German Investors’ Involvements in Japanese Real Estate and their Future Prospects

1. German Investors’ Involvements in Japanese Real Estateand their Future Prospects Yuko Tomizuka, LREA,MAI, MRICS, MBA WIB Real Estate Finance Japan K.K. 37F Roppongi Hills MORI Tower, 6-10-1 Roppongi, Minato-ku, Tokyo, Japan, yuko.tomizuka@westimmo.com

2. WIB Real Estate Finance JapanK.K. WestLB AG, Duesseldorf, Germany Subsidiary, real estate financing& transaction Westdeutsche ImmobilienBank AG, Mainz, Germany Subsidiary, focusing on Japan market WIB Real Estate Finance Japan K.K., Tokyo, Japan WIB Japan& Author-Back Ground • Yuko Tomizuka Responsibility in WIB Japan: Property Valuation & Research Assessing collateral values, instructing& reviewing external appraisals and consulting real estate financing Academic relation to ERES: alumna of SDA Bocconi, MBA 30

3. Objectives Back ground • Slowed down real estate market in Japan especially after break down of Lehman Brothers in 2008. • German investors active acquisitions under bearish market. • Current concerns: financial restructuring of assets. • Japanese market overall still seems to be lead by domestic investors. • Deal participants tend to be limited to domestic investors or non-German foreign investors due to lack of information and analytical assessment of German players’ future involvements. Purpose of this paper • Outline background of German investors’ activities • Provide analysis of their future growth • Increase the opportunities of German investors’ involvements • Promote restructuring supported by German debt providers.

4. GERMAN INVESTORS’ACTIVITIES & THEIR BACKGROUNDS Assets and numbers of institutional open-ended real estate funds (German Spezialfonds) • German public open-ended funds (GOEFs) as well as special open-ended funds have been actively investing in Japanese real estate. • The investment amount & the number of German open-ended funds has been increasing • Investment to Japanese market has remain solid, even after the market clash in 2008. • German Open-Ended Funds also followed a diversification strategy from 2005 onwards. • Their investments’ drivers • Strong currency, • Transparency of social and legal regulations • Low financing cost • Less political risk in the Asia Pacific regions • Less competitors in the market compared to the peak. • The main reasons of their appetites are strong Euro, long-term stability of Japan’s business environment and the debt availability. Immobilien-Spezialfonds Special OEREF:BVI

5. ANALYSIS OF FOREIGN EXCHANGE RATE The transition of the value of 1 Euro in JPY • Since Euro was introduced, the currency has appreciated against JPY and reached a peak in 2007. • In 2007 and following 2008, many German investors who bought the properties in Japan benefited from the favourable exchange rate. Bank of Japan

6. SENSITIVITY ANALYSIS BASED ON THE THREE SCENARIOS • Under three basic market scenarios of future market change, it will be analyzed how different currency rate would create loss or gain for Euro zone investors. • The assumptions • Market scenario; analyzed future market trends are Recovery, Stabilization, and Recession. • Investment targets; B location, B grade office buildings[1] in central Tokyo. • Value change: applying the income approach, the future value change transition is forecasted considering the past trends of rent and cap rate for the above investment targets. • Timing of investment and exit point; purchasing in 2010 and selling the asset in 2014. • Forecast exchange rate; simulations are made that 1 euro remains 125 yen, appreciated to 110 yen[2] and devaluated to 160 yen • The value change in Euro is measured as an index when the value at purchasing is 1. [1] Analyzing the location and quality of the assets purchased by German funds in the past [2] Forecasts made by Federal Reserve, West LB, and Commerzbank AG

7. Property value change under different exchange rate, Recovery Scenario • The exchange rate keeps 125 yen or is appreciated to 110 yen>>> considerable gain • Japanese Yen (JPY) devaluated to 160 yen against euro>>>small gain Produced by author based on Tokyo B grade office market data; “Real Estate White Book 2010” by CBRE

8. Property value change under different exchange rate, Stabilization Scenario • currency moves to 160 yen>>> loss • the exchange rate moves to 110yen>>>small gain Produced by author based on Tokyo B grade office market data; “Real Estate White Book 2010” by CBRE

9. Property value change under different exchange rate, Recession Scenario • The investor would suffer loss from the value change, especially large loss if the euro started being evaluated again to the level of 2007 (160 yen) Produced by author based on Tokyo B grade office market data; “Real Estate White Book 2010” by CBRE

10. SUMMARY OF THE SENSITIVITY ANALYSIS • The property appreciation plus strong yen may bring the large gain to investor while value decrease in both property and local currency may cause unexpected loss. • Assuming the acquisition of 2011, the investor may obtain positive gain or moderate return unless the market goes further into recession. • Now the market is closing to the bottom and JPY has started to appreciate against euro, the currency exchange may motivate German investors to expand their portfolios in Japan

11. ANALYSIS OF MARKET STABILIZATION • German open-ended property fund (GOEFs) improves the portfolio performance over long-term investment term. • The benchmark portfolio is assumed to consist of one third equities, one third bonds, and one third money-market investments. Increasing the allocation to property (equity; GOEFs) and decreasing the allocation of other assets results in decrease of the risk of the portfolio. • To manage the risk of portfolio efficiently, it is necessary to increase allocation to GOEFs. • GOEF’s performance should be discussed in long term time horizon. • The stability of the market over the asset holding period has also been considered to be an important investment criterion for those property funds. Average Minimum Returns (AMR) for Various Holding Periods Open-ended Property Funds as an Essential Building Block in a Successful Asset Allocation Oct 2008;BVI

12. GDP GROWTH & ITS FORECAST Actual GDP growth and its forecast • Among many factors, looking at its consistency and comparability, the GDP growth will be analyzed as the comprehensive stability indicator. • Due to slow-downed exports growth and uncertainties of the government economic policies, the average GDP growth for the next decade is 1.2% p.a. • Investment in IT especially in sustainable technologies, in telecoms or in medical-social security system might drive early economic recovery. • However, overall growth of Japanese economy looks moderate. Source: Medium Term Japan Economic Forecast 36th; Japan Centre of Economic Research (JCER); GDP Official Calculation 2008 confirmed; Cabinet of Office, Government of Japan

13. JAPAN’S POSITION IN ASIA GDP, current prices in US dollar by countries • Comparing other Asian countries, despite China, Japan’s position as the investment destination with solid economic output is expected to persist over medium term. • Considering comprehensively the political stability, market transparency, efficiency of real estate management processes (holding, leasing, and disposing), Japan will remain an attractive market for German investors as long as the country stays on positive growth path. World Economic Outlook Database 2010; IMF

14. ANALYSIS OF DEBT AVAILABILITY Gross Sales Pfandbrief • In Japan, the mainstream of real estate financing is a non-recourse loan, which is provided to the borrower SPC specifically relying on the ability of an individual asset to generate cash flow. • In Japan major non-recourse loan providers are financial institutions of large financial groups whose funding sources are savings and funds from the central bank. • In Germany, dominating banks in commercial property finance are Pfandbriefe-issuing banks who have been successful in raising funding scheme through the Pfandbriefe. • Pfandbriefe is a type of bond issued by German mortgage banks that is collateralized by long-term assets used Deutsche Bundesbank, vdp

15. PFANDBRIEFE OVERVIEW Closs Border Commercial Property Loans, except EU member states, Total Lendingas at end-2009(Share in %) • In safety on legal basis, quality assured by underlying-mortgages, simplicity (no subordination), transparency, cover pool liquidity, standardization, and continued quality control . • For Mortgage Pfandbriefe (used for the funding of property loans and which must be secured by real estate), similar to non-recourse loans in Japan, detailed due diligence and thorough analysis on property value have to be conducted. • Specifically, the assessment of the property value as conservative basis is comprehensively regulated under the The Pfandbriefe Act • Great Britain, France and Poland are important foreign markets • USA is dominating in cross-boarder lending other than EU member countries, whereas Japan so far accounts less than 2%. vdp statistic

16. DIFFICULTIES OF PFANDBRIEFE IMPLIMENTATION TO JAPAN • Local legal structure, for this scheme to be efficient, the preferential right of creditors of German Pfandbriefe should be secured in the event of insolvency of Pfandbriefe bank. • In real estate financing in Japan, TMK structure with TMK bonds issued with the General Security has generally been preferred scheme • However, legal status of the General Security being only a statutory preferential right has always been questionable in the discussion of the eligibility of this TMK for the covered pool of Pfandbrief. • General Security can not be perfected under Japanese law; it will subordinate against any registered collateral over Trust Beneficiary Interest. (TBI) • Therefore General Security per se can not establish the secured position required under the Pfandbriefe scheme.

17. SOLUTIONS FOR PFANDBRIEFE IMPLIMENTATION TO JAPAN • GK-TK,in which lenders make loans with TBI pledge or Mortgage in stead of TMK bonds, lender’s right is perfected and both mortgage and TBI pledge are considered equivalent to mortgage in Germany. • This will also apply for TMK loan portion with a mortgage or TBI pledge under a hybrid structure where TMK loan is made in combination with TMK bonds. • In recent market practice in Japan, the some progress has been made to develop a structure eligible to Pfandbrief. • WestImmo AG made a loan to a German real estate fund for purchasing an real estate located in Japan and this loan was qualified for Pfandbriefe. • Mitsubishi UFJ Trust & Banking Co., Ltd also issued a press release in January 2010 stating that they have arranged the trust contract for the creditor of Pfandbriefe as trust beneficiary for another Pfandbriefe bank for a loan originated in the past.

18. DISCUSSION ON FUTURE PROSPECTS • Currency; under recovery and stabilization scenario, the German investors may be able to gain from the property investment in Japan unless exchange rate rise up to 160 yen. >>>plausible, future economic outlooks; the real estate market in Japan is now at the bottom then will be bottoming out, evidenced through transactions and investment appetites, it is unlikely for the exchange rate to be pushed up to the level of 2007. >>> currency may not hamper further investments of German investors to the property in Japan. • Stability; Japan’s economic recovery is a tardy progress although it gives long-term stability. >>>if the China’s economic growth slowed down and keeps constant annual growth higher than that of Japan, the former might be more preferred destination. >>> Under such circumstances, the investment shift may happen for seeking more stable and solid return. • Debt availability; the positive environments to expand Pfanbriefe financing in Japan. >>>now that the basic platforms have been developed and successfully implemented, the major concern is solved, although remaining problems like insuring earthquake risks have to be considered.

19. FINAL CONSIDERATIONS • The stability of Japan’s economy might not be secured over long term compared with alternative markets. • however the currency exchange rate and debt availability may support for German investors to expand their exposure in Japan. • Consequently, so long as these three drivers change positively and moderately, further investment demand from German investors can be expected.