NEWS RELEASE
Survey on Private Real Estate Funds in Japan
July 2017– Results
September 21, 2017
Sumitomo Mitsui Trust Research Institute Co., Ltd• Starting in 2003, Sumitomo Mitsui Trust Research Institute Co., Ltd. has conducted the “Survey on Private Real
Estate Funds” as part of its research activities concerning real estate investment markets. This is the 24th survey
based on responses to questionnaires received from 50 real estate asset managers.
 Survey subject: Real estate investment asset managers that set up and manage private real estate funds
which focused on Japanese real estateThe number of questionnaires sent: 107

The number of responses: 50 (ratio of valid responses: 46.7%)

Survey period: in the July to August 2017

Survey methodology: Questionnaire survey sent by post and e-mail• Based on the results of the survey, hearings and published information, we estimated the market size of private
real estate funds (on an invested asset basis) as of the end of June 2017 to be 15.8 trillion yen. This figure
involves Japanese assets of global funds (*) that we were aware of. Assets under management (AUM) increased
approximately 220 billion yen (1.4%) from the previous survey (15.6 trillion yen as of the end of December2016). The market for domestic private real estate funds continued to expand, albeit slightly.

The market size of private real estate funds is 15.8 trillion yen including Japanese assets of global funds
・Assets under management (AUM) as of the end of June 2017 were 15.8 trillion yen. Assets under management(AUM) increased approximately 220 billion yen from the previous survey. The market for domestic private realestate funds continued to expand, albeit slightly.
・The number of asset managers who said that their assets under management increased was more than the number ofasset managers who said that their assets under management decreased. Overall, assets under management rose
approximately 1.4% from the estimate in the previous survey. While assets at domestic real estate funds, primarily
private REITs, expanded, assets at global funds declined slightly.
・Equity investors’ appetite for investment is considered to remain favorable. The circumstances of debt financing may
be changing gradually.
・To a question about from where major properties will be supplied, the largest number of respondents answered, “A third
party other than J-REITs and private real estate funds.” The second largest number of respondents answered, “Sponsors,group companies, etc.” These answers suggest that many asset managers are seeking supply from a third party, such as
operating companies, but are forced to depend on pipelines from sponsors and group companies, etc. due to a lack ofsupply of properties.
(*) We define “global fund” as a fund targeting real estate investments in various countries including Japan.

1News Release September 21, 2017

“ Survey on private real estate funds” July 2017 Survey Results(Note) [n] shown in the figures throughout this document indicates the number of effective responses.

1. Current Status of Real Estate Fund Management Business
1) Management of Overseas Capital
In response to the question as to whether they have managed overseas capital, 48% of respondents chose “Yes”.
“Yes” has been on a downward trend since the survey in July 2015. Some overseas investors are considered to have asense of caution over rising prices of domestic real estate (Fig.1).

2) Status of the Funds under Management – Results of the funds currently operating and agree to disclose
their data
In response to a question about the types of funds being managed, respondents who chose “Fixed property
type” declined to 45%. The percentage of “Additional acquisition type” and “Discretionary investment type”
rose. (Fig.2). “Open-ended funds,” which had accounted for steadily increasing percentages in the past few years, hada certain presence, with the number of issues managed exceeding 20. However, the pace of increase slowed. With
regard to management style, the percentage of “Core” remained high. (Fig.3).
As for target property types, the percentage of “Office” declined, and as a result, differences in percentage amongproperty types narrowed. One of the reasons is that the acquisition of offices remains difficult (Fig. 4). Looking at

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News Release September 21, 2017target areas, the percentage of “23 wards of Tokyo” declined from the previous survey, while the percentages of“Nagoya area” and “Local areas” rose. This indicates that investment may be expanding into major provincial cities,
albeit moderately. (Fig5).

The average target investment period was 6.0 years for funds currently under management and 5.8 years for funds
to be launched within a year (Fig.6). Looking at the breakdown of the investment period of funds currently undermanagement, the largest share of respondents chose “At least five years but less than seven years”（35%）. As for theinvestment period of funds currently under management, the period less than five years increased slightly. However,against the backdrop of the Bank of Japan’s continued quantitative and qualitative monetary easing with yield curve
control, the mainstream remained medium- to long-term funds (Fig.7).
The survey of the investment period does not include open-ended funds, whose investment period is indefinite.

Average LTV of funds under management stood at 58.8%, and that of funds to be launched within a year was 58.1%.
It has been on a downward trend (Fig.8). One of the reasons for the downward trend is considered to be an increase in
the number of private REITs that prefer long-term stability.
Looking at the breakdown of LTV ranges, for funds currently under management, the percentage of “at least 50% but
less than 60%,” and “at least 70% but less than 80%” increased from the previous survey, while that of “at least 60% but
less than 70%”, decreased(Fig.9). This survey item includes responses from private REITs.

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News Release September 21, 2017

With regard to the LTV level of funds scheduled to be launched within a year, the percentage of “At least 50% but
less than 60%” fell sharply, while the percentage of the period less than 50% rose sharply. “Less than 40%,” which
has not been chosen by any respondents after the survey in January 2011, accounted for 14% (Fig.11).
The overall average target IRR is considered to remain on a moderate downward trend after it hit a peak in theJanuary 2011 survey. In this survey, the overall average target IRR was affected by a rise in the target IRR of thediscretionary investment type, but the target IRR of the fixed property type and the additional acquisition type remainedroughly flat. (Fig.10). The average LTV is also on a downward trend. This indicates that core funds whose leverage is
low are becoming popular and the target return is on a downward trend.

3) Debt FinanceIn response to a question about the circumstances of debt financing, the percentage of “5 (Very easy)” and “4 (Easy)”
continued to fall, while the percentage of “3 (Neutral)” increased (Fig.12). The circumstances of debt financing may be
gradually changing.

4News Release September 21, 20174) Equity Risinga. Appetite of Equity Investors
As to a survey of the appetite of equity investors, the percentage of “Rising” rose slightly, and most of the
respondents chose “No change.” The appetite of equity investors remains strong (Fig13). The percentage of“Rising” rose sharply in the survey before last largely due to the Bank of Japan’s introduction of negative interest.
The appetite of equity investors remains favorable against the backdrop of the Bank of Japan’s low interest rate
policy.
In response to separate questions about domestic and foreign equity investors’ appetite by type of target property,
only small percentages of the respondents answered “Decrease significantly” or “Decrease.” As in the survey
before last, a larger percentage of investors, both domestic and foreign, chose “Increase significantly” or“Increase” for hotels than for other property types. Domestic and foreign investors have a strong interest in hotels.
There is concern about a decreased interest in “Facilities for the elderly” among domestic and foreign investors. Most
respondents chose “Remain unchanged,” but some foreign investors chose “Decrease significantly.” (Fig.14-1,
Fig.14-2).

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News Release September 21, 2017b. Sources of Overseas Capital (or Foreign Funds) by Country or Region
With respect to the capital sources from overseas, the highest response rate was for investors from “Asia (excl.
China /M.East)”at 28%. The percentage of the “Middle East” is on a downward trend, while the percentage of“China including Hong Kong,” which had been around 12%, rose to 17% in this survey (Fig.15).

c. Reasons for Foreign Investors Investing / Not Investing in Japan (Multiple answers allowed)
As for the reasons for investors investing in Japan, majority of the respondents chose “Relatively attractive due tothe yield gap”, “Allocation as part of the global portfolio”,” Highly stable income”, “The size of the real estatemarket is large”, and “Politically and economically stable” (Fig.16). These choices have been the major reasonsindicated in every survey in the past, and have been established as the reasons for foreign investors investing inJapan.
As the reasons for not investing in Japan, the largest number of the respondents chose “Rising in real estate prices”
followed by “Lack of growth potential in GDP, consumption, population, etc.”. Concern over rising real estate prices
seems to remain strong (Fig.17).

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News Release September 21, 2017d. Acquisition and Disposition of Properties in the January to June 2017
As to a survey on the acquisition of properties in the January to June 2017, the percentage of respondents who
answered "Acquired" accounted 67% (Fig.18). The main reasons that the managers did not acquire any properties
were “Can’t agree on prices” accounted 48% (Fig.19). Due to rising real estate prices, disagreement on prices
seems to be continuing.
In response to a question about sales of properties from January to June, 2017, 42% of respondents answered“Sold property.” As a reason for not selling property, 96% of respondents answered “Did not plan to sell from theoutset.” (Fig.21) . No respondents answered “Can’t agree on prices.” Comparison with the percentage of “Can’tagree on prices” as a reason for not acquiring property, 48%, reveals that a sellers’ market is continuing.

2. Plans and Investment Strategies of Asset Managers
1). Plans of Launch of New Funds and Acquisition /Disposition of Properties within a year
Regarding the funds scheduled to be launched within a year, 63% of respondents answered that they “Plan tolaunch” (Fig.22). The percentage of “Plan to launch” rose in the January 2017 survey but has been on a downward
trend.
As to plans of acquiring properties within a year, the percentage of respondents that they plan to acquire properties
accounted for 85% in this survey (Fig.23). On the other hand, that of those who plan to sell properties within a year
accounted for 50% (Fig.24). As the number of transactions is declining, real estate prices may rise further. Because
the low supply of investment-grade properties will continue throughout the entire market, while almost all managers
eager to acquire properties.

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News Release September 21, 20172). Investment Strategies of Asset Managers
a. Target Property Types (Multiple answers allowed)
As a target property type, there are no big differences between “Office,” “Residential,” “Retail,” “Industrial,” and“Hotel.” There is diversity in target property types (Fig.25).
The percentage of “Hotel” as a target property type was more than that of “Retail” as in the previous survey. The
popularity of “Hotel” as a target property type may remain high for some time to come as increasing numbers of
inbound tourists are clearly recognized.

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News Release September 21, 2017b. Target Areas (Multiple answers allowed)
As a target area, the percentages of “Central 5 Wards of Tokyo,” “23 Wards of Tokyo (excluding Central 5 wards),”“Tokyo metropolitan area,” and “Kinki area” were all 20% (Fig.26). The percentage of the Tokyo metropolitan area
including Tokyo was 60%, and the percentages of “Kinki area” and “Nagoya area” increased gradually, which indicatesthat investment targets have been expanding into the provinces.

3. Business Environment of Private Real Estate Investment Management
1）Involvement in Open-Ended Private Funds (so-called Private REITs)
In response to a question about involvement in private REITs, the largest percentage of respondents answered“Seek to develop a better understanding and gather information, but not working on a detailed study.” The second
largest percentage of respondents answered “Have already launched.” (Fig.27).
Five asset managers said that they were preparing to launch a private REIT. Open-ended private funds may
increase slightly.
As an important factor for development in the private REITs market, the largest percentage of respondents (27respondents) chose “Enhancement of the track record.” Continuing stable management, including dealing withdeterioration in the real estate market, is emphasized (Fig.28).

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News Release September 21, 20172) Outlook of asset size in the Closed-ended private real estate funds market
As for the outlook on asset size in the closed-ended private real estate funds market, the percentage of “Increase”
exceeded the percentage of “Decrease” slightly (Fig.29).
As a reason for an increase, many respondents chose “Increase in domestic investors’ money,” which indicatesthat many asset managers expect investment in real estate to continue due to the Bank of Japan’s continued
quantitative and qualitative monetary easing with yield curve control (Fig.30).
As a reason for a decrease, respondents chose “Limited supply of existing investment-grade real estate” and “Rise inreal estate prices.” Other answers included the opinion that the expansion of open-ended private funds is a reason forthe decrease in closed-ended private funds.

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News Release September 21, 2017

3) Where properties will be supplied
To a question as to where properties will be supplied from, the largest number of respondents chose “A third
party other than J-REITs and private real estate funds.” The second largest number of respondents chose “Sponsors,group companies, etc.” (Fig.31).
This indicates that many asset managers are looking for supply from a third party, such as operating companies,
but are forced to depend on pipelines from sponsors and group companies, etc. due to a lack of supply of
properties.

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News Release September 21, 20174) Manager’s Requirements for Future Growth and Sustainability of their Businesses (Multiple answers allowed)
Among requirements for sustainability and growth of the asset managers, the majority of managers chose“Strengthen property-acquisition capability”, “Enhancement of AM capabilities” (Fig.32). Acquiring properties is
becoming more challenging given rising real estate prices. In this environment, asset managers are required toenhance their ability to achieve the internal growth of properties they own.

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Definitions of Terms
The definitions of terms used in this report are as follows;
Private real estate fund:A private real estate fund is a structure under which investors’ funds are managed byprofessional asset managers. In this report, commingled funds that are designed for multiple
investors, and separate accounts, investment programs for single investors are both categorized
as private real estate funds. This does not include products governed by the Act Concerning
Designated Real Estate Joint Enterprises.
Fixed property type:
Additional acquisition type:

Discretionary investment type:

Closed-ended fund:Open-ended fund:＜Management Style＞
Core:
Opportunity :Value-added:
Development:
Debt:＜Investment Area＞
Central 5 wards of Tokyo
Tokyo Metropolitan Area:
Kinki Area:
Nagoya Area:

A type of fund in which properties to be invested have been identified at the launch of the fundA type of fund in which certain percentage of properties to be invested have been identified at
the launch of the fund, leaving additional investments after the launch usually at the discretionof manager subject to pre-determined investment guidelines
A type of fund in which the properties to be invested have not been identified at the launch of
the fund, and properties are acquired after the launch at the discretion of a manager subject topre-determined investment guidelines; Also called a blind pool typeThis refers to private real estate funds with stipulations on the management period. In principle,
this system does not allow reimbursement during the management period.
This refers to private real estate funds without stipulations on the management period.
The system enables additional investment, cancellation and reimbursement during themanagement period. The value of the holding is calculated based on the appraisal value at thetime. Open-ended funds currently managed in Japan take the form of a private REIT.

An investment style in which stable long-term investments are envisaged by investing in soundproperties generating steady income flows.
An investment style in which a large capital gain is aimed at by investing in unprofitableproperties and selling them after increasing value with improvements.
Some of opportunity investments invest in development projects and funds that invest incompanies.
An investment style that lies between Core and Opportunity, and aiming at both income gains
and capital gains.
An investment style that specializes in achieving development gains.
An investment style in which an investment is made in loans that pay the principal and interestsfrom income from real estate and real estate trust beneficiary rights. Compared with the equity
investment, the debt investment generally has a lower risk and a lower return.
Chiyoda Ward, Chuo Ward, Minato Ward, Shinjuku Ward, Shibuya Ward
Tokyo excluding 23 Wards, Kanagawa, Saitama, and Chiba prefectures
Osaka, Kyoto, Hyogo, Nara, Wakayama, and Shiga prefectures
Aichi, Gifu, and Mie prefectures

LTV (Loan To Value):

The Loan to Value (LTV) ratio is a ratio of debt against asset value. Asset value represents theappraisal value, actual acquisition price or total investment cost for acquisition.

Cash-on-cash yield:

The cash-on-cash yield is the yield of an annual cash flow on the total investment amount.

IRR (Gross):

The Internal Rate of Return (IRR), an indication of return on investment, is the discount rate thatmakes the present value of future cash flow of an investment equal to its original value of theinvestment.

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News Release September 21, 2017

Contact:

Sumitomo Mitsui Trust Research Institute Co., Ltd
3F Hulic Kamiyacho Building. 4-3-13, Toranomon, Minato-ku, Tokyo
105-0001, Japan
https://www.smtri.jp/en/contact/

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