摩根士丹利-亚太地区房地产行业-如何为利率上升做好准备

June14,202209:00PMGMT

AsiaProperty

HowtoPositionforRisingInterest

Rates

WepreferEM(drivenmainlybymacro/policy)overDM(capratestodrivevaluelowerandinterestexpensetoreduceEPS/DPS)inarisingratesenvironment.WepreferJapanoverAustraliaandSingaporeoverHongKong.

MorganStanleydoesandseekstodobusinesswithcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.

Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.

+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithFINRA,maynotbeassociatedpersonsofthememberandmaynotbesubjecttoFINRArestrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.

2

Contributors

MorganStanleyAsiaLimited+

PraveenKChoudhary

EquityAnalyst

+8522848-5068

Praveen.Choudhary@

MorganStanleyAsia(Singapore)Pte.+WilsonWNg,CFA

EquityAnalyst

+656834-6345

Wilson.W.Ng@

MorganStanleyAsiaLimited+

JeffreyMak,CFA

EquityAnalyst

+8522239-7044

Jeffrey.Mak@

MorganStanleyAsia(Singapore)Pte.+DerekChang

EquityAnalyst

+656834-6512

Derek.Chang@

MorganStanleyAsiaLimited+

PatrickJiang

EquityAnalyst

+8523963-2567

Patrick.Jiang@

MorganStanleyMUFGSecuritiesCo.,Ltd.+AtsuroTakemura

EquityAnalyst

+8136836-5429

Atsuro.Takemura@

MorganStanleyIndiaCompanyPrivateLimited+

SameerBaisiwala,CFA

EquityAnalyst

+91226118-2214

Sameer.Baisiwala@

MorganStanleyMUFGSecuritiesCo.,Ltd.+ArisaKatsuyama

EquityAnalyst

+8136836-8424

Arisa.Katsuyama@

MorganStanleyIndiaCompanyPrivateLimited+

PoojaBhatia

EquityAnalyst

+91226118-2217

Pooja.Bhatia@

MorganStanleyAsiaLimited+

BettyChen

ResearchAssociate

+8522239-7213

Betty.H.Chen@

MorganStanleyAustraliaLimited+

SimonChan

EquityAnalyst

+6129770-1316

Simon.Chan@

MorganStanleyAsiaLimited+

ChloeLiu

EquityAnalyst

+8522848-5497

Chloe.Liu1@

MorganStanleyAustraliaLimited+

LaurenABerry

EquityAnalyst

+6129770-1359

Lauren.Berry@

MorganStanleyAsiaLimited+

CaraZhu

EquityAnalyst

+8522848-7117

Cara.Zhu@

MorganStanleyResearch3

HowtoPositionforRisingInterestRates

AlthoughAsianPropertystocksaredrivenmainlybylocaldriverssuchasdemand/supplyandregulations,inflationandinterestratesarerising.Wesummarizeourviewsonhowinterestratesaffecteachofthecountries(inAsia)andvariousstocksdifferently.

IndustryView

HongKongProperty|Asia

Pacific

Cautious

IndustryView

ChinaProperty|

AsiaPacific

Attractive

IndustryView

ASEANProperty|

AsiaPacific

Attractive

IndustryView

AustraliaPropertyAsiaPacific

In-Line

IndustryView

IndiaProperty|

AsiaPacific

Attractive

IndustryView

RealEstate|

Japan

Attractive

IndustryView

J-REIT|Japan

Attractive

1)Countrypreferences:WepreferEM(India/China/Philippines)overDM(HongKong/Singapore/Australia/Japan)asweseerisinginterestrateshurtingDMstocksmore.DMstocksaresensitivetotheirassetandbookvalues,whichcandeclinemeaningfullyifcapratesrise.ManyDMstocksalsotradeondividendyield(afunctionofearnings)andcoulddeclineifgearingishighandratesarerising.CompaniesinAustraliaappearworstpositioned,inourview,whileSingaporeandHongKonglandlordsarefacingsimilarissues.Japan,ourpreferredDMpick,issome-whatuniqueinthesensethatinterestratesarestableandofficeoutlookisimprovingontopofcheapvaluation.EPRANAREITDevAsiaindexisdown8%YTD.AlthoughJapan(+3%)hasoutper-formedandAustralia(-22%)hasunderper-formed,weexpectthistrendtocontinue.Ontheotherhand,HSPisdown6%(outper-formedindex)andcouldunderperformfromhere,whileSG(-1%YTD)hasbenefitedfromborderopeningandexpatinfluxdrivingrent/priceshigher.

2)Physicalmarketoutlook:WithinEM,Indiaisexpectedtoseesolidpriceandvolumegrowthdespitemacroconcernsandhigherrates.China’spropertymarkethasbeenweakYTD,butitisnowinaneasingcyclewheremortgageratesarecomingdownandregulationsbeingrelaxedmargin-ally.

WithinDM,Japanistheonlymarketwithinterestratesnotrising,resultinginstablepropertypricesandvolumes.Singaporecouldstillseehomepriceincrease(albeitdecelerating)butvolumecoulddropmeaningfully.HKandAustraliacouldseedeclineinbothpropertypricesandvolumein2022duetohigherrates.

3)Earningsimplications:A100bpsincreaseinratescouldaffectEPSby1-7%withthegreatestimpactseenforChina(highergearing)andtheleastforJapan(highpercentageoffixeddebt).

4)Stockpreferences:AmongthetopnamesintheEPRANAREITDevAsiaIndex,wepreferMitsuiFudosan(beneficiaryofreopeningtheme,goodearningsandcashflowoutlook),MitsubishiEstate(ben-eficiaryofofficemarketrecovery),andCKA(dividendgrowth,buy-backpotential,valueaccretivedisposals)overWharfREIC(remoteborderre-opening,slowrentalrecovery).

OtherstockswefavorincludeESRCayman,AdvanceResidence,CRLandandScentreGroup.WeareUWonNWDandSuntecREIT(whichappearvulnerabletorisinginterestratesduetohighgearing),aswellasVCX(lessprotectedinahighinflationaryenvironment,unfavourableleasestructure).

4

Contents

5RegionalComparisons

8KeyStockIdeas

10JapanProperty:ContinuedProtectionFromAccommodativeMonetaryPolicy

14IndiaProperty-InflationisaBiggerWorry,atLeastforNow

18ChinaProperty:ContinuousRelaxationMeasurestoLowerSystematicRisks

21SingaporeProperty

24HongKongProperty:HigherRatestoWeighonAffordability

29AustraliaProperty

MorganStanleyResearch5

Interest

RateFramework

→→↓个

个↓↓↓

RegionalComparisons

Exhibit1:Asiaproperty:Frameworkofinterestratemovements

Source:MorganStanleyResearch

Fedrate个=

10YrUST个=

Caprate个=

Interestexp个=

HIBOR/SIBOR个

Divyieldspread↓

Bookvalue↓

EPS↓

=Mortgagerate个=Expensivevaluation

=

DPS↓

Exhibit2:AsiaPropertyPreference:PreferJapanoverAustraliainDM

Japan

>

India

>

China

>Singapore>HongKong>

Australia

Intratedirection

IntrateRelevance

→

High

个

Low

↓

Low

个

High

个

High

个

High

ResiPriceOutlook

ResiVolumeOutlook

DistoNAVvs.LTavgDivyieldspreadvs.LTavg

Mostpreferred

Leastpreferred

Source:MorganStanleyResearch

MitsuiFudosan

SumitomoRealty

个

个

→

↓

DLF

GPL

↓

↓

↓

↓

CRLand

ESRCayman

SuntecREIT

↓

↓

↓

→

CKA

NWD

↓

↓

↓

↓

ScentreGroup

Vicinity

Exhibit3:Mostandleastaffectedcompaniesamidrisinginterestrates

ImpactonEPS

Japan

India

China

Singapore

HongKong

Australia

100bpsIncreaseinFloatingRates-1.0%-6.5%-7.4%-4.0%-3.9%-3.5%

ImpactedTheMost

ImpactedTheLeast

AdvanceResidence

MitsubishiEstate

CityDevelopments

KDCREIT

NWD

SwireProp

Sobha

Oberoi

CLW

BWP

Poly

COLI

Source:MorganStanleyResearch

6

+3%

Exhibit4:Keyfundamentalsandvaluationsmetrics

JapanIndiaChinaSingaporeHongKongAustralia

Fundamentals

2022residentialpriceoutlook

2022volumeYoY

Mortgagerateexpectation

(End-2022vstoday)

Mortgagerateexpectation

(End-2023vstoday)

AvgEPSimpactfrom100bps

increaseinfloatingrates

0%

0%

0bps

+10bps

-1.0%

+5.5%

+7.5%

+100bps

+200bps

-6.5%

-6%

-7%

-ve

-ve

-7.4%

-20%

+150bps

+170bps

-4%

-2%

-10%

+90bps

+160bps

-3.9%

-5%-7%

+135bps

+185bps

-3.5%

Valuations

DiscounttoNAV-62%-30%-62%-48%-51%-18%

LTaverage-32%-31%-43%-30%-40%+3%

vs.LTaverage

-1SD

Mean

-2SD

-1SD

-1SD

-1SD

Divyieldspreadover10YT

1.7%

-1%

0.1%

2.3%

1.5%

2.2%

LTaverage

0.2%

0%

2.5%

3.5%

1.6%

2.8%

vs.LTaverage

Wider

Tighter

Tighter

Tighter

Similar

Tighter

Source:ThomsonReutersasofJune13,2022,MorganStanleyResearchestimates.Note:valuationsshowthatofrealestatedevelopersforJapan.

MorganStanleyResearch7

Country-specificconclusionsAmongDM,wepreferJapanoverAustralia

India:Overthepast10years,interestrateshavefallensteadily,byJapan:Increasinglong-terminterestratesgloballyshouldhavealim-

400bps,amidsixpropertycycles.Therefore,webelievepricesareitednegativeimpactonJapan'sPropertyindustry,reflecting:a)rela-

drivenmorebyeconomicgrowth,jobcreation,stockmarketcycles,tivelylessroomforinterestratesinJapantoclimb;b)steady

macroissues(e.g.,pandemic/NBFCcrisis),propertyprices,andinflationaryexpectationsthatappearlikelytocontinue;andc)

demandsupplydynamics.Presentindustryfundamentalsappearfundingratesthatarepredominantlyfixedforpropertydevelopers

strongafterafive-yearpause,withupcomingrecoveryexpectedinandJ-REITs.Also,weexpecttheTokyoofficemarkettorecovergoing

volumesalongwithsomepriceincreases.Againstthisbackdrop,weforward.WereiterateourAttractiveindustryviewonRealEstateand

believeanadversemacroenvironmentwillaffectvaluationdis-J-REITs.

countsmuchmorethantheearningsimpact.Weviewinflationasa

biggerworryfordevelopersthanrisinginterestratesinthenearSingapore:Webelievepropertyvalueswilllikelyholdupintheface

term.ofrisinginterestrates.What'sappearsatriskispropertycompanies'

earnings-risingrentshelp,butmaynotbeenoughtofullyoffsetthe

China:Againstabackdropofcontinuousrelaxationmeasuresandimpactofhigherborrowingexpenses.Furthermore,wethinkcapital

decliningmortgageratesinChina,webelieveincreasinglong-termflowslikelyfavoursectorsoutsideofrealestate,limitingscopefor

interestratesgloballyshouldhavealimitednegativeimpactonpropertystockvaluationmultiplestoimprove.AmongSingapore

China'sPropertyindustry.Also,lookingatpastexperience,homeequities,wepreferbanksoverproperty;withinASEANproperty,we

restrictionpoliciesanddown-paymentratioshavehadgreaterpreferexposuretoemergingmarketssuchasthePhilippinesover

impactsonpropertysalesthanmortgagerateshave.OverallfortheSingapore.

industry,webelievesharepricesmayremainrange-boundforawhile,

drivenbyfourrisks(weakpropertysales,non-SOEdevelopersHongKong:Weexpectresidentialpropertypricestodecline2%in

liquidityrisks,weaklandsales,andCovidresurgence)alongwith2022(YTD:2%drop)and5%in2023.Althoughtheeffectivemort-

marginalregulatoryrelaxation.gageratecouldremaincappedat2.5%fortherestofthisyear,it

couldriseto3.2%in2023,weighingonhousingaffordabilityandthus

PreferPhilippinesoverSingapore:WeexpectPhilippineresidentialdemand.WewouldavoidcompaniessuchasNWDwithhighdebt.We

housingsales,orpresales,toextendtheirrecoveryfrom2020lowsprefercompaniessuchasCKA(dividendgrowth,buybackpotential,

andgrow20%in2022.Togetherwithagradualreturnofforeignvalue-accretivedisposals,lessinterestratesensitivity).

buyersandpent-updemandfromlocalbuyers,weseepresalesaccel-

eratingandsustainingdouble-digitgrowthfortheyear.FiscalandAustralia:Withratehikesappearingimminentwehavetakenalook

monetarypolicesappearlikelytoremainconducivetorealestatethisateachREITs'interestratehedgingpositiontocalculatetheoretical

year.OurASEANEconomicsteamalsoseesthePhilippinesasoneofdownsidetoFFOifcostofdebtincreases.Welookedattwofactors

thebetterdomesticdemandstorieswithintheircoverageregionon-hedgepositionandinterestcover-withtheideathatstockswith

domesticdemandrecoveryfromreopening,broad-basedpolicycon-lowhedgingandlowinterestcovermaybeleastdesirable.SCG(EW)

tinuityandfiscalsupportfollowingtheelections.WepreferandCLW(OW)bothfallintothisbucket,althoughmitigatingfactors,

PhilippinesPropertyoverSingaporeProperty.suchasleasestructures,shouldnotbeignored.

8

KeyStockIdeas

Exhibit5:Asiapropertystocks:Most-preferrednames

Stock

CKA(1113.HK)

Rating

OW

PT(Upside)

HK$60.0(16%)

NAVDisc

-52%

P/B

0.49x

DivYield

4.7%

Outlook

1)Assetdisposalsshouldbodewellfordividendgrowthandbuybacks.

2)Risingrecurringincomecouldexceed60%oftotalin2024.

3)Pubbusinessshouldbenefitfromreopening.Expecthotelstoremainprofitable.

ESRCayman(1821.HK)

OW

HK$35.30(59%)

-35%

1.28x

1.1%

1)Despiterisinginterestrates,feeincomeshouldgrowthankstorecurringbasefeesandgrowingAUM.

2)ForborrowingsinChinaandJapan,baseratesarenotrising.

3)Debtrefinancedthisyearwaspricedonhigherinterestratesthannewborrowings.

Mitsui

Fudosan

(8801.T)

OW

JPY3,600(22%)

-58%

1.00x

2.2%

1)Hasgreaterexposuretohotelsandshoppingfacilitiesandcouldbenefitfromeconomicreopening.

2)Earningsoutlookisrelativelygoodgivenitsrichpipeline.

3)Goodcashflowoutlookwithlullincashoutlaysonmajorredevelopmentprojectsforthetimebeing.

Mitsubishi

Estate

(8802.T)

OW

JPY2,400(20%)

-61%

1.30x

2.0%

1)RepresentativeofficenameamidpotentialupturnintheTokyoofficemarket.

2)Highlikelihoodofprofitgrowthbackedbyitsabundantinven-toryandoverseaspipeline.

3)Couldbefavoredasadefensivenameinlatecycleoftheeconomy.

CRLand

(1109.HK)

OW

HK$45.19(39%)

-50%

0.77x

5.3%

1)Steadyrevenuegrowth;projectconstantdouble-digitearningsgrowthinF22-24.

2)StrongIPpipelinecouldsupportrentalincomeCAGRofover20%overF22-24.

3)SOEbackground,strongbalancesheet,andlowfundingcostsshouldbenefitstockpriceamidtightenedcreditenvironment.

DLF(DLF.NS)

OW

INR417(35%)

-25%

2.0x

0.6%

1)Well-balancedportfolio;commercialleaseshave7yearWALE(leaseexpiry).

2)NewassetcreationcycleinDevcoandRentcooffersgrowthstability.

3)Interestsensitivitytoprofitislowduetolowerleverage;lowerWACCsensitivityisduetolargestockofcompletedassets.

ScentreGroup(SCG.AX)

EW

A$3.18(26%TSR)

-27%

0.72x

5.7%

1)60-70%ofrentalincomecontractedtoincreasebyCPI+2%everyyear,agoodnaturalhedgevs.ratehikes.

2)Hedgepositionrobust,with50%ofborrowingshedgedtoJan-24.

3)Existingcostofdebtofc.4%+isalreadyoffahighbase,sorelativelyspeaking,REITswithlowerexistingcostofdebtmayhavemoretolose.

Source:MorganStanleyResearch;pricedasofJune13,2022

MorganStanleyResearch9

Exhibit6:Asiapropertystocks:Least-preferrednames

DivYieldOutlook

1)GrowingrecurringincomeinHK/Chinabutgearingremainshighat56%.

2)Dividendisnotfullyfundedbyrecurringincomeanddivi-

7.0%dendfromNWSeveninF24.

3)LowersalestargetinHK,landbankconcentratedinKaiTakareacouldalsomeanslowersell-through/margin.

PT(Upside)

HK$28(-5%)

Stock

NWD

(0017.HK)

NAVDisc

-52%

Rating

UW

P/B

0.34x

1)WeexpectSUN'sDPUdeliverytonormalisetopre-Covidlevelsonlyin2024,onthinningDPUtop-ups.

2)Dividenddeliverymaybeimpededbynear-termopera-

Suntectionalvolatilityfromtheretailandconventionbusinessat

REITUW1.45(-13%)-20%0.82x5.4%SuntecCity.

(SUNT.SI)3)SUNisalsomostaffectedbyrisinginterestrateswithin

ourcoverage(seeExhibit44)givenrelativelylowbor-rowinghedgelevelsof51%.

1)VCX’sspecialtyleasesarepredominantlyfixedat4-5%escalationseachyear,vs.peerSCG’sCPI+2%.

2)ItskeystrategypostCovidseemstobedevelopment-driven,butwithinterestratesmovingupandcapratespotentiallycomingunderpressure,wequestionwhetheror

5.3%notanyofmanagement’sfeasibilityupsideisreadily

achievable.

3)Leasingexposureisalsoaconcern,withc.15%oftheportfolioexposedtoCBDsandamaterialportionofitsportfoliohaving40%+ofleasesexpiringinthenext18months.

Vicinity

CentresUW1.82(+2%)

(VCX.AX)

Source:MorganStanleyResearch;pricedasofJune13,2022

-13%

0.8x

Exhibit7:KeyAsiapropertystocks-Valuationsummary

EPRAtop10RegionMSRatingKeyExposureDivYield10yGovYieldYieldspreadTrailingP/BNetGearing

JapanHKJapanHKAusHKAus

JapanJapanHK

Hotel/Retail

2.2%4.7%2.0%4.7%5.9%5.2%5.7%1.4%3.6%3.5%

0.3%3.3%0.3%3.3%3.9%3.3%3.9%0.3%0.3%3.3%

1.9%1.4%1.7%1.4%2.0%1.9%1.8%1.1%3.3%0.2%

OWOWOWOWOW

EWEWEW

UW

UW

MitsuiFudosanLinkREITMitsubishiEstateCKAsset

Dexus

SHKP

ScentreGroupSumitomoRealtyNBFREIT

WharfREIC

Retail

Office

Residential

Office

Residential

Retail

Office

Office

Retail

OtherKeyPicks

CRLandESRCayman

NWDSuntecREITVicinity

ChinaSingapore

HKSingaporeAus

5.3%1.1%

7.0%5.4%5.3%

2.8%3.2%

3.3%3.2%3.9%

2.5%-2.1%

3.7%2.2%1.4%

OWOW

UWUW

UW

Residential

Logistics

Residential

Retail/office

Retail

Note:Netgearingcalculatedbynetdebt/shareholdersequity.GrossDebt/AssetasgearingforHK/SGREITs.Source:Companydata,MorganStanleyResearch;pricedasofJune13,2022.

1.0

0.9

1.3

0.5

0.9

0.5

0.9

1.0

1.6

0.5

0.9

1.6

0.3

0.7

0.7

126%25%125% 9%39%17%37%209%79%23%

36%35%

56%42%41%

10

Q11999

Q22000

Q32001

Q42002

Q12004

Q22005

Q32006

Q42007

Q12009

Q22010

Q32011

Q42012

Q12014

Q22015

Q32016

Q42017

Q12019

Q22020

Q32021

Q11999

Q22000

Q32001

Q42002

Q12004

Q22005

Q32006

Q42007

Q12009

Q22010

Q32011

Q42012

Q12014

Q22015

Q32016

Q42017

Q12019

Q22020

Q32021

10yJGByield1yforwardinflationrate

6.0%

6.0%

JapanProperty:ContinuedProtectionFrom

AccommodativeMonetaryPolicy

AtsuroTakemura,ArisaKatsuyama

Increasinglong-terminterestratesgloballyshouldhavealimitednegativeimpactontheJapanPropertyindustry,giventhefollowing:a)relativelylessroomforinterestratesinJapantoclimb;b)steadyinflationaryexpectationsthatarelikelytoremain;andc)fundingratesthatarepredominantlyfixedforthepropertydevelopersandJ-REITs.Also,weexpectTokyo'sofficemarkettorecovergoingforward.WereiterateourAttractiveindustryviewonRealEstateandJ-REITs.

PropertypricesinJapanexpectedtoholdsteady

PropertypricesinJapanarelikelytoholdsteady,inourview,givencontinuedhighlevelsofinflationamidlimitedupsideinJapan’snom-inalinterestrate.

Lessonsfrompreviouscycle:Long-terminterestratesinJapanoverthelonghaulhavesteadilytrendeddown,butdidpickupbetween2003and2006,fueledbyexpectationsonJapan’seconomicrecovery.However,thatwasatimewhenrealinterestrateswereholdingsteady,

onthebackofrisingL-Tratesintandemwithrisinginflationexpecta-tions,andpropertycapratesweretrackingdownward.

Reasonsforoptimismincurrentcycle:Inthecurrentcycle,weseelimitedupsideinJapan’slong-terminterestrates,evenwithratesclimbingglobally,givencontinuedaccommodativemonetarypolicyinJapan.Oninflation,bycontrast,weexpecthigherlevelsthaninthepasttopersist,asinflationary“norms”inJapanappeartobechanging.Assuch,webelievethatJapan’srealinterestrateswillremainlow,andJapan’spropertypricesshouldholdsteady.

Exhibit8:10yrJGBandone-yearforwardinflationrate:L-TinterestratesroseinJapanbetween2003and2006…

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

Source:ThomsonReuters,MorganStanleyResearch

Exhibit9:Realinterestratesandcaprate:…butpropertycaprateswerefallingamidsteadyrealinterestrates

Realinterestrate

Medianofexpectedyieldforprimeoffices(RHS)

5.5%

4.0%

5.0%

2.0%

4.5%

0.0%

4.0%

-2.0%

3.5%

3.0%

-4.0%

Source:ThomsonReuters,JREI,MorganStanleyResearch

MorganStanleyResearch11

Q11999

Q22000

Q32001

Q42002

Q12004

Q22005

Q32006

Q42007

Q12009

Q22010

Q32011

Q42012

Q12014

Q22015

Q32016

Q42017

Q12019

Q22020

Q32021

Q42022e

Jun-17

Oct-17

Feb-18

Jun-18

Oct-18

Feb-19

Jun-19

Oct-

19

Feb-20

Jun-20

Oct-

20

Feb-21

Jun-21

Oct-

21

Feb-22

Jun-17

Oct-17

Feb-18

Jun-18

Oct-18

Feb-19

Jun-19

Oct-19

Feb-20

Jun-20

Oct-20

Feb-21

Jun-21

Oct-21

Feb-22

1.0%

0.8%

0.6%

0.4%

0.2%

Exhibit10:10yrJGByieldoutlook:Ourmacroteamexpectsyield

at0.3%outtomid-2023

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

Source:ThomsonReuters,MorganStanleyResearch,e=MorganStanleyResearchestimates

Exhibit11:Inflationoutlook:Ourmacroteamexpectshigher

levelsthaninthepasttoremain

3.0

2%pricestabilitytarget(2013-)

1.0

0.0

-1.0

-2.0

2010

C-taxhikeimpact

2012

2018

2014

2016

2020

2022

MSe

2.0

Japan-styleCore(Ex.FreshFood)

Core-core(Ex.FreshFood&Energy)(Ex.EffectsofVAT/FreeChildEducation)MSCore1/

Source:MIC,MorganStanleyResearch,1/MScoreexcludesthefollowingitems:Cereals,rent,energy,healthcareservices,telephonecharges(fixed-lineandmobile),mobilehandsets,education,cigarettes,chargesforaccidentinsurance,nurseryschoolfees,cutflowers,chargesforoverseaspackagetours,fireandearthquakeinsurancepremiums,andhotelcharges

Relativelowriskforhousingpricestoo

HousingaffordabilityinJapanistrackingatrelativelyreasonableandstablelevels,withlimitedriskofanincreaseinadjustableinterestratesahead,andwedon’tseesignificantheadwindsonhousingpriceseither.

Affordabilitycomparativelystable:Adjustable-ratemortgages(ARMs)accountfornearly90%ofallmortgagesinJapan.Adjustable

Exhibit12:Mortgagerates:Adjustableratesremainlow

Mortgageloanrate(adjustable,majorcitybanks)

Mortgageloanrate(fixed,majorcitybanks)

0.0%

Source:K,MorganStanleyResearch

mortgagerateshaveremainedatlowlevelsastheBankofJapanhasmaintaineditsnegativeinterestratepolicy.Thishaskeptcondoaffordabilitystableoverthepastfiveyears,andseeminglyatreason-ablelevels.Concernshaveemergedoflateaboutanegativewealtheffectpromptedbyrisingfixedmortgageratesandsofteningstockprices,makingfornot-so-rosyconditions.However,weseerelativelylowriskofadeclineinhousingprices.

Exhibit13:Condoaffordability:Relativelyreasonable&stablelevels

30%

25%

20%

15%

10%

5%

0%

Source:K,REEI,MorganStanleyResearch,Assuming30%downpaymentratiowithadjust-able-ratemortgages

12

100%

80%

60%

40%

20%

Implicationsforrealestatestocks

WemaintainourAttractiveindustryview:Asroughly90%oftheinterest-bearingdebtofpropertydevelopersistakenoutatfixedinterestrates,therisksfromapotentialincreaseindebt-servicingcostscanberegardedaslimited.Evenamidrisinglong-terminterestratesglobally,realestatepricesinJapanincludingforcondosaretrackingfirmly,andwethinkthedownsiderisktoNAVPSandEPSismodest.

Asforourstockrecommendations,wethinkfundswilltendtoflowtowardquality,highlyliquid,low-financial-leveragenames,andwerecommendMitsuiFudosan(OW)andMitsubishiEstate(OW).

ImplicationsforJ-REITs

WemaintainourAttractiveindustryview:Almostalloftheinter-est-bearingdebtforJ-REITsisfundedatfixedratestoo,sowethinktherisksfromapotentialincreaseindebt-servicingcostsarealsolim-itedforthisspace.Withlong-terminterestratesparticularlysolidinJapan,wethinkJ-REITsarewellplacedtobefavoredasdefensiveyieldproducts.

OurOW-ratedstockrecommendationsareAdvancedResidenceandNipponPrologis,whichfaceespeciallylowrisksfromrisinginterestpayments.

Exhibit14:Ratiooffixed-rate/adjustable-rateinterest-bearing

debtatrealestatedevelopers:About90%isfundedatfixedrates

FixedAdjustable

0%

MitsuiFudosanMitsubishiEstateSumitomoRealty

Source:Companydata,MorganStanleyResearch

Exhibit15:ImpactonEPSfroma100bpsor200bpsriseinadjust-

ableinterestrates:Limitedimpact

MitsuiFudosanMitsubishiEstateSumitomoRealty

0.0%

-1.0%

-2.0%

-3.0%

-4.0%

-5.0%