Introduction of the ARES J-REIT Property Database as the First Japanese Real Estate Investment Index Akemi Mizuto

1. Overview The ARES J-REIT Property Database is a service provided by The Association for Real Estate Securitization (ARES) the lists information on the ARES website concerning real estate, leasehold rights and surface rights for real estate and trust beneficiary rights placed in trust owned by listed J-REITs1 (hereafter, owned real estate collectively). Although listed J-REITs announce information on their owned real estate at each account settlement period, ARES aims to convey the broad trends of the real estate market to the general public by unifying such published information in the ARES J-REIT Property Database as well as by calculating and releasing specific indicators based on published J-REIT information. Specifically, the ARES J-REIT Property Database first provides a service for ARES members to use information on income and expenditures, appraisal amounts, leased area, leasable area, etc. of individually owned real estate that each J-REIT discloses. The

information is provided in an Excel format so that it can be easily used and processed. Second, the ARES J-REIT Property Database calculates indices based on compilations of information on the J-REITs individually owned real estate for multiple properties and discloses these indices on the web.

2. Significance The ARES J-REIT Property Database discloses various indices calculated using data on the real estate owned by J-REITs that has been published for the general public. Since J-REITs have a tendency to invest in real estate that generates stable income, these indices can be described as the macro indices that reveal the average trends of real estate owned by J-REITs. If an increasing quantity of real estate beings to be covered in tandem with the expansion of the JREIT market, accuracy of the indices as macro indicators will improve
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J-REIT (real-estate investment trust) is a collective investment scheme in which funds are The profits from

collected from multiple investors and primarily managed via real estate. managing the real estate are distributed to investors.

The formation of J-REITs became

possible with the November 2000 amendment to the Investment Trusts and Investment Corporations Law, which has expanded the assets targeted for management by investment trusts from securities to general property rights including real estate.

further. These indicators are also based on actual cash flow and actual contract results, a significant feature, making it one of the few truly valuable indices in Japan. However, since the target real estate is all J-REIT owned real estate, same form of particularity may be recognized in the indices. In addition, it must be noted that the indices do not cover the entire Japanese real estate market. Further, the ARES J-REIT Property Database provides member companies with the original data of individually owned real estate in the Excel format. High usability is provided for a user friendly format by providing a search system to the users that enables multiple owned properties satisfying conditions required by the users to be extracted.2 This service of providing information on individually owned real estate facilitates understanding and comparing changes in individual real estate owned by J-REITs and makes it easier to extract multiple owned properties and calculate indices according to the users own criteria. A wide range of other usage could be applied to these original data on real estate provided by the ARES J-REIT Property Database and thus we expect the Database to serve as a very effective tool for business application. In addition, the centralized formation of information into data through the data and indices that the ARES J-REIT Property Database provides has the merit of freeing users from data preparation activities.

3. Contents of Published Indices The ARES J-REIT Property Database covers real estate owned by J-REITs that have already filed a fiscal report after going public. In regards to the real estate that J-REITs have already sold, only the information during the period of past ownership is included in the data. The following are the specific published indicators.

(1) Average Occupancy (%) Calculation Formula: Total leased area/Leasable area Tabulation Method: In regards to the real estate owned by the respective J-REITs, monthly data gained when assuming the simple average data at the end of the previous year and at the end of the current year are to be continued every month during the current fiscal period and then calculate the monthly data by taking the weighted average using the leasable area of individually owned real estate for each month (denominator).

2 This environment will be available at the beginning of fiscal 2006. Please note that the system is presently under construction.

Data Period: The data for the fiscal period when owned real estate expecting to have special factors was acquired is not used when calculating indices but the data in the fiscal period following said period is used for calculating the indices. (2) Unit Price of Average Lease (thousand yen/m2, month) Calculation Formula: Income from leasing business/Total leased area Tabulation Method: In respect to the real estate owned by each J-REIT, the index value, calculated using the actual value of the income from the leasing business in the current year and the total leased area at the end of the current year, is assumed to be maintained each month during the current year. Based on this, monthly data consisting of the weighted average on the basis of the total leased area of the individually owned real estate for each month is calculated. Data Period: The data for the fiscal period when owned real estate expecting to have special factors was acquired is not used when calculating indices but the data in the fiscal period following said period is used for calculating the indices.

(Note 1) Half-year data is converted into monthly data. (Note 2) Rent is calculated as the amount including common expenses. In addition, income from parking lots, etc. is included in the case of same properties. Please note that, since the ratio of income from parking lots, etc. to income from leasing is 2-4%, this index calculated on the basis of numerical values including such also has a fluctuation band of about 2-4%.

(3) Ratio of NOI to Sales (%) Calculation Formula: NOI/Income from leasing Tabulation Method: In respect to the real estate owned by each J-REIT, we assume that the index value, which is calculated using the actual value of NOI in the current fiscal period and the actual value of income from leasing in the current fiscal period, is maintained each month during the current fiscal period. Based on this, monthly data consisting of the weighted average on the basis of income from leasing individually owned real estate for each month is calculated. Data Period: The data for the fiscal period when owned real estate expecting to have special factors was acquired is not used when calculating indices but the data in the fiscal period following said period is used for calculating the indices.

(Note 1) NOI is the abbreviation of Net Operating Income and indicates the net income from leasing arrived at when leasing costs (excluding depreciation costs) are deducted from the income from the leasing business. (Note 2) The NOI disclosure policy in regard to disclosed materials of each J-REIT differs depending on the J-REIT. There are cases where NOI is disclosed as the income before deduction of depreciation costs in the disclosed material, where NOI is disclosed as the income arrived at when depreciation costs are added to the profit or loss of the leasing business (after deduction of depreciation cost), and when NOI is not disclosed. (Note 3) Upon calculating this index, the disclosed numerical value is used in the case of real estate owned by a J-REIT whose NOI is disclosed in the negotiable securities. In the case of real estate owned by a J-REIT whose NOI is not disclosed in the negotiable securities report, the value arrived at when depreciation cost is added to the profit or loss of the leasing business (after deduction of depreciation cost) is used as the NOI.

(4) ARES J-REIT Property Index (%/year) The ARES J-REIT Property Index is a part of the ARES J-REIT Property Database and consists of the real estate investment return rate that is the collective term for income return, capital return and total return.

Computation Formula: Income return

NOI BMV + 0.5CI 0.5PS 0.417 NOI

Capital return

( EMV BMV ) + PS CI BMV + 0.5CI 0.5PS 0.417 NOI

Total return = Income return + Capital return The abbreviations in the calculation formula represent the following: EMVEnding Market Value BMVBeginning Market Value PSPartial Sales CICapital Improvement or Expenditures NOINet Operating Income

Tabulation Method: In regard to real estate owned by each J-REIT, the actual value of NOI in the current term and the index value, which is calculated on the basis of the appraisal amount at the end of the previous term, the appraisal amount at the end of the current term, the actual value of sales in the current term, the actual value of capital improvement or expenditures in the current term and the actual value of NOI in the current term, are assumed to be maintained each month during the current term. Based on this, monthly data consisting of the weighted average on the basis of the appraisal amount of individually owned real estate at the beginning of the term is calculated. Data Period: The data for the fiscal period when owned real estate expecting to have special factors was acquired is not used when calculating indices but the data in the fiscal period following said period is used for calculating the indices. (Note 1) Upon calculation, half-year data is converted into annual data. (Note 2) When capital expenditures for individually owned real estate are not disclosed, they are deemed to be zero in calculations.

4. Issues and Future Prospects of the ARES J-REIT Property Database The indices that the ARES J-REIT Property Database disclose have the following issues due to the constraint that only disclosed information of J-REITs are used. The first issue occurs due to the limited quantity of real estate owned by J-REITs when J-REITs initially emerged. If there is a limited quantity of owned real estate subject to an index, the index will not show the average value of the whole market and there is the risk that the individual factors of owned real estate subject to the index may be strongly reflected in the results. The second issue is caused by changes in owned real estate subject to the index in tandem with decreases and increases in real estate owned by J-REITs. This indicates the problem that

the changes in the index reflect not only changes in the average trends of owned real estate but also influences from changes in owned real estate subject to the index. In particular, in the period when the number of owned real estate by a J-REIT is small, the ratio of newly acquired owned real estate to real estate owned by the J-REIT is large. This means that there is a risk that the changes in the index may be strongly impacted by changes in the subject owned real estate. The third issue is caused due to differences in the types of items and the definition of items in the information disclosed by each J-REIT. When the ARES J-REIT Property Database

calculates the data to be disclosed, certain adjustments are made in regard to these differences.

However, it is possible that some errors may between the result from such adjustment and the actual. Particularly, the real estate investment return rate is a concept identical with the real estate indices used in overseas countries and the calculation formula was constructed based on premises equivalent to the calculation formulas of the NCREIF Index that is most widely used in the U.S. Attention needs to be paid, however, since the index contains a margin of error caused by adjusting differences between J-REITs in respect to the disclosure of the original data. When the real estate investment return rate is used to evaluate performance and investment decisions, there is a risk this will lead to the wrong decision. The fourth issue is caused due to the tabulation method of the indices. This problem is caused due to the situation that the fiscal periods of all J-REITs are semi-annual and the information on individually owned real estate is disclosed each time accounts are settled, but each J-REIT closes its accounts in different months since the fiscal periods differ among J-REITs. To calculate the indices of the ARES J-REIT Property Database, we decided to update the index on a monthly basis since there is at least one J-REIT closing its accounts each month and at that time new data on owned real estate are disclosed. As for months when no fiscal periods end, the concerned data are assumed to be identical with the data at the end of the fiscal period including the concerned month, and the weighted average is calculated for the respective individually owned real estate. Based on the assumption here, monthly changes are leveled. Therefore, when indices showing changes are separately calculated based on the indices disclosed in the ARES J-REIT Property Database, there is the risk that the variability in the indices will underestimate changes occurring in the actual market. The indices disclosed in the ARES J-REIT Property Database include, at the very least, the abovementioned issues. Caution should be exercised since there is a possibility of a mistaken judgment if the index is referred to without recognizing these issues. ARES intends for the problems of the indices to lesser through resolution of these issues along with the market expansion. Presently, it is necessary to be very cautious about issues indicated here when using the various indices.

Reference 1 Basis for Calculation Formula for Real Estate Investment Return Rate 1. Formula for Calculating the NCREIF Index Of the ARES J-REIT Property Database Indices, the formula for calculating the real

estate investment return rate was determined based on a policy following the calculation formula for the real estate index announced by NCREIF (NCREIF Index), the most widely used of such indexes in the U.S. NCREIF is the acronym for the National Council of Real Estate Investment Fiduciaries established in 1985. NCREIF is a nonprofit organization that issues the NCREIF Property Index

(NPI), which shows real estate performance returns using data submitted from its members that include pension funds engaged in real estate investment. as follows. The formula to calculate NCREIF is

(1) Income return Of the total return, this is portion derived from the net operating income (NOI) of individual properties. quarter. This is calculated by dividing NOI by the average investment amount in each

Income return

NOI BMV + 0.5 * CI 0.5 * PS 0.33* NOI

NOINet Operating Income BMVBeginning Market Value CICapital Improvement or Expenditures PSPartial Sales

(2) Capital return This is calculated by dividing capital improvements or expenditures and changes in market value after consideration of partial sales by the average investment amount of each quarter.

Capital return

( EMV BMV ) + PS CI BMV + 0.5 * CI 0.5 * PS 0.33 * NOI

EMVEnding Market Value BMVBeginning Market Value PSPartial Sales CICapital Improvement or Expenditures NOINet Operating Income

(3) Total return Total return = Income return + Capital return

(4) Meaning of the denominator The denominator in the NCREIF index, BMV0.5CI0.5PS0.33NOI represents the average investment balance in a quarter. balance is based on the following assumptions. The calculation of the average investment

Assumption 1 CI (capital improvement or expenditures) and PS (partial sales) are assumed

to be generated in the middle of the term. Image figure of Assumption 1 Previous quarter Current quarter
CI

Next quarter

It1/2 is considered that investments value made for only a half of the current period
CI is assumed to have happened in the middle of the quarter

Based on Assumption 1, the size of CI and PS as the weighed average during the current quarter is expressed in the form of 0.5*CI or 0.5*PS.

Assumption 2 NOI is assumed to be generated equally at the end of every month during the quarter (in other words, one third of NOI generated in the concerned period is assumed to be generated at the end of each month) . Image figure of Assumption 2 Current quarter

Next quarter

NOI NOI is assumed to be generated equally at the end of each month

NOI of is assumed to be generated during the last third of the current quarter NOI 0/3 NOI of NOI of
NOI 1/3 is assumed to be generated during second third of the current quarter

is assumed to be generated during first third of the current quarter NOI 2/3

Based on Assumption 2, The size of NOI as the weighted average during the concerned quarter is expressed as follows.

(1/3NOIfirst third of the quarter) (1/3NOIsecond third of the quarter) (1/3NOIlast third of the quarter) 0.33NOI

Based on Assumptions 1 and 2, The average investment balance is BMV0.5CI0.5PS0.33NOI.

2 Calculation formula when using J-REIT data (Revision of formula for calculating the NCREIF Index) Although J-REITs settle their books, the NOI of income from leasing, etc. is assumed to come in at the end of every month. In this case, 1/6 of NOI generated during the concerned period (half-year term) is deemed to be generated at the end of each month, and thus the size of NOI as the weighted average during the concerned period (half-year period) is expressed as indicated below. (1/6NOI first sixth f fiscal period) + (1/6NOI second sixth of the fiscal period) + (1/6NOI third sixth of the fiscal period) + (1/6NOI fourth sixth f fiscal period) + (1/6NOI fifth sixth of the fiscal period) + (1/6NOI sixth sixth of the fiscal period) 0.417*NOI Consequently, the average investment balance for the concerned fiscal period (half year) placed as the denominator is arrived at with the following formula.

Average investment balance for the = BMV + 0.5 * CI 0.5 * PS 0.417 * NOI concerned fiscal year (half year)
Image figure

Average investment balance for the concerned fiscal period (half year)

Thus the following calculation formula provides the real estate investment return rate (%/year)

announced by the ARES J-REIT Property Database. Income return

NOI BMV + 0.5CI 0.5PS 0.417 NOI

Capital value return

( EMV BMV ) + PS CI BMV + 0.5CI 0.5PS 0.417 NOI

Total return = Income return + Capital return Reference 2 Use of ARES J-REIT Property Index in the ARES J-REIT Property Database The Market Index shows the movement of the

There are two ways to use the index.

entire real estate market subject to investment and is used to develop an investment strategy and examine asset allocation. The Benchmark Index is used as an index to measure investment results and evaluate the performance of fund managers. In the UK and the U.S., where the use of real estate investment indices by investors is common, the index is referred to when selecting investment real estate and evaluating investment. The ARES J-REIT Property Index in the ARES J-REIT Property Database is calculated in a manner conforming to the NCREIF Index in the U.S. and has an identical concept with real estate indices used in other overseas countries. However, since the original data lacks uniformity, it can hardly be said to satisfy the requirements of being a real estate investment index. If the ARES J-REIT Property Index is used for performance evaluation and in making investment decisions, there is the risk that it may lead to a mistaken decision. It is

therefore necessary to use it simply as an indicator to show macro trends of the entire market. It is desirable that issues concerning data will be solved and requirements to be a real estate investment index will be satisfied in the future.

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