Japan Residential Investment Company

The consistent operational performance of the fund’s broad portfolio of Japanese residential properties, well-diversifed geographically and by tenant, supports an outlook of further dividend and NAV/share growth over the next few years. Portfolio occupancy levels and rental income have been steady despite global economic turmoil and local geological shocks. We see improved prospects for uplifts in asset values as the cyclical real estate market recovery gathers pace.

Portfolio 95.2% Occupied At End April, Steady Y-o-Y
Latest fund portfolio occupancy was 95.2% at end April 2012, unchanged y-o-y. Average occupancy for the year to April was 94.7% vs 94.4% for the year to April 2011, and was 95.2% for the first five months of the current financial year vs 95.8% in FY11. This represents a solid performance.

Prospects Supported By Outlook For Tokyo Market
Local property adviser Savills Japan recorded 95.9% average occupancy in Tokyo’s core eight wards in Q112, 0.6% up on the previous quarter, 0.3% ahead, y-o-y. Savills compiles aggregate residential occupancy across the Japan-listed J-REITs to provide a benchmark for wider trends in mid-market Tokyo rental apartments. Across Tokyo’s 23-ward area occupancy was 96.1%, also 0.6% up on the prior quarter, but 0.3% down y-o-y. Its latest report expects strong demand for modern mid-market Tokyo residential assets - JRIC’s typical properties - to support occupancy levels in the short to medium term and believes this will be bolstered in part by continued immigration to the capital from regional towns and cities. Although mid-market rents exhibited some narrow seasonal volatility – a fall of under 1% vs the prior quarter and a year earlier – this is attributed to a seasonal fall off in demand through the winter months.

Valuation: 6.3% Prospective Yield, 20% NAV Discount
An attractive 6.3% prospective yield is well covered by earnings from a diversified tenant base across a portfolio which has shown resilient operational performance despite external shocks, with rents paid by domestic Japanese tenants not directly vulnerable to eurozone newsflow. The fund is conservatively geared (57% at end March), c 80% of debt is at fixed rates with on average three years maturity. The portfolio is liquid and comprises assets which could readily be sold, with prevailing valuation yields on average 5.9% pa, vs 0.9% pa available on 10-year Japan government bonds. That backs an outlook for recovery in local asset values, although the NAV discount has widened from 13% to 20% since the results in March.

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