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Portfolio Structure Policy

Set forth below are the portfolio structure policies and investment standards for individual properties for the REIT Management Company and its internal regulations that serve as asset management guidelines.

1. Proportion of Investment in Assets

NAF invests mainly in rental apartments, and currently limits investment in hospitality facilities to a maximum of 10 percent of the total portfolio value on an acquisition price basis.

2. Investment Areas

NAF emphasizes Greater Tokyo (see Note 1, below), mainly the 23 wards of Tokyo, and Other Major Cities (see Note 2, below) in investing in rental apartments, while it focuses on major cities throughout Japan and their suburbs in investing in hospitality facilities. NAF invests in accommodation assets located in areas where there is substantial demand, depending on the characteristics of each asset.
By region, at least 80 percent of NAF's assets, including rental apartments and hospitality facilities, are located in the 23 wards of Tokyo on an acquisition price basis. NAF studies regional characteristics and tenant needs to invest in properties with suitable building plans and characteristics.

(Note 1) "Greater Tokyo" refers to Tokyo, Kanagawa, Chiba and Saitama.
(Note 2) "Other Major Cities" refers to each of the urban areas of Sapporo, Sendai, Nagoya, Osaka, Kyoto, Kobe, Hiroshima and Fukuoka cities.

3. Investment Standards

The REIT Management Company identifies potential investments and decides whether or not to invest in assets on the basis of the asset management guidelines summarized in the table below.

Item Standard
Investment amount In principle, the value of each property must be at least \1 billion. However, NAF may invest in properties below \1 billion after taking into account property characteristics and earnings potential and certain relevant matters.
Ownership interests In principle, NAF shall hold ownership interests of whole properties. However, NAF may invest in co-ownership; compartmentalized ownership; leaseholds, including fixed-term leaseholds; and limited proprietary rights of the land after taking into account property characteristics.
Building structure Building structures shall be reinforced concrete, steel reinforced concrete, steel (excluding light-gauge steel), and a combination of these structures. However, NAF may invest in wooden buildings (fireproof buildings only) if NAF deems it appropriate in the light of the characteristics of the use of buildings.
Earthquake resistance standards Buildings shall conform to or have antiseismic resistance equivalent to the New Earthquake Resistance Standards, which have been in force since the 1981 revision to the Building Standards Law.
PML value
(probable maximum loss)
In deciding whether or not to purchase a building for which PML is at or above 15 percent, implementation of additional antiseismic reinforcing work, additional earthquake insurance and other relevant matters must be considered.
Uncompleted properties In principle, NAF shall acquire properties that are already producing stable rental income. However, NAF may conclude contracts where properties are delivered at the same time or immediately after completion during the period from the time when building confirmation is obtained until the time of their completion, although incomplete, that are expected to carry minimum risk in respect to completion, delivery and leasing.
Properties under development NAF shall not invest in investment properties, where it acquires or leases the land and builds a structure on it (excluding reconstruction and extension of assets under management).

4. Due Diligence Standards

The REIT Management Company selects assets to invest in only after due diligence covering economic feasibility, physical condition and legal status.
Due diligence includes various written assessments and reports from third-party specialists. Based on the results of such due diligence, the REIT Management Company in principle undertakes investigation of the items listed below in order to make investment decisions as a result of comprehensive review. The REIT Management Company also conducts due diligence on hospitality facilities covering issues similar to those described in the table below.

Item Issues Investigated
Market survey
  • 1. Current residential environment in the relevant region
  • 2. Demand and supply for rental housing in the relevant region
  • 3. Rental housing competition trends in the relevant region
  • 4. Markets rents in the relevant region
  • 5. Discount rate and rate of return
Tenant survey
  • 1. Tenant creditworthiness and rent income amount
  • 2. Purpose of use and confirmation that tenants are not members of anti-social forces
Survey of
earnings and
related issues
  • 1. Current property management costs
  • 2. Development of medium-to-long-term plan for repair and renovation expenses
  • 3. Development of cash flow projections
  • 4. Verification that property is consistent with portfolio strategy
  • 1. Street conditions, access to major transportation
  • 2. Convenience and access to public facilities
  • 3. Primarily visual confirmation of status of borders between adjacent tracts and cross-border issues
  • 4. Living conditions including view, light, ambient noise and airflow
  • 5. Presence of unpleasant facilities
  • 6. Future development plans in the surrounding area
equipment, and
  • 1. Building structure, age and construction company of property and other related matters
  • 2. Layout, ceiling height, interior specifications (including ceiling, walls and floors), materials used for the interior and exterior, maintenance of facilities including sanitary facilities, ventilation facilities, electrical facilities, elevators and parking
  • 3. Need for immediate repairs
  • 1. Status of compliance with related regulations
  • 2. Actual management status
  • 3. Quality of the property management company and contract terms
resistance and
  • 1. Antiseismic resistance that meets the New Earthquake Resistance Standards or equivalent resistance
  • 2. Checks by the construction company, architectural firm, construction engineering company and construction confirmation and inspection body; confirmation of authenticity of the structural calculation sheets
  • 3. Earthquake PML
soil and other
  • 1. Investigation of whether the building contains hazardous materials
  • 2. Investigation of land use records and soil contamination
Rights and
related issues
Investigation shall be conducted as to whether the previous owner had obtained the enforceable real right.
  • 1. Issues regarding ownership interests and mortgage
  • 2. Lease contract terms (including confirmation of area of rental units)
  • 3. Any documentation related to confirmation of border or agreement regarding cross-border issues
  • 4. Permission for occupancy of roads under the Traffic Law
  • 5. Compliance with laws and regulations related to environmental preservation
  • 6. Existence of factors impeding the enforceability of the previous owner's rights
In case of complicated relation of rights, the following matters, among others, shall be investigated (the complicated relation of rights includes relationships between NAF and others in cases such as co-ownership; compartmentalized ownership; leaseholds, including fixed-term leaseholds; and limited proprietary rights of the land).
  • 1. (If the concerned right is leasehold) the perfection of such leasehold and the absence of any right which supersedes such leasehold
  • 2. The registration status of the relevant right of site; the limitation on separate transfer of such right of site from the building thereon and the registration status of such limitation; share of such right
  • 3. Measures to be taken to ensure the maintenance of deposits; reserve rules or measures based on long-term renovation plan
  • 4. Existence of agreement on prohibition of division of co-ownership property and registration status of such agreement; appropriate treatments in case of request for division of co-ownership property or sales of co-ownership share; (possible) claims against or from other co-owners
  • 5. Status of compartment of compartmentalized ownership
  • 6. Security arrangements established prior to involvement of NAF and assumption of any encumbrances or obligations in connection thereto
  • 7. Terms of special agreement with the lessor, the land lease right holder, other compartmentalized ownership holders, other co-owners and any other relevant parties
  • 8. Characteristics of the lessor, the land lease right holder, compartmentalized ownership holders, co-owners or other relevant parties (for example, corporations or individuals)
  • 9. Terms of trust agreement in case the relevant rights are beneficial interests in real estate trust