EMBODIMENT OF ENVIROMMENTAL VALUE ADDED

FOR GREEN REAL ESTATE

The Sumitomo Trust and Banking Co., Ltd.

Masato Ito

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The 3 Most Important Key Messages

1. Green real estate has possibility to make “added value” .

2. Green building rating systems have possibility to be used as a tool for evaluating ”added value”.

3. We have many opportunities to launch new businesses in order to disseminate green real estate.

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Main global environmental problems and countermeasures of real estate

Global environment problems

Countermeasures Countermeasures in real estate

arena

Examples

Global warming （ Greenhouse gas effect ）

Acid rain （ Nitrogen oxide , sulfur oxide ）

Depletion of ozone layer

Depletion of energy resources

Reduction of Greenhouse gases （ Kyoto Protocol ） Regulations on exhaust gas

Avoid Freon/Halon

Energy saving Recyclable energy

Energy-saving design

Improved insulation, reduction of illumination load, skeleton heat storage, natural ventilation, night purge

Use of recyclable energy

Passive cooling/heating, photovoltaic power generation

Avoid Toxic substances in buildings / facilities

Extinction material, Insulator, refrigerant, others

Ecosystem crisis Protecting ecosystem

Protection and creation of ecosystem

Afforestation, preservation of forest floor, adoption of local vegetation, biotope

Waste Promotion of resource recycling

Introduction of eco-friendly materials, building material circulation, and longevity

Prolongation of building life, circulation of building material, introducing material of low environmental load

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Visualizing the value-added components of sustainable real estate(1)

Three aspects of real estate valuation

Expense characteristics

Marketability Profitability

Two major elements of income approach

Countermeasures from environmental consideration

Deduce worth of environmental value-added components

“The income approach" that reflects "profitability" of real estate tends to be

emphasized

Value indicated byIncome approach (*)＝

( Real estate yield )

* In the case of direct capitalization (description upcoming )

Net income that real estate produces

Capitalization rate(*)

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Visualizing the value-added components of sustainable real estate(2)

Cash E

xpenses

Net income

Cost of NewTenants

Utilities

Leasing &Mgt

Maintenance

Gro

ss Inco

me

Taxes &Insurance

Added value

Net Income

Cost of NewTenants

Utilities

Leasing &Mgt

Maintenance

Taxes &Insurance

Decreasesby

Energy Saving

Decreasesby

Improvement ofDurability

Net IncomeIncreases

If there is a reduction of

property taxes…

If the total income

increases …

“A note on environmental value added for real estate” (Masato Ito) On the occasion tenth anniversary commemorative article for Tokyo Association of Real Estate Appraisers, 2005

Value added by Increasing Net IncomeConventional

Real Estates

Sustainable

Real Estates

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Visualizing the value-added components of sustainable real estate(3)

Marketability

environmental

Capita

lizatio

n ra

te

Risk FreeRate

Added value

Environmental

depreciation

DepreciationRisk

pre

miu

m marketability

Other

Risk FreeRate

When Durability of a building

increases

Sustainable Real Estate will not be affected by future taxation and regulations thanks to its environmental nature.

“Image Improvement Effect” thanks to environmental consideration

“A note on environmental value added for real estate”(Masato Ito)On the occasion tenth anniversary commemorative article for Tokyo Association of Real Estate Appraisers, 2005

Environmental value-added means risk premium reduction

Other

Conventional

Real Estates

Sustainable

Real Estates

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Examples of Monetary Effect (1)

The expense ratio to occupy in total income :35% The ratio of energy expenses to the total

income :10%. Provided that environmentally considered real

estate realizes energy saving by 30% The increase in net income is calculated as follows.

(1 - (35% - 10% * 30%)) / (1 - 35%) - 1=4.6% (1) (2)(1) rate of return after energy-saving realized,(2) normal rate of return

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Examples of Monetary Effect (2)

Building occupies 40% of real estate in terms of price Skeleton occupies 70% of building The differential between the depreciation rates for 50-year

durable skeleton and 100-year durable one:

(1 * 0.4 * 0.7 /50) – (1 * 0.4 * 0.7 /100) = 0.28%

Set the net income of real estate "a" and assumed the capitalization rate of normal real estate at 5.00%

Value indicated by the income approach of real estate for building of 50-year durability:

(V ) = a / 5.00%

Value indicated by the income approach of real estate for building of 100-year durability:

(V ') = a / (5.00% - 0.28%) V '/ V = 1.06

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Sustainability-related Policy in Japan (1)

Toyako Summit The goal of achieving at least 50% reduction of global greenhouse gas emissions by 2050

Reinforcement of Energy Conservation LawTighter regulations to take sufficient measures during new construction and large-scale repair

New subsidy schemesProjects for installation of advanced CO2 reduction facilities and systemsProjects for ultra long-term houses

Dissemination of CASBEE

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Sustainability-related Policy in Japan (2)

Tokyo Climate Change Strategy Reduce Tokyo’s greenhouse gas emissions by 25% from the 2000 level by 2020 adopting cap & trade law

Yokohama CO-DO 30Aims to reduce its greenhouse gas emissions by 30 percent per capita from the 2004 level by 2025, and 60 percent by 2050

Some Japanese local governments have introduced CASBEE system

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Activities 1Connecting CASBEE to Real Estate Appraisal (1)

What is CASBEE?

Comprehensive Assessment System for Building Environmental Efficiency

http://www.ibec.or.jp/CASBEE/english/methodE.htm

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Activities 1Connecting CASBEE to Real Estate Appraisal (2)

L (building environmental loadings)

Q (Building environmental quality and performance)

Building Environmental Efficiency (BEE)

BEE =

Capitalization rate

the net income generated by real estate

Value indicated by Income approach

Value of Property* =

*In the case of the direct capitalization

Improvement ofDurability(Q-2)

Decrease inrepairs

Increase inTenant Income

Improvement ofProductivity(Q-1)

Energy Saving(LR-1)

Decrease of utilities

Reduction of environmental risk

Decrease ofDepreciation

ratio

Sustainability Ranking

Image improvement effect

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CASBEE Items Real Estate Appraisal ItemsIncomeIncrease

CostReduction

RiskReduction

ImageImprovement

Q-1-1 Noise & Acoustics ○

Q-1-2 Thermal Comfort ○

Q-1-3 Lightning & Illumination ○

Q-1-4 Air Quality ○

Q-2-1 Service Ability ○ ○

Q-2-2 Durability & Reliability ○ ○

Q-2-3 Flexibility & Adaptability ○ ○

Q-3 Outdoor Environment on site ○

LR-1 Energy ○ ○

LR-2 Resources & Materials ○

LR-3 Off-site Environment ○

Sustainability Ranking ○

Activities 1Connecting CASBEE to Real Estate Appraisal (3)

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Activities 2Sustainable Real Estate Appraisal

Investigations for the planned building and the site where environmental value-added components are considered.

Analyses of price forming factors from environmental points of view

Comparison with conventional real estate

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Activities 3Consulting for Sustainable Construction

The advice offered concerns energy conservation, landscape-friendly features, longer building lifespans, use of recycling systems, etc.

The Architecture Consulting Department established in June 2006

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Preferential interest rate loans for the purchase of environmentally friendly houses

Preferential housing loan rates which are based on the “CASBEE Kawasaki” and the Apartment Environmental Efficiency Label Program of the Tokyo Metropolitan Government

Activities 4Preferential Loan Rate

for Environmentally Friendly Houses

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Activities 5Energy Conservation Promotion Mechanism

(LLP Structure)

[Owner]Pays the energy costs

for common areas(set baseline）

[Owner]Profit/loss dividend

based on common areacost reduction amount

(members’ levy)

[Tenant]Pays the energy costs

for specific areas(set baseline)

[Tenant]Profit/loss dividend

based on specific areacost reduction amount

(members’ levy)

ESCO businessesEnergy conservation

for buildings(guarantee a fixed percentage

of energy conservation)

Financial institutionsFinancing for

energy conservationconstruction business

Energy Management LLP(limited liability/

pass-through taxation)

Energy Management LLP(limited liability/

pass-through taxation)

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Activities 6 Support for

Contaminated Land Purchase and Revival Fund

Contaminated property

Eco-Land-Fund Green Earth Co., Ltd. (manager)

Land Solution, IncLand Solution, Inc

1. Entrustment

3. Investment

4. Transfer of trust beneficiary right

Investors (including Sumitomo Trust)

Sumitomo Trust

2. Trust beneficiary right

Sumitomo Trust

(sale of property)

5. Purification of property

6. Transfer of trust beneficiary right

(sale of property)

Seller

7. Dividend 4. Loan

Buyer

Cleaned-upproperty

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Activities 7On the way to launching a  “Japanese

Sustainable Real Estate Fund."

Meeting the Standard of Environment Efficiency

e.g. B+ or better CASBEE score is prerequisite

&

For example…

- CASBEE S rating buildings

- Over 50% of Energy Efficiency Ratio

- Ultra long-term houses

- Contributing to preserving Biodiversity

Highlighted sustainability

2020

We present specific products and services of Sumitomo Trust’s Eco Trustution, which provide solutions to ecological problems by using the functions of trusts.

Eco Trust Solution+ +

Eco Trustution

The concept of Eco Trustution

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Global Warming

Brown Field

Others

Preferential Interest Loans for Environmentally Friendly Housing

Environmentally Friendly Project Finance

SRIFinancial Scheme to Promote CSR Procurement

Eco-Land-Fund Investment

Development of Financial Schemes for Promoting Energy Conservation in Tenant Buildings

Establishing a Mechanism for the Promotion of Environmental Consciousness Real Estate (Buildings)

Environmental Consciousness Construction Consulting

Emission Rights Trusts

Environmentally Friendly Project Finance

Waste Disposal

Retail Financial Services Wholesale Financial Services

Eco Trustution Products and ServicesCommercialized products

Products under development

Appraisal of Biodiversity (Utilizing Habitat Evaluation Procedure)Crisis ofBiodiversity

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The Sumitomo Trust’s homepage on Green Real Estate

http://www.sumitomotrust.co.jp/csr/innovation/real-estate/01english.html