Japan RE

Research Report
Japan Real Estate

First Quarter 2014
January 2014
Prepared By:
Table of Contents
Koichiro (Ko) Obu

Head of Research & Strategy,
Asia Pacific
+81 (0) 3 5156 6522
koichiro.obu@db.com
Executive Summary ............................................................................. 1
Minxuan Hu
Property Market Research
+81 (0) 3 5156 6525
minxuan.hu@db.com
Mark Roberts
Head of Research & Strategy
+1(212) 454-0974
mark-g.roberts@db.com
Macro Economy ................................................................................... 2

Capital Market ...................................................................................... 4
Lending .................................................................................... 4
Pricing...................................................................................... 5
Transactions ............................................................................ 6
Performance ............................................................................ 7
J-REITs.................................................................................... 8
Market Fundamentals ........................................................................ 10
Office ..................................................................................... 10
Retail ..................................................................................... 13
Residential ............................................................................. 14
Industrial ................................................................................ 15
Research Topic: Japan, Asia, & Global Investing .............................. 17
Past Topics ........................................................................................ 25
Important Notes.................................................................................. 26
Research & Strategy Team Alternatives and Real Assets .............. 27
DEUTSCHE ASSET & WEALTH MANAGEMENT Japan Real Estate First Quarter 2014 | January 2014
Executive Summary
Economy: Led by a recovery in domestic consumption and external demand, Japans
GDP was expected to finish 2013 with a 1.8% expansion. Much of the growth came in the
latter half of the year. Consumer demand for durable goods such as automobiles and
white goods was strong among upper income groups. A pending tax hike is expected to
curtail consumption and deter the pace of growth in coming months, with momentum likely
to slow to 1% in 2014. For now, aggressive monetary easing has formed a tailwind for
asset prices and the overall real estate market.
Capital market: A recovery in the lending attitudes of banks pushed the preliminary
volume of commercial property transactions in 2013 to about twice as much as a year ago.
The J-REIT market raised a record amount of capital more than JPY 1 trillion yen in
2013. While some foreign managers and investors managed to expand their activities, the
Japanese investment market is still dominated by J-REITs. Cap rates continue to
compress across the commercial sectors, with an expectation of rental recovery in the
office sector.
Property markets: A boom in new housing continues in Tokyo with sales prices at their
highest levels within the last two decades. Fundamentals are strong in the leasing
markets in all three commercial sectors, including office, retail, and logistics, but the extent
of recovery is inconsistent. The office sector shows steady signs of recovery in all cities
across the country and the logistics market looks poised to absorb the current supply
surge, but the retail market will be inversely affected by the tax hike later this year.
Research Topic: Japan, Asia, & Global Investing: Japan ranks 26th worldwide as a
source for outbound cross border investment in property, making it one of the least active
advanced economies for this source of capital. The insularity of domestic investors has, if
anything, strengthened. This contrasts strongly with other Asian institutional investors who
are becoming recognised in the post-credit crisis years as active acquirers of overseas
real estate assets. In this editions Research Topic we analyse the recent trend in cross
border real estate investment into and out of Japan, highlighting the markets worrisome
insularity and structural impediments, while also outlining possible solutions.
Macro Economy
Led by a recovery in domestic consumption and external demand, Japans GDP was
expected to finish 2013 with a 1.8% expansion. Much of the growth came in the latter half
of the year, according to Deutsche Bank analysts. Consumer demand for durable goods
such as automobiles and white goods was strong among upper income groups. This was
partly due to stock market appreciation, but also to front-loaded demand preceding a
planned consumption tax increase in April 2014 from 5% to 8%. The tax hike is expected
to curtail consumption and deter the pace of growth in coming months, with momentum
likely to slow to 1% in 2014.
Exhibit 1 GDP Growth Outlook for Japan

Q1
Q2
Q3
Q4
annual growth
DB Forecast
4%
2%
0%
-2%
Dot-com Bubble burst
-4%
-6%
Consumption
Tax Increase
Consumption Tax Increase

Asian Financial Crisis
-8%
Earthquake
aftermath
Global Financial Crisis
2017F
2016F
2015F
2014F
2013E
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-10%
Notes: E = preliminary estimate, F = forecast, there is no guarantee forecast growth will materialise. Please refer to Important Notes (see end of report)
Sources: Deutsche Bank Japan Economics Weekly
As of January 2014
The Diffusion Index (DI) of the Tankan Survey conducted by the Bank of Japan (BoJ)
made a large leap in the fourth quarter 2013. The DI improved from an index value of 13
in September 2013 to 18 in December 2013, its highest level in six years. The recovery
has now started to spread beyond large corporations to mid-sized companies as well. The
Business Condition Leading Index reported by Japans Cabinet Office implies healthy
growth in the first quarter of 2014, but after that, uncertainties linger as to the potential
impact of the consumption tax increase planned for April.
Exhibit 2 Diffusion Index of Business Conditions

Business Condition Leading Index (LHS)
(2010=100)
Diffusion Index of Tankan Survey (RHS)
126
Diffusion Index of Business Conditions:

('favourable' minus 'unfavourable', % points) 50
113
25
100
87
-25
Dot.com
Bubble burst
Global Financial
Crisis
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-50
1999
1998
1997
1996
1994
1993
1992
1991
74
1995
Consumption
Tax increase
Sources: The Bank of Japan, Japans Cabinet Office, Deutsche Asset & Wealth Management
As of January 2014
Fallout from gradual tapering of quantitative easing in the United States in 2014 will have
only a marginal impact on Japans long term interest rate. The impact will be especially
mild as compared to emerging Asian markets. Japans 10-year government bond yield is
forecast to remain below 1.0% through 2014.
Due to aggressive monetary easing by the BoJ, core CPI inflation rose from negative
territory a year ago to around 1% at the end of 2013. This re-flation is expected to reach
its peak in the first half of 2014, with CPI reaching around 1.4% on a like-for-like basis that
excludes the effect of the planned consumption tax increase in April 2014. Deutsche
Bank economists estimate CPI could be as much as 3.5% including the consumption tax
effect.
Exhibit 3 Forecast of Interest Rate and CPI

Call Rate (overnight)
CPI
(%)
10y JGB
CPI incl tax effect
Consumption Tax
hike in April 2014
2
1
0
-1
DB Forecast
-2
2017F
2016F
2015F
2014F
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-3
Notes: F = forecast, there is no guarantee rates forecasted will materialise. JGB = Japanese Government Bond. CPI = Consumer Price Index. Please refer
to Important Notes (see end of report)
Sources: The Bank of Japan, Japans Cabinet Office, Deutsche Bank
As of January 2014
Capital Market
Lending
Japans credit conditions are still favourable for borrowers. The BoJs DI for lending
attitudes of banks to the real estate industry (orange line in Exhibit 4) has remained above
an index value of 15 since June 2013, the highest level in six years. The lending volume
to new real estate projects increased by 13.3% in the third quarter of 2013 (year-on-year),
reflecting the active deal flow during the period.
Exhibit 4 Real Estate Lending by Japanese Banks

growth of lending to new projects (yoy, LHS)
lending attitude DI to all industries (RHS)
lending attitude DI to real estate industries (RHS)
20%
20
2013.12
2013.09
2013.06
2013.03
2012.12
2012.09
2012.06
2012.03
2011.12
2011.09
2011.06
2011.03
2010.12
2010.09
2010.06
2010.03
2009.12
2009.09
2009.06
2009.03
2008.12
-40
2008.09
-40%
2008.06
-20
2008.03
-20%
Diffusion Index (DI)
0%
Sources: The Bank of Japan, Japans Cabinet Office, Deutsche Asset & Wealth Management
As of January 2014
The volume of commercial real estate transactions in Japan remained at a buoyant level
in the fourth quarter of 2013. The preliminary transaction volume in the rolling 12 months
to December 2013 amounted to JPY 3.8 trillion, about twice as much as the previous year.
This increase occurred in line with a recovery in the lending attitudes of banks, and the
positive trend is expected to continue through the near future.
Exhibit 5 Real Estate Transaction Volume and Lending Attitude DI

(JPY tn)
transaction volume (12 months, LHS)
lending attitude DI (6 months prior, RHS)

36
12
-12
-24
-36
2000.09
2001.03
2001.09
2002.03
2002.09
2003.03
2003.09
2004.03
2004.09
2005.03
2005.09
2006.03
2006.09
2007.03
2007.09
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
2013.12E
24
Diffusion Index (DI)
Notes: E = preliminary estimate. Please refer to Important Notes (see end of report)
Sources: Urban Research Institute, Bank of Japan, Real Capital Analytics, Deutsche Asset & Wealth Management
As of January 2014
Pricing
The TMAX all-property economic cap rate which incorporates actual market prices
tightened to 5.15% in September 2013, dropping 9 basis points from June 2013 to reach
its lowest level in six years. This parallels the ongoing compression of office appraisal cap
rates in Tokyo, which reached a preliminary 3.9% in September 2013, the lowest level in
its history. The gap between the office and residential sectors is widening, indicating a
stronger expectation of rental recovery in the office sector as opposed to the residential
sector. The average yield spread the difference between the cap rates and 10 year
bond yields remained at 440 basis points in Tokyo, providing, together with Sydney,
one of the most attractive spreads among the major global office markets.
Exhibit 6 Cap Rate (appraisal) and Yield Spread (transacted)

Average Office Yield Spread for
Actual Transactions
Average Appraisal Cap Rate for Assets

Held by J-REITs
Tokyo Office
Tokyo Residential
TMAX Economic
Osaka Office
Osaka Residential
7.0%
Tokyo
Manhattan
London
Hong Kong
Singapore
Sydney
6%
preliminary
6.5%
5%
6.0%
4%
5.5%
3%
5.0%
2%
4.5%
1%
4.0%
0%
3.5%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
-1%
2007 2008 2009 2010 2011 2012 2013
2007 2008 2009 2010 2011 2012 2013
Notes: Past performance is no guarantee of future results

Sources: ARES, TMAX, Real Capital Analytics, Bloomberg, Deutsche Asset & Wealth Management
As of January 2014
The TMAX Commercial Property Price Index1, a measurement incorporating actual market
price trends, was 88.5 in December 2013, a marginal rise from 87.8 in September 2013. It
is expected to steadily improve in 2014 following the substantial recovery posted in 2013
by the J-REIT index, a leading indicator of real estate prices in Japan.
Exhibit 7 Real Estate Capital Value in Japan

TMAX Property Price Index (LHS)
J-REIT (stock, RHS)
130
2,400
110
1,600
90
800
Sep 08
Global Financial Crisis
Mar 11
Tohoku Earthquake
0
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
70
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Notes: TMAX (Oct 2005=100) and ARES AJPI (31 December 2001=100).
Sources: ARES, TMAX, Bloomberg, Deutsche Asset & Wealth Management
As of January 2014
TMAX is a real estate appraisal and market research company in Japan. The TMAX Commercial Property Price Index measures the current price of commercial
real estate owned by J-REITs.
Transactions
Among the transactions completed or announced since October 2013, J-REITs continued
to be the most active buyers, but foreign investors expanded their activities too. The
largest transaction in value was a partial sale of Tokyos Times Square purchased by
Takashimaya, a local department store operator, followed by a multi-asset portfolio
acquired by Hulic REIT, and a couple of logistics portfolios. With the tourism industry
recovering, some overseas investors preferred hotel assets, but J-REITs were not active
in this sector.
Exhibit 8 Major Transactions in the Fourth Quarter 2013

JPY1 billion = US$10 million
Month
Type
Asset
Price
(JPY
billion)
Unit price
(JPY m
/sqm)
Cap
rates
Prefecture
May-13
logistics
JC Higashi Ogishima
Kanagawa
Aug-13
residential
5 apartments in Tokyo
Tokyo
Aug-13
office/retail
SMBC Koraibashi Bldg etc
Tokyo, Osaka
Aug-13
Aug-13
dev. site
hotel
Dev site in Motoazabu

Loisir Hotel Naha
6.5%
Tokyo
Okinawa
Aug-13
office
Star Companies Bldg
Sep-13
office
Sep-13
Sep-13
office
office
Hakata Gion Center Place

Aoba Roppongi Bldg etc
Sep-13
retail
Sep-13
retail
Sep-13
Sep-13
Oct-13
Oct-13
Oct-13
Oct-13
Oct-13
Private Investor
Morgan Stanley
Tokyo
Fukuoka
Mitsubishi Estate
Japan
Tokyo
Tokyo
Goldman Sachs
Aviva and Secured
US
UK/Japan
DECKS Tokyo Beach
10
0.15
Tokyo
Tokyu Land
Japan
Co-op Olympia Annex
11-12
Tokyo
Tokyu Land
Japan
office
Aoba Roppongi Bldg
Tokyo
Goldman Sachs
office
hotel
Riverside Yomiuri Bldg

Chisun hotel Shinsaibashi
Tokyo
Osaka
Aviva and Secured

IPC Corporation
0.63
Tokyo
Kanagawa
Riverside Yomiuri Bldg
hotel
Ueno Nomori Hotel
Higashi Ogishima Logistics
logistics
office/retail/ MG Shirokanedai bldg etc
hotel
LaSalle Investment
US
Malaysia
US
Westmont Hospitality
a German fund
US
US
UK/Japan
Singapore
US
Germany
Toyoko Inn (5 properties)

Apartments in Japan
20
6
0.92
-
4.6%
Tokyo, Miyagi ORIX JREIT
9.1% Kanagaw a, Niigata SiS International
20
0.37
5.9% Kanagaw a, Tokyo J'pn Rental Housing (REIT)
Japan
Shinjuku East Bldg etc
12
0.54
5.5%
Japan
Prologis Park Osaka 4 etc

Kintetsu Shin Nagoya Bldg
54
18
0.17
-
5.3% Osaka, Kanagaw a Nippon Prologis REIT

dAichi
h
Toyota
10
0.53
8.4%
Tokyo
Angelo Gordon
US
Chiba
LaSalle Investment
US
0.80
Tokyo
Tokyo Tatemono
Japan
47
19
1.09
1.08
4.8%
4.5%
Tokyo, Hyogo
HTokyo
kk id
Activia Properties (REIT)

Premier Investment (REIT)
Japan
Japan
74
84
1.25
Chiba, Kanagaw a financial institution, TOSEI

O
Tokyo
Hulic REIT (IPO)
Japan
14
-
0.14
-
Tokyo
Hyogo
Daiwa House Industry

Prudential
office
Nov-13
Nov-13
logistics
office
Nov-13
office
Sphere Tow er Tennouzu (67%)
Nov-13
retail
su:k Kaihin Makuhari
Nov-13
Blackrock
US
Germany
residential
Dec-13
iii-investments
Nov-13
Nov-13
Nov-13
Lone Star
Investor
origin
11
Nov-13
Nov-13
Acquired by
retail
Totenko Ueno
office/retail/h Kobe-25th etc
office/retail/ Gran Park etc
logistics
La Salle's assets (6 assets)
office/healthc Hulic Kamiyacho etc
Dev site in Takao
Merard Daikai
Tokyo, Chiba
Top REIT
Japan
Hong Kong
Japan
Japan
Japan
Dec-13
Dec-13
dev. site
retail
Japan
UK/Japan
Dec-13
retail
La Porte Shinsaibashi
12
3.08
Osaka
Tokyu Land
Japan
Dec-13
retail
Times Square
105
1.03
Tokyo
Takashimaya
Japan
Jan-14
office
60% of Hamarikyu Intercity
12
0.56
4.9%
Tokyo
Japan Excellent (REIT)
Japan
Notes: Non-office deals, assets outside Tokyo, and acquisitions by foreign managers are highlighted in gray. This table is prepared solely for information
purposes and not intended to recommend or endorse any specific company's shares or other products.
Sources: Real Capital Analytics, Nikkei Real Estate Market Report, Deutsche Asset & Wealth Management
As of January 2014
Tokyos volume of commercial real estate transactions for the rolling 12-month period
ending in December 2013 was US$28.2 billion, roughly equivalent to the previous volume
three months earlier. Tokyo continued to rank third among global cities (and first in the
Asia Pacific region) in transaction volume. About 54% of these transactions in Tokyo were
purchased by J-REITs, according to Deutsche Asset & Wealth Managements (DeAWMs)
own estimates.
Exhibit 9 Real Estate Transaction Volume by City (12 months rolling)

Office
Retail
Apartment
Industrial
Hotel
NYC Metro
London Metro
Tokyo
LA Metro
SF Metro
DC Metro
Paris
Hong Kong
Chicago
Singapore
Sydney
J-REITs
others
Seoul
Shanghai
Osaka
Beijing
Guangzhou
Taipei
($bn) 0
10
20
30
40
50
Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions
Sources: Real Capital Analytics, Deutsche Asset & Wealth Management
As of January 2014
Performance
IPD reported that the average annual total return for unlevered direct real estate
investment in Japan edged up to a preliminary 5.3% in September 2013 (the latest period
available), representing a steady recovery from 4.6% in June 2013. Among sectors,
annual office returns improved modestly from 2.9% in June 2013 to 3.5% in September
2013 (preliminary). All other sectors, including retail, residential, and logistics, posted
stronger returns of 6%-8% during the period.
Exhibit 10 Real Estate Total Returns in Japan (unlevered)

Total Return by Component
Total Return
Capital Growth
Total Return by Sector
Income Return
Office
Residential
15%
Retail
Industrial
15%
10%
preliminary
5%
preliminary
10%
0%
-5%
-5%
-10%
-10%
-15%
-15%
2004
2006
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
0%
2004
2006
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
5%
Notes: There is a time lag because of raw data being collected through semi-annual reports. Past performance is not indicative of future results
Sources: IPD Japan Monthly Indicator, Deutsche Asset & Wealth Management
As of January 2014
J-REITs
Fuelled by recovering real estate fundamentals in Japan, the J-REIT index bounced to
1,500 at the end of 2013, putting it roughly back at the same level as three months earlier.
This was atypical among global REIT markets, most of which softened mildly during the
same period due to higher long-term interest rates.
Exhibit 11 J-REIT Index and Long-Term Global Comparison

J-REIT Index and Nikkei 225 (5-year)
1,900
Global REIT Comparison (10-year)
(JPY)
J-REIT
US-REIT
19,000
A-REIT (Australia)
S-REIT (Singapore)
400
J-REIT Index (LHS)

1,600
350
16,000
300
1,300
250
13,000
200
1,000
150
10,000
(Mar-09 = 100)
100
Nikkei 225 (RHS)

2013.12
2012.12
2011.12
2010.12
2009.12
2008.12
2007.12
2006.12
2005.12
2003.12
2014.01
2013.07
2013.01
2012.07
2012.01
2011.07
2011.01
2010.07
2010.01
2009.07
2009.01
2008.07
2004.12
50
7,000
2008.01
700
Notes: Past performance is not indicative of future results. Tokyo Stock Exchange REIT Index (J-REIT), FTSE NAREIT All Equity REITS Index (US-REIT),
S&P/ASX 200 A-REIT Index (A-REIT), FTSE ST REIT Index (S-REIT)
Sources: Bloomberg, Deutsche Asset & Wealth Management
As of January 2014
On average, the expected J-REIT dividend yield was 4.75% overall and 3.14% for office
REITs in November 2013. The overall J-REIT yield tightened 44 basis points (bps) from
three months ago while the office yield compressed 26 points. The J-REIT dividend yield
provides a spread of more than 300 bps (and more than 250 bps for office REITs) over
the 10-year government bond yield. Though the J-REIT spread compressed in the fourth
quarter 2013, it is still healthier than the US-REIT spread (less than 100 bps) or the UKREIT spread (close to zero).
Exhibit 12 J-REIT Expected Dividend Yield

J-REIT
Office REIT
10Y JGB
8%
6%
4%
2%
2013.11
2013.05
2012.11
2012.05
2011.11
2011.05
2010.11
2010.05
2009.11
2009.05
2008.11
2008.05
2007.11
2007.05
2006.11
2006.05
2005.11
2005.05
2004.11
2004.05
2003.11
2003.05
2002.11
2002.05
2001.11
0%
Notes: Past performance is no guarantee of future results. JGB = Japanese Government Bond. Commercial real estate transactions exclude non-income
producing assets, such as development site transactions
Sources: Sumitomo Mitsui Trust Research Institute, Bloomberg, Deutsche Asset & Wealth Management
As of January 2014
The J-REIT market has continued to attract new capital from retail investors. In 2013
alone, it raised more than JPY 1 trillion yen, a record amount of capital. In the final quarter
of 2013, the market witnessed two new listings (Simplex Investment and Aeon REIT) and
many secondary offerings. In 2014, Hulic REIT plans to go public in February, and a
couple of healthcare REITs are in the pipeline. The aggregate amount of capital raised in
the six months to December 2013 was JPY 473 billion, which has enabled ample
purchasing activities by REITs. Fundraising activity is expected to remain strong in the
first half of 2014, followed by a mild slowdown in the latter half of the year, in line with the
expectation of a gradual increase in interest rates.
Exhibit 13 Capital Raising and Transactions by REITs in Japan

Name of REIT
JPY tn
Month
JPY bn
Public Offerings
1.0
Net Acquisition
by J-REITs
Bond
3rd Party Allotment
Public Offering
IPO
0.5
Mori Hills REIT
Oct-13
Orix J-REIT
Oct-13
17
11
Kenedix Realty
Oct-13
19
Nippon Prologis REIT
Nov-13
30
Activia Properties
Nov-13
33
other POs
Jul-Dec
224
Total
334
Initial Public Offerings
2001.09
2002.03
2002.09
2003.03
2003.09
2004.03
2004.09
2005.03
2005.09
2006.03
2006.09
2007.03
2007.09
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
2013.12E
0.0
Simplex Investment Advisors
Oct-13
35
Aeon REIT
Nov-13
99
Total
134
Planned: Hulic REIT, Shinsei Bank, SMBC (NEC)

Daiwa Securities, Kenedix
Notes: Commercial real estate transactions exclude non-income producing assets, such as development site transactions
Sources: ARES, Nikkei, Deutsche Asset & Wealth Management
As of January 2014
The volume of commercial real estate transactions in Japan in the six months to
December 2013 was a preliminary JPY 1.3 trillion, over 60% of which involved
acquisitions by listed J-REITs. The acquisition volume by non-REIT players declined in
the fourth quarter of 2013 due to stiff competition, while J-REITs maintained elevated
transaction volumes in the period.
Exhibit 14 Real Estate Transactions in Japan and J-REIT Share

(JPY tn)
80%
J-REIT share (%) of
all transactions (RHS)
4
Acquisition by others
Acquisition by J-REITs
Disposition by J-REITs
3
60%
40%
20%
0%
-20%
2013.09
2013.12E
2013.03
2012.09
2012.03
2011.09
2011.03
2010.09
2010.03
2009.09
2009.03
2008.09
2008.03
2007.09
2007.03
2006.09
2006.03
2005.09
2005.03
2004.09
2004.03
2003.09
2003.03
2002.09
2002.03
2001.09
2001.03
2000.09
-1
Notes: E = preliminary estimate. Commercial real estate transactions exclude non-income producing assets, such as development site transactions
Sources: ARES, Urban Research Institute, Real Capital Analytics, Deutsche Asset & Wealth Management
As of January 2014
Market Fundamentals
Office
Due to limited new office supply in the market, the office vacancy rate in Tokyos five
central wards has begun to recover. It fell to 7.3% in December 2013, a steady
improvement from 8.2% in August 2013. The vacancy rate for newly developed buildings
is still relatively high in Minato Ward, at 34% in December 2013, while it declined to more
manageable levels in the other four central wards. Tokyo will see a successive flow of
new office supply in 2014, but as the aggregate amount of one million square metres of
new supply is half of the volume delivered in 2012, it is not expected to negatively impact
the leasing market.
Exhibit 15 Office Vacancy Rate in Central Tokyo (5 wards)

new buildings (RHS)
2013
2012
2011
2010
0%
2009
0%
2008
10 %
2007
5%
2006
20 %
2005
10 %
2004
30 %
2003
15 %
2002
40 %
newly developed buildings
Vacancy rate for all buildings
all buildings (LHS)

20 %
Major Office Supply in Tokyo

Building
Otemachi Tower
ARK Hills South Tower
Date
Aug-13
Sep-13
Nihonbashi Muromachi East 2 3

Nihonbashi Muromachi East 1-5
Kyobashi Trust Tower
Nishi Shinbashi 1 chome project
MM21-46 Project (Yokohama)
Jan-14
Jan-14
Feb-14
Apr-14
Apr-14
Floors GFA (sqm)

38
198,000
20
55,033
22
17
21
22
14
63,000
29,120
52,000
55,000
97,400
Notes: GFA = gross floor area. sqm = square metres

Sources: Miki Shoji, Deutsche Asset & Wealth Management
As of January 2014
The vacancy rate in Tokyo declined steadily in 2013 across all categories of floor plate
sizes. For larger assets with a floor plate size of more than 200 tsubos 2 (660 square
metres), the vacancy rate dropped from 6.1% to 5.7% in the fourth quarter 2013 while it
declined from 10.1% to 9.5% in the period for the smallest category of assets, i.e., floor
plates of 50-100 tsubos (165-330 square metres).
The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)
10
Exhibit 16 Office Vacancy Rate in Central Tokyo by Building Floor Plate

Floor Plate : 165 sqm - 330sqm
Floor Plate : 330 sqm - 660 sqm
Floor Plate > 660 sqm
12%
8%
4%
1996.12
1997.06
1997.12
1998.06
1998.12
1999.06
1999.12
2000.06
2000.12
2001.06
2001.12
2002.06
2002.12
2003.06
2003.12
2004.06
2004.12
2005.06
2005.12
2006.06
2006.12
2007.06
2007.12
2008.06
2008.12
2009.06
2009.12
2010.06
2010.12
2011.06
2011.12
2012.06
2012.12
2013.06
2013.12
0%
Notes: sqm = square metres

Sources: Sanko Estate, Deutsche Asset & Wealth Management
As of January 2014
Historically, office rental growth rates correlate inversely to the vacancy rate. The vacancy
rate for buildings with floor plates of 200 tsubos (660 square metres) or more was 5.7% in
Tokyo in September 2013, close to the pivotal 5% threshold associated with rental growth.
Average office rents in this category rose by 4.6% in the third quarter in 2013 compared to
the previous year.
Exhibit 17 Vacancy Rate and Rent Growth in Tokyo (floor plate > 660 sqm)
Actual Rent Growth (QoQ, 3Q rolling avg.)
Vacancy Rate (RHS)
2013.12
2012.12
2011.12
2010.12
2009.12
2008.12
2007.12
2006.12
11%
2005.12
-12%
2004.12
9%
2003.12
-8%
2002.12
7%
2001.12
-4%
2000.12
5%
1999.12
0%
1998.12
3%
1997.12
4%
1996.12
1%
1995.12
8%
Sources: Miki Shoji, Sanko Estate, Deutsche Asset & Wealth Management
As of January 2014
The average rent for newly-built offices posted healthy growth of 5.7% while the rent for
prime offices in Tokyo remained flat in the fourth quarter of 2013. The all-class average
rent softened very marginally by 0.1% in the period. Given a steady recovery in the
vacancy rate, overall office rents will stabilise in 2014, with healthier growth expected in
prime assets.
11
Exhibit 18 Office Asking Rent in Central Tokyo by Building Floor Plate

(USD/sqf/year)
(JPY/tsubo*/mon)
50,000
182
DB Forecast
Prime
Buildings in CBD
floor plate > 660 sqm
40,000
145
30,000
109
Newly built
20,000
73
All classes
2014.12F
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008.03
2008.06
2008.09
2008.12
2009.03
2009.06
2009.09
2009.12
2010.03
2010.06
2010.09
2010.12
2011.03
2011.06
2011.09
2011.12
2012.03
2012.06
2012.09
2012.12
2013.03
2013.06
2013.09
2013.12
10,000
Notes: F = forecast, there is no guarantee forecast rents will materialise. Please refer to Important Notes (see end of report)
*The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)
As of January 2014
The vacancy rate in Osaka also declined to 9.8% in December 2013. This represented
continuous improvement from 10.9% a year earlier as the Osaka CBD absorbed
substantial supply, including Grand Front Osaka. Office vacancy rates continued to
recover in the period in all of the other markets that DeAWM covers due to the limited
supply of new buildings. We expect the trend of steady recovery to continue in these
markets in 2014.
Exhibit 19 Office Vacancy Rates in Major Cities in Japan (all grades)

(%)
Sapporo
Fukuoka
Nagoya
Osaka
Tokyo
16
12
2013.12
2013.09
2013.06
2013.03
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Major Office Completions in Regional Cities

Building
Niigata Nippo MEDIA SHIP
Daibiru Honkan (Os aka)
Grand Front Os aka A
Grand Front Os aka B/C
Fuji Film Nagoya bldg
NTT Sendai Aoba dori Bldg
Nagoya Tokio Marine-Nichido Bldg
Date
Jan-13
Feb-13
Apr-13
Apr-13
May-13
May-13
Jun-13
Floors
20
22
38
38/33
14
14
15
Abeno Harukas (Os aka)

Sapporo Mits ui JP bldg
Apr-14
Aug-14
60
20
GFA (sqm)
48,153
48,153
187,800
295,100
21,637
29,574
10,854
306,000
68,000
Notes: Please refer to Important Notes (see end of report). GFA = gross floor area. sqm = square metres
As of January 2014
12
Retail
Average high street retail rents started to recover in early 2013 in Tokyos top submarkets.
In September 2013, rents increased by 10.0% in Ginza and 12.2% in Omotesando from
the same period a year earlier, but they were relatively flat in Tokyos Shibuya and
Ikebukuro submarkets as well as in Osakas Shinsaibashi submarket. With consumer
confidence improving and foreign visitor arrivals reaching a record high, the favourable
trend in the retail sector is expected to continue, at least through the first quarter of 2014.
Exhibit 20 Average High Street Retail Asking Rents in Tokyo and Osaka
(JPY/tsubo/mon)
Ginza
Omotesando
Shinjuku
Shibuya
Shinsaibashi
Office (Central Tokyo)
50,000
40,000
30,000
20,000
2013.09
2013.06
2013.03
2012.12
2012.09
2012.06
2012.03
2011.12
2011.09
2011.06
2011.03
2010.12
2010.09
2010.06
2010.03
2009.12
2009.09
2009.06
2009.03
2008.12
2008.09
2008.06
2008.03
10,000
Sources: Attractors Lab, Miki Shoji, Deutsche Asset & Wealth Management
As of January 2014
Sales at department stores and chain stores rose in October-November 2013 compared
to the same two-month period a year earlier (on an existing store basis). This indicates
steady demand ahead of the tax rise in April 2014. Sales at existing shopping centres fell,
but this was attributed mostly to new store openings which were not included in the time
series. Consumer sentiment is expected to remain strong in coming months, but the
consumption tax (VAT) increase in April is likely to dampen consumer attitudes in the
second quarter of the year.
Exhibit 21 Retail Sales Growth in Japan (year on year)

Shopping Centre
Department Store
(for existing stores for all categories)
Chain Store
5%
0%
-5%
-10%
2000
2001
2002
2003
2004
2005
2006
2007
2008.03
2008.06
2008.09
2008.12
2009.03
2009.06
2009.09
2009.12
2010.03
2010.06
2010.09
2010.12
2011.03
2011.06
2011.09
2011.12
2012.03
2012.06
2012.09
2012.12
2013.03
2013.06
2013.09
2013.11
-15%
Sources: JCSC, JDSA, JCSA, Deutsche Asset & Wealth Management

As of January 2014
13
Residential
The boom in new housing continues in Tokyo. The average sales price per unit for newlybuilt condos in Greater Tokyo rose to JPY 49.4 million in the fourth quarter 2013, the
highest price range of the last two decades. The number of units sold rose 37.4% over the
same period a year ago, the second fastest growth rate in six years, while the contract
rate hovered at a favourable 80% in the period. This recovery is in line with our previous
forecasts, and it reflects anticipation of more inflation ahead as well as an expansion of
the housing mortgage tax incentive to offset, in part, the impact of the consumption tax
hike.3 We expect the average sales price to remain strong for the coming months.
Exhibit 22 New Condo Unit Price and Contract Rate in Greater Tokyo
Avg. unit price (LHS)
(JPY mn/unit)
Units Sold YoY (RHS)

30%
45
0%
40
-30%
35
-60%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007.03
2007.06
2007.09
2007.12
2008.03
2008.06
2008.09
2008.12
2009.03
2009.06
2009.09
2009.12
2010.03
2010.06
2010.09
2010.12
2011.03
2011.06
2011.09
2011.12
2012.03
2012.06
2012.09
2012.12
2013.03
2013.06
2013.09
2013.12
50
Sources: REEI, Deutsche Asset & Wealth Management

As of January 2014
The vacancy rate for residential rental units hovered near 10% in 2013 in the 23-ward
area of Tokyo (orange line in Exhibit 23), closely in line with the historical average. Rents
are recovering in both the broader 23-ward area (gray bar) and in the central five-ward
area (dark blue bar). This gradual recovery is expected to continue through spring,
typically the seasonal peak of rental demand in Japan.
Exhibit 23 Residential Rent and Vacancy in Tokyo

23 ward Rent Index
5 ward Asking Rent
(Index) (JPY/tsubo)
23 ward Vacancy (RHS)
(%)
100
13,500
97
13,100
2013.10
2013.07
2013.04
2013.01
2012.10
2012.07
2012.04
2011.10
2012.01
2011.07
2011.04
2011.01
2010.10
2010.07
11
2010.04
2009.09
13,900
2008.12
103
2008.03
10
2007.06
14,300
2006.09
106
2005.12
14,700
2005.03
109
Notes: The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet)
Sources: TAS Corporation with data sourced from At Home Co. Ltd. (23-ward vacancy), Leasing Management Consulting (5-ward asking rent), IPDRECRUIT Residential Index (23-ward rent index)
As of January 2014
For more on this issue, please refer to the research topic in the January 2013 edition of this report, Japan Real Estate Quarterly First Quarter 2013.
14
Reflecting strong demand, the vacancy rate of prime high-end apartments in Tokyo
recovered from 9.2% in the first quarter of 2013 to 7.8% in the third quarter. This
paralleled a similar recovery in the office sector. The rents for these prime high-end
apartments have been flat so far, but growth is expected to materialise in early 2014.
Exhibit 24 High-end Residential Rent and Vacancy Rate in Tokyo

(Yen/tsubo/month)
25,000
office rent
high end residential rent
office vacancy
high end residential vacancy
(%)
15
Quarterly
Annually
2013.12
2013.09
2013.06
2013.03
2012.12
2012.09
2012.06
2012.03
2011.12
2011.09
2011.06
2011.03
2010.12
2010.09
2010.06
2010.03
2009.12
2009.09
2009.06
2009.03
2008.12
2008.09
2008.06
2008.03
2007
7,000
2006
2005
10,600
2004
2003
14,200
2002
2001
17,800
2000
12
1999
21,400
Sources: Ken Real Estate Investment Advisors Ltd., Miki Shoji, Deutsche Asset & Wealth Management
As of January 2014
Industrial
Due to a combination of limited supply and healthy demand for modern spaces, the
leasing market for multi-tenant logistics assets remained extremely tight in the third
quarter of 2013, with 2.7% vacancy in Greater Tokyo and 0.7% in Greater Osaka. Tight
fundamentals helped push average logistics rents up by 4.7% in Greater Tokyo from a
year earlier, but they remained flat in Greater Osaka.
Exhibit 25 Logistics Leasing Market in Greater Tokyo and Greater Osaka

Vacancy Rate of Multi-tenant Logistics
Greater Tokyo
Logistics Rent
(JPY/tsubo/month)
Greater Osaka
5,000
20%
Greater Tokyo
Greater Osaka
forecast by Ichigo
forecast by Ichigo
4,000
15%
3,000
10%
2,000
5%
1,000
2014.12F
0
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
2014.12F
2013.09
2013.03
2012.09
2012.03
2011.09
2011.03
2010.09
2010.03
2009.09
2009.03
2008.09
2008.03
0%
Notes: F = forecast, there is no guarantee forecast returns will materialise. Past performance is not indicative of future results.
Sources: Ichigo Real Estate Service, Deutsche Asset & Wealth Management
As of January 2014
15
A number of new logistics completions were brought to the market in the second half of
2013, and there are more in the pipeline in 2014. Nevertheless, vacancy rates are
expected to remain at manageable levels both in Greater Tokyo and Greater Osaka in
2014. In fact, logistics rents are likely to remain firm in the year ahead possibly even
rising amid continuous, healthy demand for quality spaces from major tenants.
Exhibit 26 Logistics Supply and Vacancy Rate in Greater Tokyo

(million sqm)
New Supply (LHS)
Vacancy Rate (RHS)
forecast by Ichigo
14F
13E
12
11
0%
10
0.0
09
5%
08
0.5
07
10%
06
1.0
05
15%
04
1.5
Notes: E = preliminary estimate, F = forecast, there is no guarantee forecast growth will materialise. Please refer to Important Notes (see end of report)
Sources: Ichigo Real Estate Service, Deutsche Asset & Wealth Management
As of January 2014
16
Research Topic: Japan, Asia and Global Investing

The Japanese real estate market has experienced an upswing since the beginning of
2013, with J-REITs raising a record amount of capital in the year. In this new environment,
overseas investors have paid more attention to the Japanese market, but this has yet to
translate to a substantial increase of inbound cross border investment to Japan.
On the outbound side, Japan is not a major player as a capital source for cross border
real estate investment. In fact, if anything, the inward-looking tendency of domestic
investors actually intensified in 2013 as the value of the Japanese yen sank to a five-year
low. This capital flow environment contrasts with other Asian institutional investors in the
region. In South Korea, China and Malaysia, investors have started to follow the lead of
investors in Singapore and Hong Kong who have actively purchased overseas real estate
assets in recent years.
In this editions Research Topic we analyse recent trends in cross border real estate
investment into and out of Japan, highlighting the markets uniqueness and its structural
impediments. We conclude with possible solutions for normalising market patterns.
Inbound Investment
With inbound cross border property investment totaling $5 billion for the first nine months
of 2013, Japan ranked sixth in the world. It follows the United Kingdom, the United States,
Germany, France, and Australia as an investment destination. This ranking is relatively
low compared to the size of Japans economy, which is the second largest (after the US)
of the worlds advanced economies.
After the global credit crisis in 2008, cross border investment into Japan started to pick up
again in 2010, and has generally been on a trend of recovery ever since.4 The speed of
recovery, however, has been slower than other mature economies. In 2013, Japan did
gain some additional attention from overseas investors due largely to the success of the
Abe administrations economic policies. But this attention has yet to translate into a
significant volume of cross border investment.
Exhibit 27 Cross Border Real Estate Investment by Country of Destination

($bn)
2009
2010
2011
2012
Jan-Sep 2013
30
25
20
Japan ranks
No.6 as an investment destination
15
10
South Korea
Canada
Denmark
Hong Kong
Singapore
Netherlands
Russia
Spain
Poland
Italy
China
Japan
Australia
France
Germany
United States
UK
Sources: RCA, Deutsche Asset & Wealth Management

As of January 2014
There was a disruption to this recovery trend in 2011 due to the earthquake and tsunami.
17
Struggling leasing conditions may have deterred foreign investors, but there are other
reasons for the relatively limited recovery in cross border investment. One of these is the
dominant position of powerful domestic asset owners, such as developers and railway
companies. These asset owners bring a degree of illiquidity and insularity to the market
since they tend to hold prime assets indefinitely, selling them, if at all, exclusively to the
REITs and funds they manage. As mentioned on page 6, J-REITs are the most active
asset purchasers in the current Japanese commercial real estate market, and they source
deals mostly from their sponsoring developers.
This structural environment limits the liquidity of investment grade assets and minimises
the opportunities for investors, both foreign and domestic, to acquire prime assets.
Institutionalisation of the Japanese property market is surprisingly lacking. In fact, the
average allocation to real estate among Japanese pension funds is just 1.0% of the total
portfolio, which is significantly lower than peers in other major countries.
The Japanese government and the industry have been trying to expand the volume of
cross border real estate investment into Japan through implementation of industry tools
including more transparent return indices. So who are the cross border investors who
manage to penetrate Japans property market? Until the credit crisis, more than 80% of
these investments were completed by western investors. Since then, Asian investors have
increased their presence, expanding their collective market share to half of total cross
border investments in Japan in 2012 and 2013 (preliminary). With some of the domestic
Asian real estate markets now overheated, the Japanese market looks relatively attractive
for Asian investors. The average yield spreads of office transactions were about 140 basis
points in Singapore and Hong Kong, while it was still hovering at around 420 basis points
in Tokyo in 2013 (refer back to Exhibit 6). This has provided impetus for those Asian
investors to pour capital into the Japanese market.
Exhibit 28 Cross Border Real Estate Investment to Japan (2007-2013)

Others
100%
EU
80%
US
60%
40%
Asia
20%
0%
2007
2008
2009
2010
2011
2012
Jan-Sep 13

As of January 2014
Outbound Investment
Despite domestic efforts to improve inbound investment, the industry has paid less
attention to outbound investment from Japan, i.e. cross border investment by Japanese
investors. Japan ranks as low as 26th as a source of cross border real estate investment,
one of the lowest rankings among major economies. Japans rank on this metric falls
18
behind several small economies in the Middle East, including the UAE, Qatar, and Kuwait.
It lags small nations in Europe like Switzerland and Luxemburg. In fact, Japans ranking is
equivalent to Taiwan, a market whose GDP is just one tenth the size of Japans.
Japanese companies were actually very active in the global real estate market more than
two decades ago, purchasing offices in New Yorks Manhattan and Londons City as well
as hotels in Honolulu and the Gold Coast of Australia. Today Japanese funds largely shun
real estate in international markets. Only a handful of Japanese developers have
exposure to the UK and the US real estate office sectors. Since the allocation to real
estate among pension funds is limited to 1% on average, those institutions lack any inhouse expertise or capability in domestic real estate investment, let alone overseas
markets. Developing human resources with in-house expertise and replacing the culture
of resistance towards outbound real estate investment are believed to be the keys to
changing this current environment.
Exhibit 29 Cross Border Real Estate Investment by Country of Origin

($bn)
2009
2010
2011
2012
Jan-Sep 2013
30
25
20
15
Japan ranks
No.26 as an origin of capital
10
Russia
Taiwan
Denmark
Japan
Spain
Ireland
Malaysia
Luxembourg
Italy
Brazil
Austria
Netherlands
Israel
Sweden
Australia
Kuwait
France
Switzerland
South Korea
Qatar
Norway
UK
UAE
China
Hong Kong
Germany
Singapore
Canada
United States

As of January 2014
Comparative Performance
Despite attractive yield spreads in the current Japanese market, the US and the UK
markets have been providing more attractive total returns. Over the past fifteen quarters,
the US and the UK have averaged quarterly returns of about 2-3% compared to about 1%
on average in Japan over the same period. This underscores the opportunity costs for
Japanese investors who do not diversify their portfolios to the offshore markets.
19
Exhibit 30 Real Estate Total Return for the UK, US and Japan (unlevered)
UK IPD
(QoQ, %)
US NPI (NCREIF)
Japan AJPI (ARES)
2010
2011
2012
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
-2
2013
Sources: ARES, NPI, IPD, Deutsche Asset & Wealth Management

As of January 2014
Allocations
There is a strong tendency among Japanese pensions to squeeze allocations to
alternative assets especially to real estate. The Japanese public pension GPIF (the
worlds largest fund, with assets exceeding $1 trillion) does not have any allocations to
alternative assets, although they are considering a change to their ultra-conservative
allocation policy in the medium to long term. Allocations to alternative assets among
Japanese pensions are 9.7% on average, of which only 1.0% is in real estate. This is
significantly lower than major global peers which typically have 7-10% allocations to real
estate.
Korea's National Pension Service (NPS) provides a hopeful example of regional progress.
NPS traditionally limited its allocation to real estate, but in the last couple of years, it has
begun to ramp up its exposure in domestic and offshore markets. In just a short time, NPS
has become recognized as an active acquirer of cross border real estate. Many major
global funds experienced damage to their portfolio valuations during the credit crisis, yet
these same funds tend to provide higher returns in the long run. In contrast, the more
insular Japanese pensions tend to provide minimal long-term returns of only about 1-2%.
20
Exhibit 31 Real Estate Exposure and Investment Returns of Major Funds

100%
10%
10%
8%
7%
Real Estate
Alternatives
(PE/Hedge
Funds)
4%
8.2%
17%
16%
23%
35%
0%
26%
23%
32%
30%
Equity
1%
10%
14%
75%
50%
3%
5%
53%
45%
52%
57%
25%
Cash/
Government
Bonds
28%
69%
74%
58%
39%
17%
25%
0%
Total assets (US$ bn)

Annualised return (2012)
Long-term total return*
GIC
ABP
CalPERS
ADIA
Singapore
Netherlands
US
UAE
248
n/a
7.6%
380
13.7%
5.2%
255
10.2%
8.0%
NPS
2016F
NPS
2012
South Korea
627
n/a
6.9%
347
4.2%
6.3%
Pension avg.
GPIF
Japan
790
11.2%
1.1%
1,239
10.2%
2.0%
Lower returns compared to other pensions
*Long-term returns as of 2012. 25 years for KNPS, 20 years for ADIA and 10 years for all the other entities.
Notes: F = forecast, there is no guarantee forecast rents will materialise. Please refer to Important Notes (see end of report)
Sources: SWF Institute, PFA, GPIF, P&I, Company data, Deutsche Asset & Wealth Management
As of January 2014
Regional Investment Patterns

Among Asian investors, Singapore and Hong Kong have been exposed to international
markets for a quite a while. More recently, Malaysian, Chinese, and Korean investors
have also begun to increase their overseas property investments. In the process, these
outward-looking investors are improving their human resource development as they build
in-house expertise. Contrast this with Japanese investors who show little interest in
increasing their offshore investments. Japan's total offshore investment volume was
slightly higher than that of Taiwan in 2013 (preliminary). How much this outbound volume
may have been dampened by the weak value of the Japanese yen in 2013 is unknown. It
is worth noting, however, that in recent years when the yen's value soared, the outbound
volume was similarly low.
If there are examples to follow, then perhaps the regional Asian markets provide some
foreshadowing. One of the reasons driving Asian investors to move capital into offshore
real estate has been the heating up of the domestic markets. This has put domestic
investors under pressure to take a fresh look at offshore opportunities. Another reason is
the progressive and incremental institutionalisation of domestic markets, a process that
over time produces more experienced investors and managers with familiarity and
expertise in real estate investments and a greater comfort level when evaluating overseas
markets.
The liberalisation of real estate investment took a step forward in Taiwan in 2013. Until
now, Taiwan has not been aggressive with cross border investing, largely because it was
restricted from doing so. The policy environment shifted in the past year as the
Taiwanese government legalised offshore real estate investments by insurance
companies for the first time. Allowing more offshore investment was one of the
governments measures to cool the countrys overheated domestic real estate market.
21
Looking ahead, Taiwanese institutional investors are expected to join their regional peers
in becoming more active players in global real estate investment. Japan is now virtually
the only major Asian country that lacks a significant presence in the international property
markets.
Exhibit 32 Cross Border Real Estate Investment by Asian Origin

(USD bn)
40
Taiwan
Japan
30
Malaysia
South Korea
20
Hong Kong
China
10
Singapore
0
2010
2011
2012
2013E
Notes: E = preliminary estimate

As of January 2014
On paper at least, the Japanese government did make an effort to liberalise offshore
property investment in June 2013 when it amended regulations to enable J-REITs to
purchase overseas assets. While this may improve the inward-looking mentality of
Japanese investors in general, it is unclear how much impact it will really have on J-REITs
themselves. One argument is that most J-REIT investors do not want overseas exposure
in their J-REIT stock. Another argument is that sourcing overseas transactions would be
too difficult for most J-REITs since they have no overseas staff, nor do they have any
capability for due diligence. J-REITs, under this reasoning, are unlikely to emerge as a
driving force of outbound real estate investment from Japan.
Individual Japanese players have not been a major source of cross border real estate
investment in recent years. Since 2009, Japanese developers have made only a couple of
significant investments in London and Washington DC, but as the following exhibit shows,
no major overseas direct investments were made by Japanese insurance companies,
funds, REITs, or pensions in the same period.
The story differs in other Asian countries. Sovereign funds as well as public pensions in
South Korea, Malaysia, and China are actively purchasing buildings in global gateway
cities. The most popular destination among them is London due to its size, liquidity, and
transparency. Singapore attracts both Malaysian and Chinese investors. Like Japan,
Australia provides some of the best yield spreads among the major mature markets in the
world (see again Exhibit 6), but it attracts much more inbound foreign capital than Japan
(see again Exhibit 27).
22
Exhibit 33 Major Transactions by Asian Investors

Asset
London
S Korean
NPS
Samsung
AM
Hanwha
Hyundai Ins,
KFCC
POBA
KFCC, KTCU,
Hyundai AM
Korea Life
KIC
Malaysian
PNB
EPF
KWAP
Japanese
Chinese
Tabung
Haji
SAFE
Ping An Life
CIC
Mitsubishi
Estate
Mitsui
Fudosan
NTT Urban
Development
Nov-09
Dec-12
Oct-09
Aug-09
Jul-13
Apr-13
Mar-13
HSBC HQ
Hobart House
88 Wood Street
40 Grosvenor Pl
Commerzbank HQ
Crown Plaza
Ropemaker Place
Paddington
Aug-13
Waterside
May-12 Thames Court
Investors
1,276
336
292
282
472
220
716
266
226
Aug-12
Dec-11
Mar-12
Dec-11
Mar-12
Nov-10
Sep-11
Oct-10
Jul-11
Dec-10
Aug-11
Mar-13
Sep-12
Mar-13
Sep-12
Mar-13
Jun-12
Jun-13
Nov-12
Dec-12
Jun-11
219
117
653
550
223
291
265
247
237
231
132
326
317
311
262
716
438
395
378
287
156
One Wood Street

1 Bartholomew Lane
One Exchange Sq
Milton & Shire House
90 High Holborn
40 Portman Sq
Tower Bridge House
1 Sheldon Sq
11-12 St James's Sq
Whitefriars
The Bridge
88 Wood Street
10 Gresham St
151 Bucking'm Palace
10 Queen St Place
Ropemaker Place
Drapers Gardens
The Lloyds Bldg
Winchester House
1 Victoria St
City Tower
Jul-12 BBC Television Centre

Jul-13 Angel Court Tower
Mar-13 265 Strand
Jun-11 1 King William Street
Malaysian
Chinese
YTL Corp
TA Global
Genting
Bright Ruby
Fantasia
Westwood Apt
Ngee Ann City (26%)
Wisma Atria (26%)
Swissotel Merchant Ct
Singapore Tech Bldg
Grand Park Orchard
Malaysian
Chinese
105
117
111
S Korean
Malaysian
303
Mar-13 Ultra Mansion
121
Centennial Plaza TwrC
NPS
CIMB
KWAP
TA Global
Mar-11
Oct-11
Nov-10
Dec-08
595 Collins St
Aurecon HQ
737 Bourke St
Westin Melbourne
PNB
Starhill REIT
Jul-10 Santos Place

Nov-12 Marriott Brisbane
Location
NPS
Kumho
Zhang Xin
(SOHO)
Fosun Intl
Hainan Air
Investors
Jun-11
Mar-12
Mar-12
Aug-09
May-13
Oct-11
Oct-13
May-11
May-12
Helmsley Bldg
Colgate-Palmolive
Cityspire (51%)
AIG HQ
General Motors Bldg
Park Ave. Plaza (49.9%)
One Chase Manhattan
1180 Ave of Americas
Cassa NY Hotel
Date
NPS
Hong Kong
Agri. Bank
of China
UK
D.C.
S.F.
Honolulu
Bank of China
SAFE
Mitsubishi
Estate
Mitsui Fudosan
Mitsubishi
Acom
May-10 Sony Center

Oct-11 O'Parinor (total 75%)
May-13 BG Group Place
Apr-12 50 Connaught Rd
Jul-13 Silesia City Center
Jun-12
Mar-11
Dec-11
Jan-12
Sep-12
Dec-11
770
148
62
113
1,360
590
725
274
126
Asset
Other Destinations
Berlin
Paris
Houston
823
626
241
179
124
209
129
116
$m
147
116
112
103
$m
239
117
$m
New York
Poland
Aug-13 Knightsbridge
YTL Corp
KWAP
EPF
Bright Ruby
Hainan Air
CIC
$m
Erina Fair
Aurora Place
Marriott Sydney
ASX Bldg
Greystanes Park
Telstra House
Colonial House
- Brisbane
Malaysian
Katowice,
300
70
41
199
114
621
NPS
May-13
Dec-09
Nov-12
Oct-11
Jun-12
Feb-13
May-11
Jun-13
- Melbourne
314
Singapore
Nov-07
Oct-08
Oct-08
Jun-10
Feb-11
Aug-13
S Korean
316
Aug-12 Vintners Place
Asset
Date
Australia - Sydney
$m
S Korean
Date
Chinese
Investors
Tesco (3 retail assets)

1101 K Street
1100 First St NE
Homer Building
50 Beale Street
Waikiki Galleria
$m
759
445
480
628
537
526
199
172
315
305
187
Sources: Company data, Deutsche Asset & Wealth Management

As of January 2014
Conclusion
Japans recovering market fundamentals, attractive exchange rate, and healthy yield
spreads are now drawing international attention to the countrys real estate market,
especially among Asian investors. The volume of cross border investments to Japan,
however, ranks only sixth worldwide due to the illiquidity of prime assets and the relatively
limited access for institutional investors compared to the size of its market.
Perhaps a bigger concern is the even greater absence of outbound investment from
Japan. The country ranks by far the lowest among major economies (26th) as an origin for
outbound property investment. Neither the government nor the industry are fully aware of
the countrys unique isolation from global markets nor is there full awareness of the
underling structural problems of limited institutionalisation, limited sophistication and
capacity of institutional investors, and dominance of local developers. All of these factors
23
limit human resource development and cross border investment. It provides a stark
contrast to other major Asian countries where institutional investors are rapidly evolving.
The entrenched mind set cannot be reformed overnight. The Japanese real estate
industry, including managers and investors, must groom human resources for institutional
real estate investment through domestic and eventually cross border investment.
Investors, including local players and public pensions, should revisit their portfolio
allocations and apply modern portfolio theory, gradually increasing alternative asset
exposure over the long term. Only then will managers be able to develop new structures
or vehicles which can accommodate investor demand for overseas investment.
24
Past Topics
Vol
Year
Publication
Research Topic
Q2
Jun-08
Making sense of the rental market in Japan
Q3
Sep-08
Impact of the credit crunch
Q4
Dec-08
Revitalisation of ailing J-REITs
Q1
Mar-09
Tokyo office market in its global context
Q2
Jul-09
Japan residential market
Q3
Oct-09
History repeats itself? A comparison of the Year 2003

Problem with 2009
Q4
Jan-10
Introducing unit pricing analysis in Japan
Q1
Apr-10
Portfolio optimisation analysis in Japan
Q2
Jul-10
Japans capital market in a global context
10
Q3
Oct-10
Quarterly Report
11
Q4
Jan-11
Cross-border investment into and out of Japan
12
Q1
Apr-11
The Great Tohoku Earthquake and its impact on the

Japanese real estate market
Q2
Jul-11
Adapting Japans land price index for real estate analysis
14
Q3
Oct-11
Quarterly Report
15
Q1
Jan-12
The J-REITs next 10 years
Q2
Apr-12
Quarterly Report
17
Q3
Jul-12
Quarterly Report
18
Q4
Oct-12
The inward-looking focus of the real estate investors in

Japan
19
Q1
Jan-13
Can the housing tax credit boost demand?
Q2
Apr-13
Quarterly Report
21
Q3
Jul-13
Logistics : Rapid Modernisation

Underway in the Asia Pacific Region
22
Q4
Oct-13
Quarterly Report
Q1
Jan-13
Japan, Asia and Global Investing
2008
2009
9
2010
13
2011
16
2012
20
2013
23
2014
25
Important Notes
Deutsche Asset & Wealth Management represents the asset management and wealth management
activities conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche
Asset & Wealth Management products or services by one or more legal entities that will be identified to
clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such
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and RREEF Spezial Invest GmbH; in Australia: Deutsche Australia Limited (ABN 37 006 385 593) an
Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory
(not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft,
Hong Kong Branch (for direct real estate business), and Deutsche Asset Management (Hong Kong)
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(Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK)
Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK)
Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden:
Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management
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Key Deutsche Asset & Wealth Management research personnel are voting members of various investment
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This material was prepared without regard to the specific objectives, financial situation or needs of any
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any security or other instrument, or for Deutsche Bank AG or its affiliates to enter into or arrange any type
of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any
of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is
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the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability
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recipient of this document or any other person.
The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of
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prepared without regard to the specific objectives, financial situation or needs of any particular person who
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An investment in real estate involves a high degree of risk, including possible loss of principal amount
invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/
units and their derived income may fall or rise. Any forecasts provided herein are based upon Deutsche
Asset & Wealth Managements opinion of the market at this date and are subject to change dependent on
the market. Past performance or any prediction, projection or forecast on the economy or markets is not
indicative of future performance.
The forecasts provided are based upon our opinion of the market as at this date and are subject to change,
dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock
market, bond market or the economic trends of the markets is not necessarily indicative of the future or
likely performance.
2014 Deutsche Bank AG. All rights reserved. I-033852-1.3
26
Office Locations:
Research & Strategy Team Alternatives and Real Assets
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Chicago
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United States
Tel: +1 312 537 7000
Global
Mark Roberts
Head of Research & Strategy
mark-g.roberts@db.com
Americas
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Industrial Specialist
ross.adams@db.com
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Performance & Risk Analysis
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Office Specialist
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Economic & Quantitative Analysis
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Tel: +44 20 754 58000
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Tokyo
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2-11-1 Nagata-cho
Chiyoda-Ku
Tokyo
Japan
Tel: +81 3 5156 6000
Koichiro Obu
Head of Research & Strategy, Asia Pacific
koichiro.obu@db.com
Asia Pacific
Minxuan Hu
minxuan.hu@db.com
Natasha Lee
natasha-j.lee@db.com
www.rreef.com

Japan RE

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Research Report

Japan Real Estate

Koichiro (Ko) Obu

Executive Summary ............................................................................. 1

Macro Economy ................................................................................... 2

Exhibit 1 GDP Growth Outlook for Japan

Dot-com Bubble burst

Consumption Tax Increase

Global Financial Crisis

Exhibit 2 Diffusion Index of Business Conditions

Diffusion Index of Tankan Survey (RHS)

Diffusion Index of Business Conditions:

Exhibit 3 Forecast of Interest Rate and CPI

Exhibit 4 Real Estate Lending by Japanese Banks

Diffusion Index (DI)

Exhibit 5 Real Estate Transaction Volume and Lending Attitude DI

transaction volume (12 months, LHS)

lending attitude DI (6 months prior, RHS)

Diffusion Index (DI)

Exhibit 6 Cap Rate (appraisal) and Yield Spread (transacted)

Average Appraisal Cap Rate for Assets

2007 2008 2009 2010 2011 2012 2013

2007 2008 2009 2010 2011 2012 2013

Notes: Past performance is no guarantee of future results

Exhibit 7 Real Estate Capital Value in Japan

J-REIT (stock, RHS)

Exhibit 8 Major Transactions in the Fourth Quarter 2013

SMBC Koraibashi Bldg etc

Dev site in Motoazabu

Star Companies Bldg

Hakata Gion Center Place

DECKS Tokyo Beach

Co-op Olympia Annex

Aoba Roppongi Bldg

Riverside Yomiuri Bldg

Aviva and Secured

Riverside Yomiuri Bldg

Toyoko Inn (5 properties)

5.9% Kanagaw a, Tokyo J'pn Rental Housing (REIT)

Shinjuku East Bldg etc

Prologis Park Osaka 4 etc

5.3% Osaka, Kanagaw a Nippon Prologis REIT

Activia Properties (REIT)

Chiba, Kanagaw a financial institution, TOSEI

Daiwa House Industry

Sphere Tow er Tennouzu (67%)

su:k Kaihin Makuhari

60% of Hamarikyu Intercity

Japan Excellent (REIT)

Exhibit 9 Real Estate Transaction Volume by City (12 months rolling)

Exhibit 10 Real Estate Total Returns in Japan (unlevered)

Total Return by Sector

Exhibit 11 J-REIT Index and Long-Term Global Comparison

Global REIT Comparison (10-year)

J-REIT Index (LHS)

Nikkei 225 (RHS)

Exhibit 12 J-REIT Expected Dividend Yield

Exhibit 13 Capital Raising and Transactions by REITs in Japan

Mori Hills REIT

Nippon Prologis REIT

Initial Public Offerings

Simplex Investment Advisors

Planned: Hulic REIT, Shinsei Bank, SMBC (NEC)