Invest In Tokyo A presentation to KIC - Nicole, Disha, Ben, William, Shuo, Maibi, George, Haoran, Drew

Invest In Tokyo
                A presentation to KIC

Nicole, Disha, Ben, William, Shuo, Maibi, George, Haoran, Drew

Korean Investment Corporation (KIC)

●   KIC manages assets entrusted by the Government, BoK and other public funds → Conservative, risk-adjusted returns.
●   Entrusted with USD 80 bn following inception in 2005, and has a net asset value of USD 91.8bn as of the end of 2015.

●   Investment Philosophy :
    - Long-term perspective and based on intrinsic value
    - There is premium for investing in risky or illiquid assets.
    - Research-based value → excess returns in light of mkt inefficiency
●   According to the Sovereign Wealth Fund Institute, AUM of the world’s SWFs totalled USD 7.4 trn (as of Dec. 2015).
●   SWFs funded by oil, or other commodity exports, totaled USD 4.2 trn at the end of 2015, or 53% of overall SWFs’ assets.

Recent KIC deals

• Jan16 : Brookfield Property Partners LP JV with KIC to make acquisition of buildings on Berlin’s Potsdamer Platz. Cost
  EUR 1.4bn for complex which consists of 17 buildings, 10 streets and two squares in central Berlin.

• June16 : Singapore-listed ARA AM is seeking more major assets in Australia after due diligence began on landmark
  Southgate Complex in Melbourne in a deal worth $600 mn - KIC identified as backer.

• Aug16 : has invested a combined $330 mn to buy stakes in U.S. hotels. -> The KIC as a strategic investor has recently
  signed separate deals to invest in six five-star hotels, including Manhattan's Ritz Carlton Hotel and SF’s Four Seasons'
  Hotel

• Nov16 : KIC and the Korean Teachers’ Pension Fund will invest in a U.S. warehouse portfolio fund for an undisclosed
  sum

Japan

Why Japan - Macro

          Japan                              USA                               UK                        Germany
(+) GDP expanded in Q3 2016      (-) Uncertainty due to election.   (-) Uncertainty due to Brexit   (-) Elections next year.
to 2.2% GDP. 3rd straight
                                 (-) Low productivity growth.       (-) US strong export receiver   (-) 1mm+ refugees.
quarter of expansion.
Exports, government              (-) Potential turmoil from Brexit. (-) Inflation rises above 2%    (-) Deutsche Bank’s potential
spending & residential                                              target.                         $14 bn fine by US DofJustice.
investment.
(+) Employment and wages
continue to improve and
moderate economic recovery
continues.
(-) Capital expenditures are
flat and domestic activity are
weak.
(M) Approved $132 billion
stimulus package to boost
the economy in August 2016.
(M) 2020 Olympics

Why Japan - Macro

            Japan                    USA             UK                Germany
               GDP                    GDP           GDP                   GDP
           Growth Rate              Growth Rate   Growth Rate           Growth Rate

       Unemployment               Unemployment    Unemployment        Unemployment
                Rate                   Rate            Rate                Rate

               3.0%                   4.9%             4.8%              4.2%
http://www.tradingeconomics.com

Why Tokyo

(+) Demographics
  -   Rising Population in
      Central Region

(+) World Financial Capital

(+) Large Chinese Capital
Inflows

(+) Abenomics
  -   Monetary easing            Source: NRI based on Basic Resident Register Population Migration Report
  -   Fiscal stimulus
  -   Structural reform

(+) Government Regulations
  -   Relaxing of Visitor Visa
      conditions

Tokyo Real Estate Market

(+) High Yield Spread

(+) Liquidity

(+) Office
  -   Current Fear of
      Oversupply & Low
      Absorption

(+) Residential
  -   Stable rent & high
      occupancy

(+) Hotels & Retail
  -   Surge in foreign
      visitors

Effects of the 2020 Olympics on Tokyo’s Economy

Source: BOJ Reports and Research Papers Jan. 2016 (estimates by Brückner and
Pappa [2015] using cross-country panel data from 1950 to 2009)

Increase in Foreign Visitors due to Olympics

Hospitality & Retail

Source: JLL Hotel Investor Sentiment Survey December 2015

                                                            Source:BOJ Reports and Research Papers Jan. 2016 - Japan Tourism Agency

Hotel Performance

•5,601 new rooms, 5.93% of inventory,
built in recent 2 years
•Occupancy dropped slightly in 1H/2016
•However, the average ADR increased
10.6%
•RevPAR increased 6.8%

Hotel Supply & Demand Dynamics
       Planned new hotel rooms   •Total planned new hotel rooms in 2016-2020 accounts for 12.8% of existing supply
            Source: Savills      •Much smaller than the expected demand increase
                                 •Huge potential for price growth
     2016               3,407

     2017               4,485

     2018               1,382

     2019               2,557

     2020                819

     TBD                 322

    Total               12,972

Existing Supply        107,428

      %                 12.08%

Hotel Supply & Demand Trends
CBRE forecasts Tokyo would likely suffer from acute room shortage.

Tokyo Olympic Map

                                              Odaiba

The Olympic Village Site will become the Tokyo International
Exchange Plaza residential and mixed-use development after
the Games.

Why Odaiba

Location:

  ●    20 venues will be located in the Tokyo Bay zone
  ●    Popular shopping and entertainment area
  ●    15-minute drive from financial district of Tokyo
  ●    Attractions: Rainbow Bridge, Fuji TV Odaiba, malls and
       etc.

Transactions:
2015 - Hotel Nikko Tokyo had signed an agreement with Hilton
Worldwide for the conversion.

2016 - Hulic (REIT) purchased the Grand Pacific Le Daiba for over
$600 million and renamed as Grand Pacific Le Daiba.

Sample Deal: Tokyo Bay Ariake Washington Hotel

•   Three-star hotel located in the heart of Okaida

•   5-minute walk from train station, 5 km from the tuna auctions at Tsukiji fish market
    and 11 km from the Tokyo Disney Resort

•   Trip Advisor Reviews: “GREAT location, dirty rooms”

Climate for Foreign Investment
    One of the deepest and friendliest RE markets for KIC : Japan is the largest CRE market in Asia-Pacific.
              Annual transaction volume in 2014 was up 14% overall over the previous year, the highest annual volume since
               the global financial crisis began.

    No restrictions on FDI for real estate investment in Japan and direct offshore acquisitions by investors

              A foreign corporation / Japanese subsidiary of a foreign corporation may, in principle, own RE in Japan on its
               own
              An owner of RE may freely utilize and dispose of property with no duration restriction.

    Japan ranked #8 globally for property rights by the Property Rights Alliance

    Domestic investors historically dominated the market, but foreign investors have boosted share of total volume to 15%
       in 2014 from 9% the year before.
              Foreign capital ¥1t in 2014, up 29% from 2013 and highest since 2008

Sources : http://www.ey.com/Publication/vwLUAssets/EY-top-five-thoughts-to-consider-when-investing-in-japanese-real-estate/$FILE/EY-top-five-thoughts-to-consider-when-investing-in-japanese-
real-estate.pdf; https://www.dlapiper.com/en/us/insights/publications/2015/09/re

Lending Environment

●   BOJ policy rates -0.1% → JGB yields negative up to 10y maturity

●   Example: MUFJ reduced prime rate on 10-year fixed-rate residential
    mortgage by 0.30 points to 0.55% after Jul 2016.

●   Japan Housing Finance Agency’s 35-year fixed rate loan set a
    record low of 1.47 percent this month in 2015

                                                                         PWC : “Japan continues to be a favorite target for
                                                                         opportunistic funds, although some of the deal-structuring
                                                                         strategies used are beginning to raise eyebrows. Cap rates
                                                                         in Tokyo may be low, but ultra-low borrowing costs create
                                                                         cash yields that can be levered as high as 90% —by far the
                                                                         highest loan-to-value (LTV) ratio in the region. As a result,
                                                                         more and more investors are willing to take short-term
                                                                         levered debt and buy at very compressed yields on the basis
                                                                         that further yield compression will provide outsized returns.

Types Of Deal Structure (Legal)

                                                  Tokumei Kumiai (TK)

Tokutei Mokuteki Kaisha (TMK)

Key differences: TK-GK vs TMK

Taxes Considerations

Taxes Considerations
Permanent Establishment: based on varying criteria, RE investments (construction) are generally categorized
as permanent establishments for tax purposes.

Corporate Tax Rate: 30% but effective tax rate with local state tax is about 35%

Capital Gains Tax:
For companies without PE→ 30%
For companies with PE→ Aggregated with rest of rental income, same as regular effective tax rate

Depreciation: Assets may be fully depreciated, based on their useful life until their remainder value is the
equivalent of JPY 1

Property Acquisition Tax: 4% on assessed value.

Withholding Tax: 20% of dividends are withheld and sent to government directly.

Japan has entered into a Double Taxation Treaty with Korea

Currency Hedging
No spot pair between KRW/JPY

Hedging options are:

  • OTC forward contract - Liquid pair

    Mark-to-market on daily basis, settle margin

    Based upon project duration (5 Yrs) - quote is 11.87 KRW to 1 JPY

    NDF - so must unwind and realize PnL

• JPY/KRW OTC Option

   European Style option - exercisable only at expiration

   Costly alternative, and the cost is out front to secure this hedge

• Buy asset in local (JPY), perfect currency hedge by having short position in local

  LIBOR +50bps for short JPY cash balance

Swap / Option Quotes

Current FX Quotes

●   JPY 25% cheaper to buy in KRW than 4 years ago
●   JPY strong appreciation trajectory vs USD or EUR