Xymax Real Estate Institute

RESEARCH REPORT

Economic Value of Repair
Repairs that are well-planned and consistent
have a positive impact on rent.

September 28, 2016

REPORT SUMMARY

Office buildings are now used for a longer period of time and the value of the property will
decrease (the "deterioration" of the value) for all the stakeholders: the landlords, investors,tenants and others. We must face this risk.

Well-planned and consistent repairs against such risk are important. Use the idea of therisk management. More specifically, the future risk should be analyzed first and then arepair plan should be prepared. Each repair should be performed in a timely manner (notall at once).

The new rent is 3%-7% higher for buildings with a repair plan and timely implementationsof such plan; the data accumulated by Xymax revealed.

Repair is an important part of real estate management. It is not only about fixing thefailure. Well-planned and consistent repairs can mitigate the risk of deterioration and give
benefit to the building.

BackgroundLong Life of Buildings and Deterioration Risk
The social maturity, population decline and slowing economic growth; Japan is now moving to a new era wherethings are maintained and used for a much longer period of time ("Stock Type Society" is the word typicallyused in Japan) from the era of mass consumption ("Flow Type Society"). In the real estate industry, buildings areincreasingly more maintained and used longer rather than being demolished and constructed. Real estate
investors are changing too; their focus on short-term capital gain is now being replaced by long-term incomegain.
The impact of the deterioration on value in the future, including the decrease in asset value and decrease invalue of using, cannot be ignored.
If the landlord ignores the ongoing deterioration, the buildings will eventually lose competitiveness in themarket and see a decrease in rental income or a decrease in asset value. Also, tenants and visitors may accuse
the landlord of any damage on them caused by such deteriorations. What is more, for tenants who use thespace as an important base of their intellectual production, a troubling and obsolete office building andfacilities will affect the productivity and will give negative impact on the health of the workers. Such low-value
and less-usable buildings also become problems in the market if they exist in a large volume. Thus, there is arisk of deteriorations, which may give negative impact on all the stakeholders of the office building. (Figure 1)
Economic Value of Repair
All rights reserved. All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Corporation.
Copyright © 2016 Xymax Real Estate Institute Corporation. All rights reserved.

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Figurre 1: Office B
Building of "Stock"
Type Society"

The pace annd frequencyy of deteriorations are different forr every build
ding depend
ding on the components
included. The land does not deterioraate, but the bbuilding deteeriorates as time goes by.
y. Buildings ca
an be divided
dinto the stru
ucture and facilities:
ffacilities tend too have shorrter life and deteriorate relatively fasster than thee
*1structure .
The type of tthe deteriora
ations also va
aries: Physicaal Deteriorations are the loss of qualitty or functio
on after beingg
used for a long period of time or being used many timess; Market-Drriven Deterioorations are the facilities
obsolete due
e to change in value orr demand of users or due
dto new technologie
es; and Lega
albecoming oDeterioration
ns are the bu
uildings becooming illegal after a law changecor citty plan changge.
*1Structure: The structure
e forming the building; the ffloor, wall, bea
ams, etc.
alled to the buuilding; power supply, waterr supply, draina
age, air condittioner, elevatoors, etc.
Facilities: Facilities insta

Well-Plan
nned and ConsistentCt Repair ass Risk Mannagement
In real estatee manageme
ent, "repair" is a solution
n for the com
mplicated risk
k of deteriorration. The "rrepair" in thisreport includ
des all the woorks which arre performed
d to keep thee quality or too increase thhe value of th
he building asa result.
The repair shhould be perrformed baseed on the riskk manageme
ent process becauseb
deteeriorations arre consideredda risk. More specifically: 1)
1 "Know thee Risk" Do thee site inspecttion and checck the recordd to find out which repairs
ements will be needed; 2) "Analyze"" Decide prio
ority based on the frequuency and degree
dof theeand improvedamage if itt happens; 3)) "Repair Con
nsistently" Peerform the repairs
rand immprovementts, but not all together atonce; do theem in a timely manner annd continue; and 4) "Reppair with Plann" Make a reppair plan, allo
ocate budge
etand be prepaared for futu
ure damage. TheT repair baased on risk managemen
mt is considereed useful in terms
tof costt,
workload, annd impact to the tenants, compared too ad-hoc rep
pairs and posstponed repaairs.
Economic Value of Repairr
All rights reserved. AAll the contents are as of the date of this report. Xymax Corrporation does not guarantee
gthe accura
acy or completenesss of the information herein.
Copying, quoting, foorwarding, distributing, reprinting or any otherouse of this repo
ort is not allowed witthout prior permission from Xymax Corpooration.
Copyright © 2016 Xyymax Real Estate Insttitute Corporation. Alll rights reserved.

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T｜Xymax Reeal Estate Innstitute
Risk manage
ement is, howwever, not always adopteed in the acttual real esta
ate managem
ment today. It is becausee:the importan
nce of the repairs are nott understoodd enough; theere are restricctions in accuumulating kn
now-how andddata; there aare restriction
ns in using manpower;
mannd it is difficu
ult to presentt the econom
mic value of suchsrepairs.
In this repor t, we used thhe statistical analysis to eexamine the benefit
bof thee well-planneed and consiistent repairss.

Analysis and Result
R
Data and Method
The databasse of new rent and repaiir record wa s used in this analysis. The
T data wass accumulate
ed by Xymaxx
through the property maanagement services it proovided.
The data use
ed in this annalysis includ
des the rent under 2,167 new lease agreements
aoof 245 officee buildings innTokyo 23 Waards for the period between 1997 annd 2015. The physical info
ormation of the office bu
uildings (sizee,age and areaa) and wheth
her well-plannned and connsistent repa
airs had beenn performed were added to the renta
aldata. (See thhe overview ata the end off this report ffor information about thee data.)
Whether or not the welll-planned annd consistentt repairs hadd been performed was juudged as folllows: "repairs
had been pe
erformed thre
ee years in a row prior too the signing
g of the leasee" (consistenccy) and also "repairs wereeplanned andd performed in the year beforebthe leease signing"" (well-planned); if both w
were 'Yes', it was deemeddthat well-plaanned and coonsistent repairs had bee n performedd.
To examine which of thee repairs had
d impact on rrent, we separated the reepairs into siix groups. Reepairs can beegrouped intoo several typ
pes based onn the type off work (building's structure, electricityy supply, air conditioningg,etc.), which p
parts of the facility are reepaired, the accounting rules,
rand whhether it is juust a day-to--day repair oro
special repair to increasse the value of the propperty. In thiss analysis, su
uch categoriies were div
vided into sixx
different grooups based ono the princip
pal componeent analysis (Figure 2).
Figure 2: Repairs in
nto Groups

The method we used in thist analysis is
i one of the regression techniques ca
alled the hed
donic approach, which is astatistical analysis that clarifies the coorrelation bettween the quuality and the price. This method can calculate thee
impact of the repairs on new rents affter removin g the influen
nce of other factors such as location, size and age
eof the building.

Economic Value of Repairr
All rights reserved. AAll the contents are as of the date of this report. Xymax Corrporation does not guarantee
gthe accura
acy or completenesss of the information herein.
Copying, quoting, foorwarding, distributing, reprinting or any otherouse of this repo
ort is not allowed witthout prior permission from Xymax Corpooration.
Copyright © 2016 Xyymax Real Estate Insttitute Corporation. Alll rights reserved.

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Result andd Commen
ntary
The result oof the analyssis was statisstically signifficant as follows: Buildings with welll-planned annd consistentrepairs got hhigher new reents compare
ed to those w
without such repairs. The impact on reents by group was: +3.5%%
for "Air Condditioner"; +6.9% for "Facilities"; +5.2%% for "Complliance"; and +6.9%+for "Immprovement".
Other explan
natory variab
bles ("Tenant Related" a nd "Cleaningg") had no statisticallysssignificant reesult (see theemiddle colum
mn of Figuree 3). As a refeerence, we a lso analyzed repairs that are not welll-planned annd consistentt.
The result w
was: "Improvement" had a statistical ly significantt impact on rents but oother repairs such as "AirConditioner"", "Facilities" and "Complliance" had n
no statistically significantt result (no immpact on rents). (See theeright columnn of Figure 3..)gure 3: Impaact of Repaiirs on New Rents
RFigTenants mayy complain andaexpress fearfif there are breakdoowns or prob
blems with thhe air condittioners, otheerfacilities andd compliancee-related ma
atters. Well-pplanned and consistent repairsrcan aavoid such troubles frommhappening oor can minim
mize the damage even if tthere happen
ned to be such troubles. The result off this analysis
indicated thaat tenants va
alue a good real estate mmanagementt approach. Improvementts such as th
he conversion
nto LED lightss and seismic reinforcem
ment also had
d a positive impact
ion neew rents beccause such immprovements
will increase the quality ofo the office building.

Conclussion
So far, with tthe process ofo risk managgement, we mmade clear th
he risks of deteriorations aand repairs, whichw
are theechallenges ppeople face whenw
office buildings aree used longe
er, and then analyzed thee impact of well-planned
dand consisteent repairs ono new rentss. The analyssis indicated that some repairs had approximate
ely 3%-7% ofo
positive impact on the reent.
In the tenannt survey connducted by Xymax
X
Real EEstate Institute in 2014 on the use off office spacee, 41% of thee
respondentss said the cle
eanness and maintenancee of the building is "veryy important" when choossing an officeebuilding; thee fourth mo
ost importantt criteria in the survey result.
rThe affordable
areent (62%) ran
nked the toppfollowed byy enough seeismic resistance (51%) and 24-hou
ur 365-day operation (442%). The result
rof thisquantitative analysis of reepair supporrts the findin gs from the tenant surve
ey: tenants vaalue not only
y the locationn,size and age
e of the build
ding but also quality real eestate management servvices.

Economic Value of Repairr
All rights reserved. AAll the contents are as of the date of this report. Xymax Corrporation does not guarantee
gthe accura
acy or completenesss of the information herein.
Copying, quoting, foorwarding, distributing, reprinting or any otherouse of this repo
ort is not allowed witthout prior permission from Xymax Corpooration.
Copyright © 2016 Xyymax Real Estate Insttitute Corporation. Alll rights reserved.

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RESEARCH REPORT｜Xymax Real Estate Institute
If repairs are performed consistently and with a plan, rather than merely for the purposes of fixing failures andbreakdowns, they can mitigate the risk of deterioration. This also indicates that the repairs are the importantparts of real estate management which can achieve benefits. The circumstances surrounding the real estate arechanging now: the buildings are to be used for a longer period of time; real estate investors' behaviors arechanging too; the demand varies tenant by tenant; office workers' working style are also changing; and the costof construction is surging while the workers are becoming in short supply. All of these tell us that the real estate
management based on the mid- to long-term view will be more important in the future.
This analysis mostly focused on tenant-occupied buildings, but well-planned and consistent repairs are equallyimportant for company-owned buildings in terms of safety of the employees, keeping and improving theproductivity, the business continuity plan and other matters.
We hope our study helps the long-term use of buildings, mitigation of risks and good real estate management.

Analysis Overview
Subject Buildings
Period245 office buildings in Tokyo 23 Wards
1997 - 2015

Number of Data

2,167
New Rent: JPY17,029 per tsubo

Average Building

Gross Floor Area: 1,844 tsubo
Age: 18.1 year

Analysis Method

Hedonic Approach
Explained Variable
Rent per tsubo including CAM charge in a new lease agreement
Explanatory Variable
Gross floor area, number of floors above ground, typical floor area, age of building,raised floor or not, individual air conditioning or not, automatic security or not, walking
distance from station, office market, year the lease was signed, well-planned andVariablesconsistent repairs performed or not.** If the building was 'Yes' for both "repairs performed for three consecutive years prior
to the lease signing" (consistency) and "budgeted repair was performed in the year
before the lease signing" (well-planned), the dummy variable is '1'. This test wasperformed for all the six types of repairs.

For questions on this report, please contact us.
Xymax Real Estate Institute
PHONE: +81 3 3596 1477 FAX: +81 3 3596 1478 info-rei@xymax.co.jp

Economic Value of Repair
All rights reserved. All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Corporation.
Copyright © 2016 Xymax Real Estate Institute Corporation. All rights reserved.

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