Kenedix : 2Q 2021 Kenedix Market Report

KENEDIX Real Estate Market Report 2Q 2021

Contents

Macroeconomic

Condition ………………2

J-REIT Market …………………2

Real Estate

Investment Market ………4

Office Market …………………5

Residential Market ……………7

Retail Facility Market …………8

Logistics Facility Market………9

Hotel Market …………………10

Summary

The real GDP growth rate in January-March 2021 was down QoQ

The real GDP growth rate in January-March 2021 was down 5.1% QoQ at an annualized rate (seasonally adjusted), showing negative growth for the first time in 3 quarters. This was due mainly to slow consumption resulting from constraints on demand centered on industries such as food service and tourism due to the declaration of the second state of emergency. Consumption of households was down 5.4% over the same period. Expectations for the quarter April-June 2021 call for low growth or the second consecutive quarter of negative growth. The third state of emergency took effect beginning April 25 in Tokyo and the 3 prefectures of Osaka, Kyoto, and Hyogo. The lengthy state of emergency can be expected inevitably to have an impact on the food-service, travel, and retail industries.

The TSE REIT Index recovers to the 2,000-point level

The TSE REIT Index's performance in January-March 2021 was up 12.8%, rising for the 4th consecutive quarter. The TSE REIT Index recovered to the 2,000-point level for the first time in about a year. At the end of April, the NAV ratio had risen to 1.14 times, while yield on dividends fell to 3.46%. A look at examples of sales of properties shows that many sales were at prices above the most recent appraised values. This rise in valuation appears to reflect the favorable conditions in the real estate investment market. According to the Japanese Real Estate Investor Survey published by the Japan Real Estate Institute, when asked about their thinking on real estate investment over the coming year 94% of investors surveyed answered that their approach to new investments would be proactive, as the improving trend in investors' appetite for investment appears to be continuing.

The office vacancy rate in Tokyo is the only one at the 5% level among the 5 major urban areas

The vacancy rate in Tokyo business districts (5 central wards) at the end of March 2021, announced by Miki Shoji, was up 0.93%pt from the end of December 2020 to 5.42%. At the same time, a look at vacancy rates in other major urban areas shows increases lower than those in Tokyo. For example, the rate in Osaka was up 0.47%pt to 3.91%, while Nagoya's rate was up 0.21%pt. None of these rates was higher than 5.0%. While vacancies in Tokyo increased by 309 thousand tsubo over the past year, rising even faster than they did in the last office market downturn, the increases in vacant floor space in the 5 major cities other than Tokyo are lower than they were during the Global Financial Crisis, as the current trend appears to differ clearly from the past, with vacancies are increasing at a rapid pace in Tokyo only.

The decrease in the inflow of population and increase in its outflow continues in the 23 wards of Tokyo

The population of the 23 wards of Tokyo had continued to show a net outflow since July 2020, and considerable attention was focused on the population trend in March 2021, when the inflow of population fell 5,280 YoY to 80,857 people while the outflow was up 6,652 YoY to 60,584 people, resulting in a net inflow of just 20,273 people, down 11,932 YoY. The net inflow in March has trended around 30 thousand people in recent years, and this year was the first time in 7 years since 2014 that the net inflow in March was at only the 20 thousand level. As the phenomena of decreasing inflows and increasing outflows continue, attention is likely to focus on whether or not the figures will show net outflows again in April and later months. Since if the monthly outflows of 2-5 thousand people seen through February continue, due to the restrained the number of net inflow in March, there is a possibility that the population flow for the full year of 2021 could show a net outflow.

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KENEDIX JAPAN REAL ESTATE MARKET REPORT 2Q2021

KENEDIX MARKET REPORT

【Macroeconomic Conditions】

The real GDP growth rate in January-March 2021 was negative for the first time in 3 quarters

The real GDP growth rate in January-March 2021 was down 5.1% QoQ at an annualized rate (seasonally adjusted), showing negative growth for the first time in 3 quarters. This was due mainly to slow consumption resulting from constraints on demand centered on industries such as food service and tourism due to the declaration of the second state of emergency, leading to the falling household consumption to -5.4% over the same period. While conditions for private residential investment were favorable over the same period, rising by 4.5%, private non-residential investment showed negative growth for the first time in 2 quarters, down 5.5%. While exports were up 9.7%, backed by economic recoveries overseas, this was exceeded by growth in imports (up 16.8% over the same period), and the contribution of net exports was -0.9%.

Expectations for the quarter April-June 2021 call for low growth or the second consecutive quarter of negative growth. On April 25, the third state of emergency was declared for 4 prefectures of Tokyo, Osaka, Kyoto, and Hyogo. It later was expanded to include Aichi and Fukuoka prefectures on May 12 and Hokkaido and Okinawa Prefecture on May 23. The third state of emergency includes calls for some large retail stores such as department stores to suspend business operations, and if the state of emergency remains in place over a lengthy period it is likely to be unavoidable that it would have an impact on the food-service, tourism, and retail industries. While there are expectations of increased exports accompanying resumption of economic activities in the U.S., China, and other markets, there also is a possibility that the worsening semiconductor shortage could restrain supplies to the automotive and other industries. It appears likely that a full- fledged economic recovery can be expected in autumn or later, when economic activities are expected to resume due to progress in vaccination.

【Fig.1】Real GDP Growth Rate and Contribution to Change

(%)

25

20

15

10

5

0

-5

-10

Private Inventories

Net Exports

-15

Public Demand

-20

Private Non-Resi. Investment

Private Residential Investment

-25

Consumption of Households

-30

Real GDP Growth Rate

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

2018

2019

2020

2021

Source: The Cabinet Office

	【J-REIT Market】
	The TSE REIT Index outperforms TOPIX for the first time in 6 quarters
	The TSE REIT Index's performance in January-	【Fig.2】TSE REIT Index、TOPIX、JGB 10 Yield
	March 2021 was up 12.8%, rising for the 4th
	0.2 (%)
	consecutive quarter. Since TOPIX was up 8.3%							2,300
	over the same period, the TSE REIT Index
	outperformed the stock market. A look at full-
	year performance in 2020 shows that the J-									2,100
	REIT market was down 16.9% while TOPIX
	was up 4.8%. It appears that it has been	0.0								1,900
	reconsidered since the start of 2021, while J-
	REIT market's recovery had been lagging. In
	March, the TSE REIT Index recovered to the									1,700
	2,000 point level for the first time in about a
	year, since the market fell rapidly in response to
	the COVID-19 pandemic in March of last year.	-0.2								1,500
	However, while TOPIX had recovered to pre-
	pandemic levels at the end of March 2021, up
	12.7% from the end of January 2020, the TSE				JGB 10 Yield (LHS)				1,300
	REIT Index was down 6.9% over the same				TSEREIT Index(RHS)
	period, as it still has not yet reached its pre-
				TOPIX (RHS)
	COVID-19 level.
	-0.4								1,100
	A look at performance by asset type shows that	'19/1	'19/7	'20/1	'20/7	'21/1
	both office REITs and residential REITs were	Source: Bloomberg, Kenedix
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 2Q2021

Market capitalization (RHS) NAV ratio (LHS)

0.0 2/'02 8/'03 2/'05 8/'06 2/'08 8/'09 2/'11 8/'12 2/'14 8/'15 2/'17 8/'18 2/'20

Source：The Association Real Estate securitization, Kenedix

5

0

0.5

10

1.0

15

1.5

20

Acquisition value (RHS)（JPY in trillion） 25

（times） 2.0

【Fig.5】AUM, Market Capitalization, NAV Ration of J-REITs

KENEDIX MARKET REPORT

up 12.0%, retail REITs were up 15.0%, and logistics REITs were up 6.8% (calculated by Kenedix based on the SMTRI J- REIT Index® from Sumitomo Mitsui Trust Research Institute). Performance of individual hotel REITs also showed marked improvement, as Japan Hotel REIT Investment Corporation was up 17.5% and Invincible Investment Corporation was up 25.9%. Thus, these sectors, which had been underperforming until now, have shown sharp rates of increase.

The yield on 10-year JGBs over this period rose from 0.021% at the end of 2020 to as high as 0.16% level for a time in February, before falling again to trend now in the range around 0.08%. Due to increases in unit prices and in long -term interest rates, the yield spread based on the TSE REIT Index fell from 4.08% at the end of 2020 to 3.54% at the end of March 2021.

【Fig.３】Price Performance by Asset Type (Jan.2020=100)

180

OfficeResidential

160	Retail	Logistics

140

120

100

80

60

40

19/1

19/4

19/7

19/10

20/1

20/4

20/7

20/10

21/1

Source：「SMTRI J-REIT Index®」made by Sumitomo Mitsui Trust Research Institute, Kenedix

【Fig.4】Amount of Public offering

1.4	（JPY in trillion）		Q4
1.2			Q3
1.0			Q2
		Q1
0.8
0.6
0.4
0.2

0.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Source：The Association Real Estate securitization, Kenedix

Active property trading by J-REITs despite a low amount of public offerings

The amount of public offerings in the quarter January-March 2021 was down 55.6% YoY to JPY81.6 billion. This can be said to be a low level of transaction volume for a January-March quarter. On the other hand, the amount of property acquisitions by J-REITs was down 6.5% YoY to JPY443.4 billion. As a result of this limited decrease, the figure does not suffer greatly from comparison with the January-March quarters in the past 2 years. The amount of public offerings in the previous period was high at JPY276.0 billion, and in this period the amount of disposition was relatively high at JPY113.8 billion. Some reshuffling of properties could be seen among REITs, as MORI TRUST Sogo Reit, Inc. sold the Tokyo Shiodome Building and acquired Kamiyacho Trust Tower. Sale of properties also continued for the purpose of supplementing dividends, which had decreased due to COVID-19.

The NAV ratio recovered to 1.0 times as unit prices rose.

Valuation increased as unit prices rose in the J-REIT market. At the end of April the NAV ratio was up to 1.14 times as an average for the J-REIT as a whole, while

yield on dividends fell to 3.46%. While the

NAV ratio had been below 1.0 times for a time, its upward trend has been

strengthening since autumn 2020. While many REITs, such as hotel REITs, continue to show NAV ratios of less than 1.0 times, some REITs show high valuations of more than 1.5 times. The unrealized gains of J- REITs (appraised value - book value) has reached about JPY40 trillion, and the unrealized profit margin exceeds 20%. A look at examples of properties sold by J- REITs shows that many sold at prices in excess of their most recent appraised values, as transactions continue at relatively high price levels in the spot real estate investment market. The rise in valuation in the J-REIT market also can be surmised to reflect favorable conditions in

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KENEDIX JAPAN REAL ESTATE MARKET REPORT 2Q2021

KENEDIX MARKET REPORT

the real-estate investment market.

In April, the U.S. investment fund Starwood Capital Group announced a takeover bid (TOB) for Invesco Office J-REIT (IOJ). The initial price of the TOB was 20,000 yen/unit, reflecting a premium of 13.1% compared to IOJ's NAV/unit of JPY17,684. Starwood increased the bid price to JPY21,750 on May 10, but then on May 20, IOJ's sponsor Invesco Group announced that it planned a TOB for all units of IOJ. The TOB price of 22,500 yen/unit reflects a premium of 27.2%.

【Real estate investment market】

While commercial property transactions were down YoY in January-March 2021, conditions were favorable compared to other countries

According to CBRE, the amount of investment in commercial real estate in January-March 2021 was down 24% YoY to JPY926 billion. While this figure is down YoY, since the amount of investment in January-March 2020 was higher than in the average year, the level in this period appears largely unchanged from that for the quarter January-March in 2019 and earlier years. It also appears to reflect a rebound from the high level, despite the COVID-19 pandemic, of JPY120.4 billion, up 8% YoY, in October-December 2020. The amount of investment by domestic investors other than J-REITs was down 15% YoY, and the investment amount by overseas investors was down 17%, as investment fell overall. However, according to JLL the amount of investment in real estate in Tokyo was second in a global ranking of cities, as conditions in Japan's real estate investment market appear to be comparatively favorable.

【fig.6】Major Transaction Volume by Investor Type

(JPY in billion) 6,000

Domestic (J-REITs)

Domestic (Others)

Overseas

5,000

4,000

3,000

2,000

1,000

-

This period again saw a succession of property	05	06	07	08	09	10	11	12	13	14	15	16	17	18	19	20	Q1	Q1
																20	21
disposition by operating companies. Kintetsu Group	Source: CBRE "Investment Market View", Kenedix

Holdings sold 8 group hotels, including Miyako Hotels, to the Blackstone Group. This is expected to help improve the financial basis of the Kintetsu Group, whose business results have worsened due to the impact of COVID-19. In addition, Fujita Kanko, which operates the Washington Hotels chain and other hotels, announced the disposition of Taiko-en in Osaka City. Buyers include the above-mentioned Blackstone, and BentallGreenOak, which acquired Hirokoji Cross Tower, as appetite for investment appears to remain strong among foreign-affiliated investment funds.

【Fig.7】Significant deals

Property Name	Type	Buyer	Prefecture	Value	Date
(JPY in bn)
Miyako Hotel Kyoto Hachijo and other 8 hotels	Hotel	SPC of Blackstone Group and others	-	Approx 60.0	Mar-21
Torch Tower	Hotel	SPC of Mitsubichi Estate and Tokyo Century	Tokyo	56.0	Mar-21
Hirokoji Cross Tower and others	Office	SPC of BentallGreenOak	Aichi	Approx 40.0	Feb-21
Taiko-en	Others	Domestic corporation	Osaka	39.0	Feb-21
NBF Minami-Aoyama Bldg.	Office	Domestic general business companies and LLC.	Tokyo	31.6	Mar-21
Nanko Distribution Centre 1	Logistics	ESRのSPC	Osaka	29.5	Mar-21
Kamiyacho Trust Tower	Office	MORI TRUST Sogo REIT	Tokyo	28.0	Mar-21
Tokyo Shiodome Bldg.	Office	MORI TRUST	Tokyo	28.0	Mar-21
MFIP Inzai Ⅱ	Others	Mitsui Fudosan Logistics Park	Chiba	15.2	Mar-21
Ueno East Tower	Office	Nippon Building Fund	Tokyo	13.4	Mar-21
Logicross Narashino	Logistics	Mitsubishi Estate Logistics REIT	Chiba	11.9	Feb-21
Aeon Takatsuki	Retail	Hitachi Capital Community	Osaka	11.0	Mar-21
4 rental condominiums in Tokyo	Residential	PGIM Real Estate	Tokyo	9.2	Jan-21

Source: Companies publication documents, News report, Kenedix

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KENEDIX JAPAN REAL ESTATE MARKET REPORT 2Q2021

20%

0%

Source: Japan Real Estate Institute "The Japan Real Estate Investor Survey", Kenedix

KENEDIX MARKET REPORT

Investors' expected yields are down markedly for rental residences and logistics facilities

According to the Japanese Real Estate Investor	【Fig.8】Real Estate investor's Expected Yield
Survey, published semiannually by the Japan
Real Estate Institute, in the April 2021 survey the							Office(Marunouchi/Otemachi)
indicator of (median) expected yields on class-A	(%)						Residential/Standard Studio(Southern Tokyo)
					Downtown high-end Retail property (Tokyo Ginza)
buildings in Tokyo (Marunouchi/Otemachi) was	7.0
					Suburban Retail Facility
unchanged from one half-year earlier, at 3.5%.							Logistics/Multiple tenants type (Tokyo coastal area)
						Hotel (Tokyo/around a main station of JR or subway)
The figure has remained largely unchanged for 4
years and appears not to have been	impacted	6.0
much by COVID-19. A look at expected yields on
rental residences shows that expected yields on
standard studios were down 0.1%pt from half a	5.0
year ago in the 3 cities of Saitama, Chiba, and
Yokohama in the greater Tokyo area as well as in
Kobe City. Expected yields on family-type
apartments were down in 9 cities, including	4.0
Sendai, Nagoya, and Fukuoka in addition to cities
in the greater Tokyo area, other than Tokyo. Thus,
appetite	for	investment in rental	residences	3.0
appears to be rising again. A look at expected
yields on logistics facilities shows decreases on	Source: Japan Real Estate Institute "The Japan Real Estate Investor Survey",
all the major cities of Tokyo, Chiba, Nagoya,
Osaka, and Fukuoka, with a decrease of 0.2%pt	【Fig.9】Anticipates Real Estate Investment Activity in Next 12 Months
in some areas, such as among multitenant
facilities	in	the Osaka waterfront area,	as	the	100%				Plan to look for new investment opportunities
market	for	logistics facilities appears	to	be				No plan for new investment
				Plan to sell some holdings
overheating even more than that for residential
properties. At the same time, expected yields on	80%
limited-service hotels rose in 5 out of 8 cities
(Sapporo, Sendai, Nagoya, Kyoto, Osaka, and
Fukuoka). The popularity of hotels appears to be	60%
in a downward trend overall, as expected yields
have risen for 3 consecutive quarters in some
cities. However, this trend must be observed	40%
carefully, since investors' view on hotel
investments varies widely.

The same survey asked about investors' thinking on real estate investment over the coming year, with 94% of respondents answering that their approach to new investments would be proactive. This figure was up from 92% half a year ago, rising for 2 consecutive quarters. At the same time, the percentage who answered that they would refrain from new investment for the time

being fell to 7% from 11% half a year ago. Clearly, investors' appetite for investment continues an improving trend after bottoming out in April 2020, when the COVID-19 pandemic first began to spread.

【Office Market】

The vacancy rate continues to rise in the Tokyo office market

The vacancy rate in Tokyo business districts (the 5 central wards) announced by Miki Shoji stood at 5.42% at the end of March 2021, up 0.93%pt from the end of December 2020. The rate was 5.24% in February, exceeding the critical 5% level for the first time in 5 years and 8 months, since June 2015, and it remains in an increasing trend. Total vacant floor space increased by 73 thousand tsubo in January-March 2021. While this was less than the increase of 82 thousand tsubo in October-December 2020, the quarterly increase in vacant floor space remains large. Vacant floor space stood at 425 thousand tsubo at the end of March, after rising 309 thousand tsubo over the past year to exceed 400 thousand tsubo for the first time in about 6 and one-half years since August 2014. The pace of the increase in vacancies is even higher than it was in the Global Financial Crisis (GFC) in 2008, when vacant floor space rose by 245 thousand tsubo over 4 quarters starting in Q4 2008. Also, while it is said that the GFC was spurred by the bankruptcy of Lehman Brothers Holdings in September 2008,

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KENEDIX JAPAN REAL ESTATE MARKET REPORT 2Q2021