islands on 5 January 2004. The objective of the Company is to invest in residential real estate primarily located in provincial cities in Japan such as Sapporo, Fukuoka, Sendai and Hiroshima.
The Company, by applying suitable leverage, seeks stable rental income to produce a consistent dividend stream. It also seeks opportunities for portfolio enhancement through value-adding strategies such as improvement in property management.
01 Annual Report 2006 CORPORATE INFORMATION
BOARD OF DIRECTORS CUSTODIAN Stuart Leckie (Chairman) Northern Trust International Fund Fiduciary Kenneth Gaw Services (Ireland) Limited Colin Kingsnorth (resigned on 7 August 2006) IFSC House International Financial Services Centre, Dublin 1 REGISTERED OFFICE Ireland Cricket Square Hutchins Drive, P.O. Box 2681 ADMINISTRATOR, REGISTRAR AND Grand Cayman KY1-1111 TRANSFER AGENT Cayman Islands Northern Trust International Fund Administration Services (Ireland) Limited INVESTMENT MANAGER IFSC house Altus Capital Limited International Financial Services Centre, Dublin 1 8/F Hong Kong Diamond Exchange Building Ireland 8 Duddell Street, Central Hong Kong BRITISH VIRGIN ISLANDS SUBSIDIARY Japre Investment Limited [email protected] Romasco Place, Wickhams Cay 1 P.O. Box 3140, Road Town WEBSITE Tortola http://www.jof2.com British Virgin Islands
AUDITORS JAPANESE SPECIAL PURPOSE VEHICLES PricewaterhouseCoopers Yugen Kaisha Housen 33/F, Cheung Kong Center 12/F, Kasumigaseki Building 2 Queen’s Road Central 2-5 Kasumigaseki, 3-chome Hong Kong Chiyoda-ku, Tokyo 100-6012 JAPANESE AUDITORS Japan AZSA & Co. (the Japan member firm of KPMG International) Yugen Kaisha Houun AZSA Center Building 12/F, Kasumigaseki Building 1-2 Tsukudo-cho 2-5 Kasumigaseki, 3-chome Shinjuku-ku Chiyoda-ku, Tokyo 162-8551 Tokyo 100-6012 Japan Japan
INVESTMENT ADVISOR Yugen Kaisha Houryu Sakura Management Limited 12/F, Kasumigaseki Building Sea Meadow House 2-5 Kasumigaseki, 3-chome Blackburne House Chiyoda-ku, P.O. Box 146, Road Town Tokyo 100-6012 Tortola Japan British Virgin Islands
Japan Opportunities Fund II Limited 02 DIRECTORS’ REPORT
Following the completion of our investment in September 2005, Japan Opportunities Fund II Limited has derived rental revenue from the property portfolio during the the year ended 30 June 2006. Surplus cash has been distributed on a quarterly basis. During the year, a total dividend of JPY 54.49 per share has been distributed.
At the macro level, the economic recovery has prompted The Bank of Japan to begin raising rates. The management has observed signs of this recovery reaching Japan’s secondary cities. We hope this macro recovery will continue and generate attractive returns for the company.
The management informs us that it continues its strategy of close cost and occupancy monitoring with a view to improving rental income and cash flow. Detailed information on the portfolio and the strategy can be found in the Manager’s Report as well as in the appendix of this Annual Report.
Lastly, we take this opportunity to record that Mr. Colin Kingsnorth resigned on 7 August 2006 and we would like to thank him for his contributions to the Company. We are currently considering the appointment of additional director(s) and will inform you in due course.
27 October 2006
03 Annual Report 2006 MANAGER’S REPORT
Profile
Japan Opportunities Fund II Limited was commenced on 30 April 2004 to invest in residential property in Japan’s regional cities. The Company seeks to generate consistent dividends with a suitably leveraged portfolio, and with the expected Japanese economic recovery, targets capital gains by the Company’s maturity. The Japan Opportunities Fund II has an initial life of five years until 30 June 2009, and may be extended subject to shareholders vote.
Dividend and NAV
The dividend history of the Company has to date been stable. A total dividend of JPY 54.49 per share for the financial year ended 30 June 2006 has been distributed as follows.
Quarter ended Declaration date Dividend per share JPY
30 September 2005 5 December 2005 14.72 31 December 2005 10 March 2006 13.02 31 March 2006 7 June 2006 13.05 30 June 2006 4 September 2006 13.70
54.49
Total dividends paid for the previous financial year ended 30 June 2005 amounted to JPY 11.89.
In accordance with the requirements of the International Accounting Standards, the portfolio has been revalued as of 30 June 2006 and such valuation has been incorporated in preparation of the financial statements. On a consolidated basis, the NAV is JPY 1,109 per share. We would point out that this may or may not be the actual NAV per share should the portfolio be liquidated today. Therefore investors should not rely on this estimate as a basis for trading in the shares of the Company.
Market Overview
Macro economic development
The macro economic climate for investing in the Japanese real estate market continues to improve. Japan’s Zero Interest Rate Policy (“ZIRP”) has ended with the raising of rates by a quarter of a percent in mid July 2006. For many years the ZIRP was one of the key policies used to combat deflation; and its ending signals a turn around. Initially, the Bank of Japan was expected to rapidly take short rates closer to 1%, but the recent slowing of the US economy and a moderation of commodity prices may have changed the balance of opinion to a more modest interest rate hike scenario. Long rates have been relatively stable with 10-year Japanese Government Security yields consistently below 2%. Another significant event is the succession of Prime Minister Koizumi by Mr. Shinzo Abe. While Mr. Abe has declared that there will not likely be a shift in economic policy, market participants are still looking at this as a potential uncertainty.
Japan Opportunities Fund II Limited 04 MANAGER’S REPORT
Real estate market
The real estate market in Tokyo is moving beyond the recovery stage. Vacancy rates, especially of commercial space have rapidly declined. The physical asset market lacked high profile activity for the past few months, but this was dramatically altered by the USD 1.7 billion acquisition by KK daVinci Advisers of Pacific Century Place in Marunouchi, Tokyo in September 2006. It was not only one of Japan’s largest recent real estate transactions but its capitalization rate of around 2% was also one of the lowest in recent years. In addition, in September, the Ministry of Land Infrastructure and Transport announced that property prices in Japan’s 3 key cities rose by 0.9%, making it the first year-on-year price rise in 16 years. Another significant statistic is the 18% rise of residential prices in the three key wards of Tokyo.
Whilst the price performance for Tokyo commercial and residential properties has been encouraging, we should point out that the Tokyo real estate market is not an accurate reflection of the real estate markets for regional cities. We are of the view that there is a time lag between Tokyo’s commercial real estate recovery, and that in other regions and asset classes. It is evident, nevertheless, the capitalisation rates for properties similar to those held by the Company have tightened in the past two years.
The J-REIT market
A significant factor behind the rise in real estate demand has been the REIT (real estate investment trust) market’s success. There are currently over 35 REITs listed on the Tokyo Stock Exchange encompassing prime commercial, retail, hotel and residential properties. Besides REITs, there are also a number of active opportunity funds.
Recently, REITs listed on the Tokyo Stock Exchange have exhibited a degree of underperformance. Property funds have become more cautious since the Bank of Japan decided to end its ZIRP. Also, supervisory bodies have taken an anti-inflationary stance. Some of the pre-REITs or REIT incubators have accordingly been suffering from the closure of the IPO market as a source of capital. We believe this is a temporary phenomenon, and that we may see, in regional cities, a shift from institutional buying to more selective buying by individual investors. The relatively high yield spread between real estate and the cost of funds remains a key attraction to investors to have a meaningful presence in the market. Contrary to domestic developments, offshore interest is evidenced by the successful secondary offering of an Australian listed REIT (of Japanese real estate assets) for the acquisition of real estate in Japanese regional cities.
05 Annual Report 2006 MANAGER’S REPORT
Yields
Generally, we have noticed that the recent economic recovery has encouraged new construction which competes for tenants with existing buildings.
With a view to ensuring a consistent and high yield from the property portfolio, the management team has been active in the monitoring and formulation of: (1) leasing strategy, ensuring the properties are properly marketed, (2) renovation strategy, lowering renovation costs while selectively upgrading room and common areas, and (3) building management, ensuring tenant’s satisfaction. Occupancy levels have been kept at around the 90% level. Given competition from some newly developed buildings, rental reduction has been necessary to maintain competitiveness, and rental deflation during the year ended 30 June 2006 amounted to approximately 1.4%.
September December March June Quarter ended 2005 2005 2006 2006
Occupancy rate 88% 89% 91% 90%
As regards leasing, the management team is closely involved in setting rental rates, agent’s commissions, rental deposit requirements, rent free periods and in organizing other promotional efforts. The management team constantly reviews local property managers replacing those who are not effective performers. Renovation costs are closely monitored; particular attention is paid to the number of vacant apartments and each apartment’s renovation cost before deciding whether to proceed with a renovation. To this end, the team tracks renovation requests for every apartment within the portfolio.
Outlook
The immediate focus for the coming year is to increase portfolio cash flow by enhancing rental yields. The management team will continue its efforts in leasing and renovation, whilst selectively upgrading rooms and common areas with a view to increasing asking and actual rentals. While acknowledging the generally optimistic macro conditions, the management team is fully appreciative of the competitive landscape at the operational level, and will closely monitor day-to-day operations to ensure rental yields are maximised, so as to take advantage of the tightening of capitalisation rates for an eventual exit.
Altus Capital Limited Sakura Management Limited
27 October 2006
Japan Opportunities Fund II Limited 06 INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF JAPAN OPPORTUNITIES FUND II LIMITED (Incorporated in the Cayman Islands with limited liability)
We have audited the accompanying consolidated balance sheet of Japan Opportunities Fund II Limited (the “Fund”) and its subsidiaries (together, the “Group”) as of 30 June 2006 and the related consolidated statements of income, cash flows and changes in shareholders’ equity for the year then ended. These financial statements set out on pages 8 to 31 are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 30 June 2006, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards.
PricewaterhouseCoopers
Hong Kong 27 October 2006
07 Annual Report 2006 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET As at 30 June 2006
As restated Note 2006 2005 JPY JPY
Assets Non-current assets Investment property 8 10,617,260,000 7,912,260,000 Loan to shareholder of TK operators 22 9,000,000 6,000,000
10,626,260,000 7,918,260,000
Current assets Cash and cash equivalents 6 744,767,536 884,297,563 Prepayments, deposits and accounts receivable 7 9,760,972 25,238,484
754,528,508 909,536,047
Total assets 11,380,788,508 8,827,796,047
EQUITY Capital and reserves attributable to the Fund’s investors Share capital 9 40,167 40,167 Share premium 3,757,000,450 3,948,037,977 Retained earnings 696,171,864 145,588,679
4,453,212,481 4,093,666,823
Interest attributable to shareholder of the TK operators 10 33,221,020 15,640,578
Total equity 4,486,433,501 4,109,307,401
LIABILITIES Non-current liabilities Borrowings, secured 11 6,347,125,000 4,388,375,000 Deferred tax 155,206,200 42,435,400
6,502,331,200 4,430,810,400
Current liabilities Accounts payable, deposits and accrued expenses 58,974,175 17,971,691 Unearned rental income 63,159,043 48,290,718 Interest payable 34,471,245 23,163,421 Consumption tax payable 2,676,200 — Corporate tax payable 254,400 254,000 Property tax payable 16,994,356 6,468,950 Withholding tax payable 12,748,318 9,354,872 Tenant deposits 12 202,746,070 182,174,594
392,023,807 287,678,246
Total liabilities 6,894,355,007 4,718,488,646
Total equity and liabilities 11,380,788,508 8,827,796,047
The notes on pages 12 to 31 are an integral part of these consolidated financial statements.
Japan Opportunities Fund II Limited 08 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF OPERATIONS For the year ended 30 June 2006
As restated For the period from 5 January 2004 (date of For the year incorporation) to Note ended 2006 30 June 2005 JPY JPY
Revenue 13 978,962,037 340,052,520 Net gains from fair value adjustment on investment property 8 531,056,338 506,656,788 Repair and maintenance costs (88,613,904) (28,075,770) Accounting fees 14(a) (11,310,000) (7,291,667) Advertising (32,359,086) (12,189,667) Asset management fees to shareholder of the TK operators 14(b) (7,162,381) (2,269,047) Administration, registrar and transfer agent fees 14(c) (8,299,908) (5,187,225) Custodian fees 14(d) (4,150,101) (2,510,897) Management fee 14(e) (80,333,400) (48,156,021) Gas, water and electricity (50,915,998) (12,208,430) Insurance (14,056,116) (4,843,755) Legal and professional fee (6,419,227) (13,069,748) Travel expenses (1,046,229) (4,577,943) Property management fees 14(f) (44,344,618) (12,071,653) Property tax expense 15 (53,807,649) (38,493,551) Other operating expenses 16 (26,564,223) (38,164,091) Interest income 283,942 60,874 Bank charges (1,641,302) (1,519,144) Director’s fee (2,305,054) (2,551,350) Director’s and officer’s insurance (2,942,399) (4,541,869) Audit fee (9,539,172) (9,251,732) Incorporation fee — (1,460,017) Loan commission expense (41,069,555) (75,428,990) Consumption tax expense 17 (79,248,480) (244,373,549)
Operating profit 944,173,515 278,534,066
Finance costs 18 (210,393,936) (64,916,859)
Profit before taxation 733,779,579 213,617,207
Taxation 19 (165,615,952) (61,387,950)
Profit for the year/period 568,163,627 152,229,257
Attributable to: Investors of the Fund 550,583,185 145,588,679 Shareholder of the TK operators 17,580,442 6,640,578
568,163,627 152,229,257
The notes on pages 12 to 31 are an integral part of these consolidated financial statements.
09 Annual Report 2006 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY For the year ended 30 June 2006
Interest attributable to shareholder Share Share Revaluation Retained of the capital premium reserve earnings TK operators Total equity JPY JPY JPY JPY JPY JPY
Balance at 5 January 2004 (date of incorporation) —————— Issue of Class A ordinary shares —————— Issue of Class B ordinary shares 40,167 3,968,603,328 ———3,968,643,495 Issue of shares attributable to TK operators ————9,000,000 9,000,000 Distributions — (20,565,351) ———(20,565,351 ) Net profit for the period ———145,588,679 6,640,578 152,229,257
Balance at 30 June 2005 40,167 3,948,037,977 — 145,588,679 15,640,578 4,109,307,401
Balance at 1 July 2005, as previously reported 40,167 3,948,037,977 138,366,466 (24,152,914 ) — 4,062,291,696 Effect of adoption of SIC 12 (note 1) ——(138,366,466 ) 169,741,593 15,640,578 47,015,705
Balance at 1 July 2005, as restated 40,167 3,948,037,977 — 145,588,679 15,640,578 4,109,307,401 Distributions — (191,037,527) ———(191,037,527) Net profit for the year ———550,583,185 17,580,442 568,163,627
Balance at 30 June 2006 40,167 3,757,000,450 — 696,171,864 33,221,020 4,486,433,501
The notes on pages 12 to 31 are an integral part of these consolidated financial statements.
Japan Opportunities Fund II Limited 10 FINANCIAL STATEMENTS CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 June 2006
For the period from 5 January 2004 (date of For the year incorporation) to Note ended 2006 30 June 2005 JPY JPY
Cash generated from operating activities Cash generated from operations 21 517,954,638 10,483,873 Interest paid (199,086,112) (41,753,438) Interest received 283,942 60,874 Income tax paid (441,100) (64,100) Withholding tax paid (49,010,206) (9,279,578)
Net cash generated from/(used in) operating activities 269,701,162 (40,552,369)
Cash flow from investing activities Purchase of investment property (2,173,943,662) (7,405,603,212)
Net cash used in investing activities (2,173,943,662) (7,405,603,212)
Cash flows from financing activities Proceeds from borrowings 1,958,750,000 4,388,375,000 Proceeds from issuance of shares — 3,968,643,495 Distributions (191,037,527) (20,565,351) Loan to shareholder of the TK operators (3,000,000) (6,000,000)
Net cash provided by financing activities 1,764,712,473 8,330,453,144
Net (decrease) increase in cash and cash equivalents (139,530,027) 884,297,563 Cash and cash equivalents at beginning of the period 884,297,563 —
Cash and cash equivalents at end of the period 744,767,536 884,297,563
Analysis of cash and cash equivalents: Bank balances 744,767,536 884,297,563
The notes on pages 12 to 31 are an integral part of these consolidated financial statements.
11 Annual Report 2006 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2006
1. General information
The Fund and its subsidiary
Japan Opportunities Fund II Limited (the “Fund”), is a closed-end direct investment fund, incorporated as an exempted company in the Cayman Islands. The registered office of the Fund is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.
The Fund will hold an extraordinary general meeting on or before 30 June 2009 and an ordinary resolution shall be proposed that the Fund continues as an investment company. If that resolution is not passed either at that time or subsequently, the directors shall formulate proposals to be put to investors at a further extraordinary general meeting to be held within 90 days of that extraordinary general meeting to wind up the Fund. If the resolution to continue as an investment company is passed, a similar resolution will be proposed at two yearly intervals thereafter until such resolution is not passed.
On 19 July 2004, the Fund established also a wholly owned subsidiary, Japre Investment Limited, which was incorporated in British Virgin Islands for investment holding purposes (the “Subsidiary”) (together referred to as the “Fund Group”).
The objective of the Fund Group is to achieve stable rental income together with opportunities for capital gains through value adding strategies such as improvements in property management and refurbishment of properties where appropriate, as well as through recovery in market conditions. Gearing will be utilised with the objective of enhancing potential returns. The Fund Group’s investments are focused on Japanese real estate, primarily located in provincial cities such as, but not limited to, Sapporo and Fukuoka.
The Investment Manager of the Fund Group is Altus Capital Limited (the “Investment Manager”), a licensed corporation incorporated under the laws of Hong Kong. The Investment Manager is appointed to provide discretionary investment management and advisory services in respect of the Fund’s investment activities under the Investment Management Agreement.
The Advisor to the Investment Manager is Sakura Management Limited, incorporated under the laws of British Virgin Islands. The Adviser is appointed to provide discretionary investment management and advisory services in respect of the Fund’s investment activities under the Investment Advisor’s Agreement.
The Fund has no employees.
The Group
The group is established through “TK - YK” structures, a form of investment structure under Japanese law, pursuant to silent partnership (Tokumei Kumiai, “TK”) agreements. A TK is a form of limited partnership and can only be formed by 2 or more persons. One party is the TK operator and the other party or parties are the TK investors. The TK operator is a Yugen-Kaisha (“YK”), a form of Japanese private company incorporated with limited liability.
Japan Opportunities Fund II Limited 12 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
1. General information — Continued
The Group — Continued
Such a structure should facilitate the financing of property acquisitions through the financing arrangements, as well as favourable tax treatment. Separate TK agreements are entered into during the period between the Subsidiary and TK operators in respect of each financing agreement.
Agreements set forth the basis for capital contributions, allocations and distributions to the Subsidiary including allocation of profit and loss, and distributions of net cash flow from such TK-YK structure.
As at 30 June 2006, the Fund has entered into TK agreements through the Subsidiary with three Japanese TK operators, being YK Houun, YK Houryu and YK Housen. Under the TK agreements, the Subsidiary will be entitled to 100 per cent of TK investor capital accounts. In addition, the net income of the TK business of YK Houun, YK Houryu and YK Housen, comprising principally the income generated from the property holding business, will be passed up to the Subsidiary. The Subsidiary is entitled to 97 per cent of the profits and losses of such business while the shareholder of the TK operators is entitled to the remaining 3 per cent of the allocable profits and losses. The Fund through the Subsidiary, is, therefore, exposed to the majority risks and rewards from its agreement with the TK operators and the underlying property holding business. Management has assessed the economic reality of the Fund Group, its investing activities through the TK operators and concluded that as the Fund Group primarily bears the risks and enjoys the benefits under the TK agreements, the TK operators are considered as special purpose entities.
In the prior period, the financial statements were presented on a group basis with respect to the Fund and the Subsidiary whilst the financial statements of the TK operators were presented separately. Management has re-assessed such accounting treatment in view of the application of Standing Interpretations Committee No. 12 (“SIC 12”) and concluded that the consolidated financial statements of the Fund should be presented on a group basis by consolidating the Subsidiary and the TK operators as special purpose entities (the “Group”) for the financial year ended 30 June 2006. The application of SIC 12 has affected the opening net assets of the Group (refer to the respective financial statements for the effect of the application). The prior period comparatives have also been restated to reflect such application of SIC 12.
13 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
(a) Basis of preparation
The consolidated financial statements of Japan Opportunities Fund II Limited have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention except that investment property is carried at fair value.
Adoption of new/revised IFRS
In 2006, the company adopted the new/revised standards of IFRS below, which are relevant to its operations. The 2005 comparatives have been amended as required, in accordance with the relevant requirements.
IAS 1 (revised 2003) Presentation of financial statements IAS 8 (revised 2003) Accounting policies, changes in accounting estimates and errors IAS 21 (revised 2003) The effects of changes in foreign exchange rates IAS 24 (revised 2003) Related party disclosures IAS 32 (revised 2003) Financial instruments: disclosure and presentation IAS 39 (revised 2003) Financial instruments: recognition and measurement
The adoption of IAS 1, 8, 21, 24, 32 and 39 (revised 2003) resulted in some changes to the Group’s accounting policies. In summary:
• IAS 1 (revised 2003) has affected disclosures.
• IAS 8 (revised 2003) had no material effect on the Group’s accounting policies.
• IAS 21 (revised 2003) had no material effect on the Group’s accounting policies. The functional currency of the Group has been re-evaluated based on the guidance to the revised standard and is still considered appropriate.
• IAS 24 (revised 2003) has affected the identification of related parties and some other related-party disclosures.
• IAS 32 (revised 2003) had no material effect on the Group’s accounting policies.
• IAS 39 (revised 2003) affected the categories of financial assets and liabilities for recognition and measurement purposes.
All changes in the accounting policies have been made in accordance with the transition provisions in the respective standards. All standards adopted by the Group that are relevant to its operations were applied retrospectively other than IAS 39 (revised 2003) — the de-recognition of financial assets is applied prospectively. This standard requires simultaneous adoption with IAS 32 (revised 2003). There was no impact on opening net assets at 5 January 2004 from the adoption of any of the above-mentioned standards.
Japan Opportunities Fund II Limited 14 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
2. Summary of significant accounting policies — Continued
(b) Consolidation
The Group identified the TK operators established in Japan as listed in Note 20 to the consolidated financial statements as special purpose entities as defined in Standing Interpretations Committee No. 12 (“SIC 12”). The property investment companies are principally engaged in the investment holding business. Whilst the Fund primarily bears the risks and enjoys the benefits of the investments held by these special purpose entities and, accordingly, consolidates their financial statements for financial reporting purpose.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
Special purpose entities are fully consolidated from the date on which the relationship of special purpose entities defined under SIC 12 is established between the Fund Group and the TK operators. They are de-consolidated from the date that such relationship ceases.
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of Subsidiary and special purpose entities have been changed where necessary to ensure consistency with the policies adopted by the Group.
Minority interests
Minority interests represent the interests in the operating results and net assets of Subsidiary and special purpose entities attributable to the shareholder of the TK operators, in accordance with the TK agreements.
(c) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Japanese yen, which is the Fund’s functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year- end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated income statements.
15 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
2. Summary of significant accounting policies — Continued
(d) Cash and cash equivalents
Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents include cash at bank with a maturity of three months or less from date of investment.
(e) Accounts receivable
Receivables are recorded at their nominal values. If the loss of a certain part of the receivables is probable, provisions are made to cover the expected loss.
(f) Investment property
Property that is held for long-term rental yield or for capital appreciation or both, and that is not occupied by the companies in the consolidated Group, is classified as investment property. Investment property comprises freehold land and freehold buildings.
Investment property is measured initially at its cost, including related transaction costs.
After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, the Group uses alternative valuation methods such as recent prices on less active markets or discounted cash flow projections. These valuations are reviewed annually by external valuers.
The fair value of investment property reflects, among other things, rental income from current leases and assumptions about rental income from future leases in the light of current market conditions.
The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property. Some of those outflows are recognized as a liability, including finance lease liabilities in respect of land classified as investment property; others, including contingent rent payments, are not recognised in the consolidated financial statements.
Subsequent expenditure is charged to the assets’ carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the consolidated income statements during the financial period in which they are incurred.
Changes in fair values are recorded in the consolidated income statements.
Japan Opportunities Fund II Limited 16 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
2. Summary of significant accounting policies — Continued
(g) Leases
Operating leases — properties leased out under operating leases are included in investment property in the consolidated balance sheet.
(h) Share capital
Ordinary shares are classified as equity.
(i) Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statements over the period of the borrowings using the effective interest method.
(j) Deferred taxation
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and law) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.
Deferred tax is provided on temporary differences arising on investments in TK operators, except where the timing difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
(k) Revenue and expense recognition
Revenue includes rental income, service charges and management charges from properties.
Rental income from operating leases is recognised as income on a straight-line basis over the lease term.
Service and management charges are recognised on a gross basis in the accounting period in which the services are rendered.
Interest income is recognized on a time proportion basis, taking into account the principal revenues from investment advisory and management services recognized when the services are rendered.
Income and expenses are gross of consumption tax.
17 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
3. Financial risk factors
The principal activities of the Group are investment holding, property investment, asset management and investment in rental properties. The Group’s activities expose it to a variety of financial risks: market risk (including concentration risk, market price risk and interest rate risk) and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.
Risk management is carried out by management in the Group. Management identifies, evaluates and mitigates financial risks to prevent significant unfavourable movement in the markets which affect the Group.
Market risk
(a) Market risk
All investments at 30 June 2006 related to real estate located in Japan. As a result, the Group is exposed to risk associated with concentration of investments in Japan and is vulnerable to negative effects of economic forces in Japan.
To mitigate risk associated with concentration of investments in Japan, the Group is pursuing investment properties located in different cities around Japan.
(b) Market price risk
The Group’s investments in real estate are also susceptible to market price risk arising from uncertainties about future prices of these investments. This risk is managed by the Group through the following measures:
i) Diversification of investments — investments in real estate are diversified in investment properties located in different cities around Japan; and
ii) Performance of due diligence at investing stage.
(c) Interest rate risk
The Group has significant interest-bearing liabilities. The Group’s interest expenses are substantially independent of the changes in market interest rates as the interest rates on the liabilities are mostly fixed in nature.
Japan Opportunities Fund II Limited 18 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
3. Financial risk factors — Continued
Market risk — Continued
(d) Foreign currency risk
Additionally, the Group’s loans are denominated in Yen giving rise to risk associated with fluctuations in foreign exchange rates. To address this risk, the Group maintains a significant amount of its cash reserves in Yen currency.
Liquidity risk
The Group’s investments are mostly financed by bank borrowings. With recurring interest payment obligations and operating expenses, the Group is also exposed to liquidity risk. The Group addresses this risk by:
(a) Maintenance of sufficient cash reserves for interest, tax, insurance, capital expenditure, leasing commissions, and other major operation-related disbursements; and
(b) Preparation of budgets, cash flow forecasts and regular monitoring and matching of assets to liabilities as they become due.
4. Critical accounting estimates and judgments
The preparation of financial statements in conformity with IFRS requires the use of accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies.
Estimates and judgments are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors.
5. Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial period are discussed below.
(a) Estimate of fair value of investment properties
The best evidence of fair value is current prices in an active market for similar leases and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable fair value estimates. In making its judgment, the Group considers information from a variety of sources including;
19 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
5. Critical accounting estimates and assumptions — Continued
(a) Estimate of fair value of investment properties — Continued
i) current prices in an active market for properties of different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences;
ii) recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices;
iii) discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of any existing lease and other contracts, and (where possible) from external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows; and
iv) general industry valuation benchmarks applicable in the relevant market e.g. net operating income indicators.
(b) Principal assumptions for management’s estimation of fair value
If information on current or recent prices or assumptions underlying the discounted cash flow approach to investment properties is not available, the fair values of investment properties are determined using discounted cash flow valuation techniques. The Group uses assumptions that are mainly based on market conditions existing at each balance sheet date.
The principal assumptions underlying management’s estimation of fair value are those related to: the receipt of contractual rentals; expected future market rentals; void periods; maintenance requirements; and appropriate discount rates. These valuations are regularly compared to actual market yield data, and actual transactions by the Group and those reported by the market.
The expected future market rentals are determined on the basis of current market rentals for similar properties in the same location and condition.
(c) Income taxes and withholding taxes on income distributions
The Group is subject to income taxes. Significant estimates are required in determining the provision for income taxes and withholding taxes.
Japan Opportunities Fund II Limited 20 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
6. Cash and cash equivalents
Cash and cash equivalents consist of the following:
2006 2005 JPY JPY
Cash at bank 744,767,536 884,297,563
744,767,536 884,297,563
7. Prepayments, deposits and accounts receivable
Prepayments, deposits and accounts receivable represent:
2006 2005 JPY JPY
Advance payment on investment properties not yet purchased — 14,147,500 Accounts receivable 1,340,177 562,452 Prepaid expenses 8,420,795 10,528,532
9,760,972 25,238,484
8. Investment property
2006 2005 JPY JPY
At 1 July 2005/5 January 2004 (date of incorporation) 7,912,260,000 — Additions 2,173,943,662 7,405,603,212 Net gain from fair value adjustments on investment property 531,056,338 506,656,788
At 30 June 10,617,260,000 7,912,260,000
21 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
8. Investment property — Continued
The Group’s investment properties were revalued at 30 June 2006 by independent professionally qualified valuers. Valuations were based on relevant current prices in an active market and expected future cash flows discounted at the relevant rate for the relevant properties. Expenses directly attributable to the cost of properties are initially capitalised as a part of investment property and fair valued subsequently. The Group’s investment properties are located in the following geographical areas in Japan:
2006 2005 JPY JPY
Residential properties: Aichi prefecture 222,000,000 196,000,000 Fukuoka prefecture 4,440,500,000 3,819,700,000 Hiroshima prefecture 376,000,000 354,000,000 Hokkaido prefecture 4,514,660,000 2,948,160,000 Miyagi prefecture 920,100,000 458,400,000 Okayama prefecture 144,000,000 136,000,000
Total residential properties 10,617,260,000 7,912,260,000
9. Share capital
No. of shares
Authorized share capital: Class A Shares of US$0.0001 each 100,000,000 US$10,000 Class B Shares of JPY0.01 each 100,000,000 JPY1,000,000
Issued and fully paid: At 5 January 2004 (date of incorporation) —— Issue of Class A shares 1 US$0.0001 Issue of Class B shares 4,016,670 JPY40,167
At 30 June 2005 4,016,671 JPY40,167
At 1 July 2005 —— Issue of Class A shares —— Issue of Class B shares ——
At 30 June 2006 4,016,671 JPY40,167
The authorized capital of the Fund is consisted of 100,000,000 Class A Shares at US$0.0001 per each and 100,000,000 Class B Shares at JPY0.01 per each. The Class A Shares and Class B Shares rank pari passu in all respects with each other to form a single uniform class of share capital and be subject to the same rights, obligations and entitlements.
Japan Opportunities Fund II Limited 22 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
10. Minority interests
Minority interests represent interests attributable to the shareholder of the TK operators, YK Tenyu Holdings.
11. Borrowings, secured
All the Group’s borrowings are at fixed rates of interest. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position.
2006 2005 JPY JPY
Borrowings from international financial institutions 6,347,125,000 4,388,375,000
6,347,125,000 4,388,375,000
Borrowings include amounts secured on investment property to the value of JPY10,617,260,000 (2005: JPY7,912,260,000).
The maturity of non-current borrowings is as follows:
2006 2005 JPY JPY
In the first year — — In the second year — — In the third to fifth year 6,347,125,000 4,388,375,000 After the fifth year — —
6,347,125,000 4,388,375,000
The fair value of these interest bearing borrowings approximates their carrying values at the balance sheet date.
The carrying amounts of the Group’s borrowings are denominated in Japanese yen.
12. Tenant deposits
Tenant deposits represents deposits received from the tenants of the investment properties held through the TK operators — YK Houun, YK Houryu and YK Housen.
23 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
13. Revenue
Revenue represents as follows;
5 January 2004 (date of incorporation) to For the year Period from ended 2006 30 June 2005 JPY JPY
Rental income 950,806,307 326,573,975 Rental related income 28,155,730 13,478,545
978,962,037 340,052,520
All the rental income and other rental related income on the consolidated income statements was generated from the Group’s investments in investment properties in Japan.
14. Fees
(a) Accounting fees
Accounting fees represents fees paid to Kasumigaseki International Accounting Office (“KIA”) in respect of accounting and administration services provided to the TK operators pursuant to the agreement between the TK operators and KIA. Fee for each TK operator is set at the specific rate based on the asset of each TK operator and is calculated and payable on a monthly basis. During the period, the Group paid JPY11,310,000 to KIA (2005: JPY7,291,667).
(b) Asset management fees to holding company
Asset management fees to the shareholder of the TK operators represents asset management fees paid to the sole shareholder of the TK operators, YK Tenyu Holdings in identifying and evaluating investment opportunities, executing investment decisions and monitoring the investment performance per the asset management agreements made between the TK operators and YK Tenyu Holdings.
Such fees were calculated with reference to the amount of services provided to the TK operators in accordance with the asset management agreements. During the period, the Group paid JPY7,162,381 (2005: JPY2,269,047) in total to YK Tenyu Holdings.
Japan Opportunities Fund II Limited 24 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
14. Fees — Continued
(c) Administration, registrar and transfer agent fees
Administration fees represent fees paid to Northern Trust International Fund Administration Services (Ireland) Limited, appointed by the Fund as its Administrator in respect of keeping the Fund’s register of Shareholders, arranging for the issue of Shares and for the general administration of the Fund under the Administration Agreement.
The Administrator’s fees are 0.20 per cent per annum of Net Asset Value with a minimum monthly fee of US$2,000 for the first twelve months and US$4,000 thereafter and are payable by the Fund. During the year, the Fund paid JPY8,299,908 (2005: JPY5,187,225) to the Administrator.
(d) Custodian fees
Custodian fees represent fees paid to Northern Trust International Fund Fiduciary Services (Ireland) Limited, appointed by the Fund as its Custodian in respect of acting as Custodian to all assets, including cash and the shares of the Fund but excluding those held by any brokers to the Fund and the title deeds and other documents of the Fund pursuant to the Custodian Agreement. Such assets of the Fund will be held by the Custodian for the account of the Fund or by sub-custodians appointed by the Custodian.
The Custodian’s fees are 0.10 per cent per annum of Net Asset Value with a minimum of US$9,000 for the first year and US$18,000 per annum thereafter, plus GBP50 per transaction, and are payable by the Fund. During the year, the Fund paid JPY4,150,101 (2005: JPY2,510,897) to the Custodian.
(e) Management fee
The Investment Manager is entitled to a Management Fee equal to 2 per cent per annum of the monthly weighted average of the amount called up on each class of Shares, net of any returns of capital resulting from realizations of investments. Such management fee is payable in the currency of denomination of each class of Shares. During the year, the Fund paid JPY80,333,400 (2005: JPY48,156,021) to the Manager.
(f) Property management fees
Property management fees represent service fees paid to third parties in respect of the services provided to the TK operators in managing daily operations of the investment properties. The services provided mainly include property and building management and property related inspection and testing.
Such fees were calculated with reference to the amount of services provided to the TK operators in accordance with the property and building management agreements. During the period, the Group paid JPY44,344,618 (2005: JPY12,071,653) in total to the property managers.
25 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
14. Fees — Continued
(g) Performance fee
In respect of each class of Shares, subject to the return of capital in full to Shareholders and an 8 per cent per annum cumulative preferred return to Shareholders, the Fund will pay to the Investment Manager a performance fee equivalent to 20 per cent of the excess as described below.
Accordingly, payments by the Fund are made, in the currency of denomination of each class of Shares, in the following order of priority:
(a) firstly, to the Shareholders of the relevant class until distributions and capital repayments to the Shareholders of the relevant class on a cumulative basis equal (i) the capital contributed by the Shareholders; and (ii) a cumulative preferred return of 8 per cent per annum on the capital contributed by the Shareholders from the date such amounts were contributed until the date such amounts are repaid;
(b) secondly, to the Investment Manager, a performance fee equivalent to 25 per cent of the amount paid to Shareholders under paragraph (a) (ii) above; and
(c) thereafter, 80 per cent to the Shareholders of the relevant class and 20 per cent to the Investment Manager as a further performance fee.
During the year, no performance fee was paid to the Investment Manager (2005: JPYnil).
15. Property tax
Under the Japanese tax regulation, property tax is paid on a quarterly basis. During the period, property tax paid to the tax office of JPY47,151,506 (2005: JPY12,964,650) was incurred by the Group in respect of its investment properties held through YK Houun, YK Houryu and YK Housen, and recorded in the consolidated income statement for the year.
In 2006, JPY6,656,143 (2005: JPY25,528,901) property tax paid to the sellers for investment properties held through YK Houun, YK Houryu and YK Housen was also recorded in the consolidated income statements.
Japan Opportunities Fund II Limited 26 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
16. Other operating expenses
Other operating expenses represent leasing commission, property repairs and maintenance, sales promotion fees, land leases, and property utilities expense incurred by the investment properties held by the Group.
17. Consumption tax expense
Consumption taxes received or paid by the TK operators are charged in the consolidated income statements in the period in which the consumption tax is incurred.
18. Finance costs
Finance costs consist of the following:
For the period from 5 January 2004 (date of For the year incorporation) ended 2006 to 30 June 2005 JPY JPY
Interest expenses on — borrowings from a financial institution (Note 11) 210,393,936 64,916,859
210,393,936 64,916,859
27 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
18. Finance costs — Continued
The interest rates for each of the loans at 30 June 2006 are as follows:
Loan principal at TK operator Lender Maturity Interest rate 30 June 2006 JPY
YK Houun Deutsche Trust 25 April 2010 3.38% 430,000,000 YK Houun Deutsche Trust 25 July 2010 3.27% 1,100,000,000 YK Houun Deutsche Trust 25 July 2010 3.26% 580,000,000 YK Houun Deutsche Trust 25 October 2010 3.47% 940,000,000 YK Houryu Shinsei Bank 17 March 2010 3.217% 408,375,000 YK Houryu Shinsei Bank 17 March 2010 3.106% 438,750,000 YK Housen Deutsche Trust 25 April 2010 3.51% 2,450,000,000
6,347,125,000
The interest rates for each loan at 30 June 2005 are as follows:
Loan principal at TK operator Lender Maturity Interest rate 30 June 2005 JPY
YK Houun Deutsche Trust 25 April 2010 3.38% 430,000,000 YK Houun Deutsche Trust 25 July 2010 3.27% 1,100,000,000 YK Houryu Shinsei Bank 17 March 2010 3.217% 408,375,000 YK Housen Deutsche Trust 25 April 2010 3.51% 2,450,000,000
4,388,375,000
19. Taxation
Taxation was calculated on the estimated assessable profit for the year at the rates of taxation prevailing in the countries in which the Group operates.
Cayman Islands
Under the current laws of the Cayman Islands, there is no income, estate, transfer, sales or other Cayman Islands taxes payable by the Fund. Accordingly, in the judgment of the directors no income tax provision has been made for the period.
Japan Opportunities Fund II Limited 28 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
19. Taxation — Continued
Japan
The Group is subject to Japanese taxes where the TK operators operate. The amount of taxation expense charged to the consolidated statement of operations is made up of:
Period from 5 January 2004 (date of For the year incorporation) ended 2006 to 30 June 2005 JPY JPY
Current income tax 441,500 318,100 Withholding tax on income distributions 52,403,652 18,634,450 Deferred tax 112,770,800 42,435,400
Taxation expense 165,615,952 61,387,950
20. TK operators
The following is a list of the TK operators at 30 June 2006 and 30 June 2005:
Percentage share of profit and Place of loss based on Name of companies incorporation TK agreement Principal activities
YK Houun Japan 97% Property investment holding YK Houryu Japan 97% Property investment holding YK Housen Japan 97% Property investment holding
29 Annual Report 2006 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
21. Cash generated from operations
Period from 5 January 2004 (date of For the year incorporation) ended 2006 to 30 June 2005 JPY JPY
Profit before taxation 733,779,579 213,617,207 Adjustments for — Net gain from fair value adjustments on investment property (531,056,338) (506,656,788) — Interest income (283,942) (60,874) — Interest expense 210,393,936 64,916,859 — Minority interest (17,580,442) (6,640,578) Changes in working capital: — Accounts receivable, advance and prepayments 15,477,512 (25,238,484) — Minority interest 17,580,442 15,640,578 — Accounts payable, deposits and accrued expenses 41,002,484 17,971,691 — Consumption tax payable 2,676,200 — — Unearned rental income 14,868,325 48,290,718 — Property tax payable 10,525,406 6,468,950 — Tenant deposits 20,571,476 182,174,594
Cash generated from operations 517,954,638 10,483,873
22. Related party transactions
Apart from those disclosed above, significant related party transactions, which were carried out in the normal course of the Group’s business were as follows:
(a) During the period, a loan was advanced to the shareholder of the TK operators, YK Tenyu Holdings in the total amount of JPY9,000,000 (2005: JPY6,000,000).
(b) During the period, a consultancy fee of JPY3,458,812 (2005: JPY3,833,555) was paid to Stirling Finance Limited, a company in which a director of the Fund has a beneficial interest.
Japan Opportunities Fund II Limited 30 FINANCIAL STATEMENTS Notes to the Financial Statements For the year ended 30 June 2006
23. Future operating lease arrangements
As at 30 June 2006, the Group had future aggregate minimum lease receipts under non- cancellable operating leases as follows:
2006 JPY
Less than one year 740,541,955 From one to five years 331,143,851 Five years and over 171,216,000
1,242,901,806
24. Subsequent events
No major subsequent events are noted for the Group.
25. Approval of accounts
The accounts were approved by the board of directors on 27 October 2006.
31 Annual Report 2006 APPENDIX PORTFOLIO HIGHLIGHTS
• Map of Japan
Sapporo
Hakodate
Sendai
Tokyo Yokohama Okayama Hiroshima Nagoya Osaka Fukuoka
Japan Opportunities Fund II Limited 32 Portfolio Highlights
Type of unit Total number of units Residential 1,538 Commercial 31 Car park 372 Date of acquisitions and gross floor area
Acquisition Property Date Gross floor area (sqm) 1 Excellencia Hakata Jul 2004 2,571 2 Royal City Aug 2004 1,063 3 Marine Hills Tsukisamu Sep 2004 1,166 4 White Building Sep 2004 1,477 5 Marion Befu Sep 2004 611 6 Casa Tenjin Minami Nov 2004 480 7 Estate More Jonan Nov 2004 818 8 Maison Éclair N26 Nov 2004 587 9 Sanko Heights Maruyama Nov 2004 4,508 10 Ark Palace Nov 2004 1,744 11 Annex Kasahara Tenjin Minami Dec 2004 1,320 12 South 1 West 18 Dec 2004 1,667 13 Grand Mer South 8-jo Dec 2004 503 14 J Stage Iikura Dec 2004 951 15 Heights Sophia A Dec 2004 331 16 Heights Sophia B Dec 2004 324 17 City House Sumikawa Dec 2004 660 18 JJS Funairi Dec 2004 756 19 M Serena Dec 2004 532 20 LC Dec 2004 746 21 Fort Torikai Jan 2005 408 22 Relief Josei Feb 2005 1,013 23 Relief Tenjin Higashi Feb 2005 885 24 Urban Net Mar 2005 537 25 Urban Hakozaki Mar 2005 1,041 26 Maison Miyanomori Mar 2005 805 27 Lumiere Yoshino Apr 2005 639 28 Maison Kitaura Apr 2005 695 29 Grandeur Hamayu Apr 2005 723 30 Louer Maison Loire Shirakibaru Apr 2005 585 31 Avenir Premier May 2005 752 32 First Court B May 2005 726 33 Juglans Miyanomori May 2005 995 34 My Life Kotoni May 2005 743 35 Patios Kenchoumae May 2005 2,214 36 Relief Muromi Nishi May 2005 1,685 37 Sun Vario Miyachiyo May 2005 415 38 Chateau S6 Jun 2005 514 39 My Court Hakozaki II Jun 2005 419 40 Progress Meinohama Jun 2005 691 41 Lib Haranomachi Jun 2005 919 42 Park Zone Jun 2005 477 43 Miyanomori KT Mansion Jul 2005 569 44 Coiffeur Jul 2005 506 45 City Sakuragi Aug 2005 935 46 Relief Yakuin Aug 2005 1,537 47 Partire Minami Hiragishi Aug 2005 934 48 Heights Amenity Aug 2005 1,053 49 Kolscom Aug 2005 642 50 Providence Minami Hiragishi Aug 2005 1,024 51 Lions Mansion Yunokawa Aug 2005 3,908 52 Imperial N36 Sep 2005 1,335 53 Chambre Asahigaoka Sep 2005 511 54 Brave Nakano Sakae Sep 2005 532 Portfolio total 54,182
33 Annual Report 2006 Portfolio Highlights
Occupancy rates (as at 30 September 2006)
By expected Property revenue By units By space 1 Excellencia Hakata 93% 91% 92% 2 Royal City 83% 81% 84% 3 Marine Hills Tsukisamu 75% 70% 75% 4 White Building 93% 93% 92% 5 Marion Befu 88% 88% 88% 6 Casa Tenjin Minami 89% 89% 89% 7 Estate More Jonan 97% 96% 97% 8 Maison Éclair N26 89% 89% 89% 9 Sanko Heights Maruyama 100% 100% 100% 10 Ark Palace 95% 93% 92% 11 Annex Kasahara Tenjin Minami 92% 92% 91% 12 South 1 West 18 100% 100% 100% 13 Grand Mer South 8-jo 88% 88% 89% 14 J Stage Iikura 92% 90% 93% 15 Heights Sophia A 100% 100% 100% 16 Heights Sophia B 100% 100% 100% 17 City House Sumikawa 93% 93% 93% 18 JJS Funairi 83% 83% 83% 19 M Serena 100% 100% 100% 20 LC 91% 92% 89% 21 Fort Torikai 88% 87% 87% 22 Relief Josei 93% 93% 92% 23 Relief Tenjin Higashi 97% 97% 97% 24 Urban Net 85% 85% 84% 25 Urban Hakozaki 94% 94% 94% 26 Maison Miyanomori 72% 71% 71% 27 Lumiere Yoshino 85% 83% 84% 28 Maison Kitaura 94% 94% 94% 29 Grandeur Hamayu 95% 95% 95% 30 Louer Maison Loire Shirakibaru 74% 71% 71% 31 Avenir Premier 87% 86% 86% 32 First Court B 89% 88% 91% 33 Juglans Miyanomori 68% 69% 65% 34 My Life Kotoni 89% 88% 89% 35 Patios Kenchoumae 90% 89% 91% 36 Relief Muromi Nishi 88% 88% 88% 37 Sun Vario Miyachiyo 89% 88% 88% 38 Chateau S6 82% 80% 80% 39 My Court Hakozaki II 88% 87% 87% 40 Progress Meinohama 87% 85% 86% 41 Lib Haranomachi 98% 97% 97% 42 Park Zone 78% 79% 74% 43 Miyanomori KT Mansion 84% 85% 85% 44 Coiffeur 100% 100% 100% 45 City Sakuragi 97% 96% 96% 46 Relief Yakuin 100% 100% 100% 47 Partire Minami Hiragishi 87% 85% 86% 48 Heights Amenity 93% 93% 92% 49 Kolscom 76% 75% 75% 50 Providence Minami Hiragishi 89% 89% 89% 51 Lions Mansion Yunokawa 87% 88% 87% 52 Imperial N36 90% 90% 91% 53 Chambre Asahigaoka 89% 88% 87% 54 Brave Nakano Sakae 100% 100% 100% Portfolio average 91% 90% 90%
Japan Opportunities Fund II Limited 34 Portfolio Highlights
Occupancy rates (as at 30 September 2006)
By expected Type of unit revenue By units By space Residential 90% 90% 90% Commercial 98% 94% 97% Car park 69% 69% —
35 Annual Report 2006