October 15, 2015

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Xymax Real Estate Instituteinfo-rei@xymax.co.jp

Paying Rent Index is released
The new index shows changes in office rents paid by tenants andunderlines the stability of office properties.
Xymax Real Estate Institute developed a new index Payment Rent Index based on the data of lease contracts
signed for office buildings in Tokyo 23 Wards. This index will be released every quarter on our website.
Up until now many real estate market indices based on new rents existed, but those based on paying rents*which represents tenant's office rents and the income streams from office buildings did not exist in the past.
* Paying rents include not only new rents, which are the rents agreed by new tenants, but also existing rents, which
are the rents agreed by existing tenants, and are largely influenced by ongoing relationship between the owner andthe tenant, meaning existing rents are determined based on a different mechanism compared to new rents which
are basically determined based on market balance.

Paying Rent Index (Figure 1), which we have developed, shows changes in office rents over time and has thefollowing unique features:
1. Sample data includes both new rents and existing rents.
2. Rents are based on tenants rather than office buildings.
3. Statistical approach (Hedonic approach) is used to adjust the use of different sample data,
deterioration of office buildings due to age, and changing preference of tenants.
Figure 1: Paying Rent Index (Q1 2005 – Q2 2015)

This index will be a useful tool for real estate owners and investors in understanding actual income from officebuildings and making appropriate decisions. The income stability of office buildings was not easy todemonstrate with quantitative data, but now this index will help market participants understanding the stabilityand giving an explanation on the stability. It is also expected that this index can be a benchmark for officetenants in making strategic decisions based on the understanding of changes of entire rents including thoseof spaces they have been occupying. (See following pages for the data, analysis, index overview and index data todate.)

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

11. Data Used in This Index
The subject of this index is office buildings in Tokyo 23 Wards in which Xymax provides property management
services. Xymax developed a database where data of lease contracts and memorandums signed by tenants
are entered into. We used this database and calculated rents per tsubo for each tenant. Each sample data isbased on this rent per tsubo after adjusting property-specific influences such as location, size and quality ofthe building.
The sample data for the latest quarter, which is the second quarter of 2015, was 4,374 tenants in 187
buildings. The average gross floor area was 5,111 tsubo (1 tsubo = 3.3 sqm). The average building age was23.63 years. The key features and distribution of the data are presented in 4. Index Overview.
We have, however, excluded buildings that do not represent a typical image and specifications of office buildings, suchas those listed below:• Spaces that are not used as office but used as warehouse, retail, etc.
• Spaces on below-ground floors and ground floor (first floor)• Office buildings with less than 300 tsubo gross floor area or less than 30 tsubo typical floor area.
• Any outlier not mentioned above.

2. Calculation of Paying Rent Index
Due to the characteristics of the samples, the number of samples for each quarter differs as tenants may
move in and out and our management services may start and end. Because of this, average rents increase if
a large new office building is included in the samples, and they decrease if such building is excluded from thesamples. Accordingly a simple comparison of average figures is not enough when tracking changes of therent level.
To remove such property-specific influences from the index, we used the hedonic approach, a method often
used in Consumer Price Index (e.g. personal computers of which specifications change quite often).
Figure 2 is Paying Rent Index derived from the calculation. The index shows a cyclical pattern with a peak in
the first quarter of 2009 and a bottom in the third quarter of 2013. The latest quarter, the second quarter of2015 was 81, indicating a slow recovery from the bottom of the cycle.
Figure 2: Paying Rent Index (Q1 2005 – Q2 2015)

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

2Figure 3 compares Paying Rent Index with New Contract Rent Index*. Both of the indices have seven- toeight-year cycle.
*See Xymax New Contract Rent Index released on September 19, 2014 for details of New Contract
Rent Index.
The latest peak of the new rents was the second quarter of 2008 while the paying rents, which include both
new and existing rents, lagged about a year behind with a peak in the first quarter of 2009. The bottom of thecycle of the new rents was in the second quarter of 2012 while that of the paying rents lagged about one anda half years behind and bottomed in the third quarter of 2013. If we look at the highs and lows, the volatility issmaller for the paying rents (105 – 77) than for the new rents (161 – 76).
Thus, the comparison of the two indices shows that paying rents have a relatively stable stream with slower
changes and smaller volatility than new rents.
Figure 3: Comparison of Paying Rent & New Rent

3. Analysis
This section analyzes what are behind our findings pointed out in the preceding section, which is: Paying
rents have a relatively stable stream with slower changes and smaller volatility than new rents.
We calculated the percentage of tenants who had no rent change in the past 12 months based on the tenant'scontract data. The percentage was 78.5% for the fourth quarter of 2009. The breakdown of the "no rentchange" was as follows: Tenants who had no event of rent change (such as renewal of the contract),
represented as (1) in Figure 4; Tenants who were replaced by other tenants but the rent remained the same,represented as (2) x (3) in Figure 4; and Tenants who signed a renewed lease contract but the rent remained
the same, represented as (4) x (5) in Figure 4.

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

3Figure 4: Events of Possible Rent Change and Results

Total

Increased

No change

Decreased

No event

31.6% (1)---Tenant departed(space remained vacant)

5.0%

---

Tenant change

2.0% (2)20.0%

5.7% (3)74.3%

Lease contract renewal

61.4% (4)8.5%

76.2% (5)15.3%

Figure 5 is a quarterly data of the percentage of tenants with no rent change in the past 12 months. During
this period, market had both upturns and downturns, but the percentage remained around 80%, indicating thatpaying rents are less vulnerable to market fluctuations.
Figure 5: Percentage of Tenants Who Had No Rent Change in Past 12 Months

Behind this result is that when tenants consider whether to terminate or revise their current lease contracts,
they decide based on their current business conditions and corporate strategy. Relocating office may benefit
the company as they achieve cost reduction, improve work efficiency or have a better location. On the other
hand, however, there are also some downsides. Companies must pay the moving costs and restoration costs
and may risk increasing rents depending on the market conditions at that time.
Whereas for owners, replacing a tenant is a chance to increase rental income, but there is also a variety ofrisks such as leasing costs (fees to agents), downtime until occupancy by new tenants, and income loss
caused by free rents given to the new tenants at the start of the lease.
Tenants and owners negotiate their current lease and decide whether to terminate, agree toincrease/decrease the rent or leave the rent unchanged considering their own situation.
Based on the above, paying rents (new rents and existing rents) have a relatively stable stream with slower
changes and smaller volatility than new rents because the existing rents are influenced not only by the officespace market trends but also by the situation of tenants and owners as well as negotiations between them.

This analysis is detailed on page 61-67 of "Micro Structure of Office Rent Change, Analyzing the Income Stability ofOffice Property" Real Estate Securitization Journal vol. 26 August 2015.

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

44. Paying Rent Index Overview
NameExplanation

Paying Rent Index
Changes in office rent per tsubo paid by corporate tenants.
(Contracts with new tenants and contracts with existing tenants are both included.)

SubjectCalculation unit
PeriodOffice buildings in Tokyo 23 Wards
By tenantQ1 2005 – Q2 2015 (continue)

Release frequency

Quarterly

Time lag between

approx. 40 days

data and release
Source of data

Data of lease contracts with tenants in office buildings in which Xymax provides realestate management services.

Number of samples

4,347 tenants in 187 buildings (Q2 2015)

Index approach

Hedonic approach

Unique features

1. Sample data includes both new rents and existing rents.
2. Rents are based on tenants rather than office buildings.
3. Statistical approach (Hedonic approach) is used to adjust the use ofdifferent sample data, deterioration of office buildings due to age, andchanging preference of tenants.

Basic Statistics

Distribution of Data (Gross Floor Area & Age of Buildings)

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

55. Changes of Paying Rent Index
Paying RentIndex
Q1 2005
Q2 2005
Q3 2005
Q4 2005Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 20151009796969595
94
94
91
92
94
95
100
102
104
105105
105
104
102
100
97
9391
89
87
85
84
83
82
8179
78
78
7777
78
79
80
80
80
81(Reference)
New Contract
Rent Index
99
101101105116118120129
135139150147146161148145
129
117111
109
100
96100949391
939085768283938187879491
94949293The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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