13 May 2020

DAIWA REAL ESTATE APPRAISAL REPORT

Economic Impact of COVID-19 on Japan’ Real Estate Market Vol.3(Author)-Capital Markets-

Kazumasa Takeuchi

Chief Research Analyst
Kazumasa.takeuchi@daiwakantei.co.jp
Research & Marketing Office

Japan’s economic slowdown has also impacted on the real estate capital markets on the back of
the COVID-19 epidemic and the self-restraint request in response to the State of Emergency
Declaration by Japanese government. In April, a steep downturn was examined with the decrease
number in new inquiries about our appraisal services which considered as a leading indicator ofinvestment volumes. Here, we share the analysis about the number of our new inquiries and the latest
view addressing the impact of COVID-19 pandemic on transactions.
1. Changes in the number of new inquiries regarding real estate appraisal.
・ The increasing/ decreasing trend of our inquiries is considered as one of the leading indicator,
since the healthy market pushed up the number of our inquiries.
・The number of inquiries in 2019 increased thanks to the prosperity of the real estate market,
despite the tax hike in October 2019. Following a massive surge in the numbers in January
compared to the previous year, we saw a drop in February and in April with 34% and 48%
respectively whilst slight uptick 4% in March.
・After the rise by over 50% Y-o-Y in the first half of March, the emergency law of COVID-19 on
14th March imposed a drop by 46％ Y-o-Y in the second half of March, by 66％ Y-o-Y in thefirst of April and by 63％ Y-o-Y in the second half of April respectively.
The number of new inquiries（monthly）（Source） Daiwa Real Estate Appraisal

The number of new inquiries（every 2 weeks）（Source） Daiwa Real Estate Appraisal| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|12. The breakdown of our inquiries
・Coupled with the decrease number of inquiries, the change in the composition ratio has been
seen by the segments and by region.
・A composition of inquiries by segments over the two weeks period from 12th April, which after
the state of emergency declaration on 8th April showed that there were slightly rise in theratio of office and residential and double in the logistics to 13% compared to the same period
from 1st March, while hotel saw a steep drop to zero from 12%,・ The decline in the number of inquiries on logistics industry was notable compared to the firsthalf of the last year due to the active acquisitions by REIT and other firms over the sameperiod.
・Likewise, the breakdown by regions shows that there was a growth of inquiries in Tokyo
Metropolitan 5 words and Greater Tokyo area, meanwhile Kinki area, Chubu area and otherprovincial areas saw a decline over the same period.
Change Of Ratio By Segment（Source） Daiwa Real Estate Appraisal

Change Of Ratio By Region（Source） Daiwa Real Estate Appraisal

Composition of Inquiries By Segment YoY（Source） Daiwa Real Estate Appraisal

Component Ratio By Region YoY（Source） Daiwa Real Estate Appraisal| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|2

3. The impact of COVID-19 on the real estate market
・Although COVID-19 outbreak which was first identified in the city of Wuhan, China, hasspread since around January, the impact on Japan’s economy was limited with Chinese
tourists from 27th January cancelled. At the beginning, only popular commercial oversea
tourist area was affected.
・In the second half of February, the impact of COVID-19 on the revenue of hotels anddepartment stores intensified, whilst the sales of online shopping, drugstores, andhome-centers increased compared to the previous year.
・Coupled with the spread of this infections in China, the alarm on pandemic increased acrossthe world resulted in a historical down in the world stock market in the second of February.
Tokyo REIT Index saw a steep decline to half of the highest price in the second of March. The
sharp decline in the stock price, the public offering of new shares related to not only hotel andretail but also office and residential was postponed or cancelled, investment on properties aswell was imposed to put off or cancel.
・While the sales of hotel and restaurants fell sharply on the back of the constrain of activities
with the closing of school and the mood of self-restraint, the expansion of expenditure fromstaying at home pushed up the sales of online shopping.
・The state of emergency declaration over 7 prefectures on 8th April pleaded with residents to be
self-restraint. The Tokyo Metropolitan Government asked a wide range of businesses, inTokyo, universities, pet shops, rental shops, cinemas, athletics facilities, assembly hall, andpachinko parlors were requested to close.
・Hotel which supplied for 2020 Tokyo Olympic saw a sharp decline in the transactions due tothe low occupancy rate with the decreasing number of guests including international arrivals.
The cancellations of deal were examined as well on the back of the request for rent reduction
in tandem with low revenue, a ban for foreign investor arrivals and suspension of new loans.
・The increase requests to reduce rents in retail, the postpone of opening in the occupier, theuncertain prospect of rent, the restriction to conduct site inspection for an engineer reportresulted in halting the transaction of the properties.

| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|3

4. The breakdown of impact by J-REIT firms
・ Annual reports from J-REIT’s firms noted while the impact of COVID-19 on industrial
market was not apparent, significantly impacts on the hotel and the retail were examined.
・ ORIX JREIT Inc. saw the significant impacts on the sale of retail and hotel, and has
prospect to take up slowdown in the office market. Nomura Real Estate Master Fund, Inc.
reported that there are no significant impact identified on over 80% of their investment
sectors due to the rent is based on a fixed-rent basically.
・ One REIT, Inc. revealed that there are 8 cases of rent increased, 5 cases of move-in, and 3
cases of rent reduction and cancelation of take-up which affected by COVID-19.
・ Invincible Investment Corporation revised its forecast of financial results and announced
that Distribution per Unit for the fiscal period ending June 2020 saw a steep decline by
98.3% in net income and total distribution amount compared to previous forecast on 20thFebruary due to amend the fixed-term building lease agreement and property managementagreement with major tenants.
・ Ichigo Inc. wrote down assets (primarily hotel and retail) that are being significantly
impactedby current business conditions, thus expected to record an extraordinary

Covid-19 loss of JPY 8.07 billion in February 2020
・ Financial Results from Japan Retail Fund Investment Corporation noted that while someinvestors hold back a new investment, other proceeded to sell their properties for cash.
Therefore, there are good opportunities to acquire new property as the number of
information of new properties has been soared for this situation.
・ APA Group, which is a Japanese hospitality group, promotes the expansion strategy of M&A
with perceiving this tight period instead as opportunities.
・ Hoshino Resorts., CO. Ltd, which is a Japan based international operator of ryokan(Japanese inns) assumes that domestic demands recover rapidly and significantly after thedevelopment of vaccine.
ORIX JREIT Inc.

Nomura Real Estate Master Fund, Inc.

Current assumptions that may impact DPU forecast in view of COVID-19

Impact of COVID-19 on Earning Forecasts

TypeAug.2020

Feb.2021

OfficeIncrease in vacancy due to move-indeferment
DPU ▲10yen

Additional increase in vacancy due tomove-in deferment and increase inmove-out DPU ▲38yen

Retaili. 20% tenants vacating fromurban-type retail facilities(Vacantperiods:3months)
ii. Other move-in deferment
DPU ▲78yeni.

Residential－Logistics－Hotel andOthers

Approx.15% rent decrease(equivalent to approx.30% salesdecrease) from HUP” Hotel
Universal Poet”(50% of total rent
linked to sales) DPU▲72yen

Continued vacancy on left column for
an additional 6 months
ii. Other move-in deferment
DPU ▲131yen

TypeOffice
Residential
Logistics
Retail-near stations
Retail- residential areas
Hotels

Impact of COVID-19
No significant impact
Decrease in variable rent
due to decline in sales atretail facilities and hotels－－No variable rent to be received from HUPetc. DPU▲122en| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|4

（Source）ORIX JREIT Inc.（36th Fiscal Period Sep.1 2019 –Feb. 29 2020）（Source）Nomura Real Estate Master Fund, Inc.（9th FiscalPeriod Ended Feb.29, 2020）

5. Economic confidence of J-REIT・Investment volumes in Q1 2020 soared 37% YoY to 1.36 trillion yen which is the same highest
level as Q1 2015 after 2008 financial crisis according to Nikkei Real Estate Market Report.
・Listed REIT invested 454 billion yen on the properties in Q1 2020. However, this movement
slowdown due to the standstill in public offering of new share with drop in JREIT index fromthe second half of February.
・The decline sharply in Tokyo REIT Index has been seen from February to March. Change ratefrom 21th February to 19th March fell 49.0％in the Tokyo REIT Index, 29.2％ in the Nikkei
Stock Average and 33.9％ in the Dow-Jones average respectively. However, as the market
improved from 19th March, the change rate from 19th March to 8th May increased +44.5％,+21.9％ and +26.9％ respectively.
・Tokyo REIT Index by segment showed that slight slip and sharp recovery in the residentialindex from the second half of February to the first half of March. In addition, hotels saw a
sharply decline in the change rate of investment unit price from the end of May 2019 to 7thMay 2020, meanwhile it muted in logistics.
Transaction Volume（Source） Nikkei Real Estate Market Report

TSE REIT Index by Segments（Weekly）

Stock Market Indices in Japan and the US （Weekly）（Source）Quick

Change Rate of Investment Unit PriceReit

Segment Change Rate

Mitsubishi Estate Logistics REIT Investment Corporation

Mitsui Fudosan Logistics Park Inc.

Logstics
Logstics

29.5%
27.70%

ITOCHU Advance Logistics Investment Corporation

Logstics

25.70%

Nippon Prologis REIT, Inc.

Logstics

25.50%

LaSalle LOGIPORT REIT
CRE Logistics REIT,Inc.

Logstics
Logstics

25.30%
22.60%

Industrial & Infrastructure Fund Investment Corporation

Logstics

15.00%GLP J-REIT

Logstics

13.70%

Nippon Accommodations Fund Inc.
Comforia Residential REIT, Inc

Residential

11.30%
10.10%

Residential

MORI TRUST Hotel Reit,Inc.

Hotel-41.0%

Japan Retail Fund Investment Corporation
Ichigo Hotel REIT Investment Corporation

RetailHotel-44.6%-52.4%

Invincible Investment Corporation

Hotel-53.4%

Japan Hotel REIT Investment CorporationHotel-60.7%| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|5

（Source）Quick（Note） Period from the end of May 2019 to 7th May 2020（Source）JAPAN-REIT.COM| Copyright ©2020 Daiwa Real Estate Appraisal All rights reserved|6