Final Results

 12 March 2013

JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

(the "Company")

Consolidated Financial Statements for the Year Ended 30 November 2012

Japan Residential Investment Company Limited (AIM: JRIC) is a closed-ended Guernsey registered company established to make and hold investments in residential property in Japan. The Company, its subsidiaries and entities in which it has a beneficial interest are referred to collectively as the "Fund". The Company presents its audited consolidated annual financial results for the year ended 30 November 2012.

Highlights

·; Portfolio value growth rate accelerated to 2.6% YoY on a like-for-like basis.

·; Unrealisedvaluation gains on investment property totalled £6.9 million (5.3% of NAV) for the year ended 30 November 2012.

·; Profit for the year nearly doubled to £14.7 million, supported by property value growth.

·; Average occupancy for the financial year improved to 95.2% from 94.9% one year prior.

·; Underlying profit for the year totalled £7.5 million or 4.0p per share.

·; Cumulative distributions rose to 3.6p per share in respect of the year ended 30 November 2012.

·; NAV down 2.1% to 69.7p (¥92.1) per share as the decline in the Yen was largely offset by valuation gains and retained underlying profit.

·; Share price discount to NAV narrowed to 15.4% as at 30 November 2012, down from 26.3% one year prior.

Chairman's Statement

I am pleased to present the Company's Annual Report and Consolidated Financial Statements for the year ended 30 November 2012 (the "financial statements"). The Fund consists of a high quality portfolio of residential property located predominantly in the three largest metropolitan areas of Tokyo, Osaka, and Nagoya which it holds for income and capital gain.

The financial year was distinguished by continued strong operating performance and pronounced value growth in the underlying portfolio. The value growth trend that emerged in 2011 accelerated in 2012. Unrealised gains on investment property during the year totalled £6.9 million, representing a 2.6% rise in investment property value and 5.3% of NAV. Maintaining high occupancy and a tight handle on costs, the Fund has consistently demonstrated its capacity to generate substantial amounts of free cash flow.

New leadership in Japan has moved aggressively to address the post financial crisis economic malaise. The large fiscal stimulus budget announced in January 2013, combined with enhanced monetary easing by the Bank of Japan, is expected to spur growth and help propel the economy out of its deflationary orbit. These developments bode well for the prospect of Fund rental income growth and continued portfolio value expansion.

The Board is pleased to welcome Liberum Capital ("Liberum") to the Fund's advisory team. Liberum was appointed Joint Corporate Broker in December 2012, to work alongside Westhouse Securities in support of the Fund's promotion, market making and corporate advisory functions. In light of the pending continuation vote, the Board is seeking to enhance the Fund's profile and maximise dialogue with shareholders as it explores the full range of options available to the Fund.

Results

Profit for the year nearly doubled to £14.7 million (or 7.8p per share), bolstered by an unrealised valuation gain on investment property of £6.9 million. Interest and financing costs on bonds and loans payable increased by £233,000, reflecting a lower average Sterling/Yen exchange rate for the year and the write down of financing costs capitalised after debt refinancing in February 2012. The taxation charge rose due to increased taxable income and a reduced loss carry forward tax shield at the property holding company level. Underlying profit declined 1.2% to £7.5 million (or 4.0p per share) as increases in the interest and taxation charge items were largely offset by higher net rental income.

NAV per share was 69.7p (¥92.1) as at 30 November 2012, down 1.5p over the year. NAV increases of 4.0p in underlying profit and 3.7p from a net gain in fair value adjustments were offset by a 5.6p net foreign exchange loss and 3.6p dividend payment. The Fund does not hedge currency exposure. I wish to emphasise that NAV and the amount of income available for distribution is directly affected by movements in the Yen against Sterling.

The Fund share price discount to NAV has reduced. At the date of this report, the share price is 54.8p, which represents a discount of approximately 15.8%, down considerably from the 26.3% discount one year prior.

Borrowings

At year end, bonds and loans payable totalled £131.6 million against investment property totalling £249.4 million. Gearing was 43.1%, calculated as total debt less cash and restricted reserves as a proportion of total assets. The weighted average interest cost was 1.85%. Interest coverage was 3.4x (underlying profit before interest and tax/interest expense). Of the total debt outstanding, 50.2% was at fixed interest rates, 24.6% was fixed with a swap, and 25.2% was floating. The Fund weighted average debt maturity was 2.7 years.

With property fundamentals improving and increasing competitiveness among lenders, the Fund continues to improve the terms of its arranged debt. In June, Resona Bank provided the Fund five-year debt in the amount of ¥1.2 billion (£9.1 million) against the newly-acquired Lilienberg property and 3 previously unlevered assets. At 30 November 2012, this loan had a floating interest rate of 1.03% and a loan-to-value ("LTV") ratio of 59.6%.

The Fund has two loans totalling ¥6.3 billion (£47.6 million) with an average interest rate of 2.31% maturing on or before 31 January 2014. The Investment Adviser has had initial conversations with the lenders and is confident in its ability to refinance this debt at improved terms.

Distributions

The Directors are pleased to announce a further interim distribution of 1.8p per share to be paid on 26 April 2013 to shareholders on the register on 2 April 2013, bringing the amount paid and payable in respect of the 12 months ending 30 November 2012 to 3.6p per share, an amount which is fully covered by underlying profit of 4.0p.

At the time of writing, 2012 distributions represent an attractive 6.6% yield on the share price of 54.8p, particularly when compared to ten-year Japanese government bonds that currently yield 0.7%. In accordance with the Fund objective of achieving both steady income and capital growth, the Board intends to maintain a prudent and sustainable distribution policy.

Outlook

Since its launch in 2006, the Fund has developed a loyal investor following by providing efficient access to the Japanese residential property market under a UK listing, regulatory, and corporate governance regime. The return prospects for the Fund are heightened by a reflating asset base and stable to increasing portfolio income. In an environment of restrained economic growth and low interest rates, the Fund stands out as an attractive alternative for risk-sensitive investors seeking reliable income.

The recapitalisation of the Fund in June 2010 was followed by successful deleveraging initiatives and the refinancing of debt with extended maturities. The reduction of debt and progressive improvement in financing terms enables the Investment Adviser to enhance portfolio quality and income through new acquisitions. The June purchase of a central Tokyo property on terms that were accretive to both income and NAV signals an opportunity for additional Fund growth.

The operating environment for residential property in Japan remains strong with steady tenant demand and limited new supply heightening competition for quality assets in major urban areas. As previously announced, the Fund has received unsolicited approaches relating to the potential purchase of the Fund portfolio. Following initial discussions, and in light of the upturn in portfolio value, improving liquidity and the overall prospects for the asset class, the Board has decided not to pursue these approaches further at this time.

With increased availability of debt and improved property sector fundamentals, the Fund is moving from a cautious to a more assertive investment approach. In June 2012, supported by a strengthened balance sheet and healthy operating position, the Fund made its first acquisition since 2008. As part of a capital rotation strategy, the Fund is seeking to sell select non-core assets, using the proceeds and moderate amounts of additional gearing to make new opportunistic purchases of high quality, attractively priced properties. This strategy is expected to be accretive from an earnings standpoint while helping to grow NAV.

With a resilient Yen-based income stream from a modestly priced, conservatively leveraged portfolio, the Fund is an attractive alternative for investors seeking stable dividends and asset diversification. The share price discount to NAV has continued to narrow since recapitalisation in 2010. The Board believes the track record of prudent management and stable income generation since launch enhances the prospects for the Fund going forward. As the Fund approaches its seven-year anniversary and the pending continuation vote, the Board, together with the Manager and other advisers, is considering all avenues available to achieve the Fund's objectives and to maximise shareholder value, including weighing the potential realisation of NAV through near-term asset sales against longer term prospects for further income and capital growth.

Raymond Apsey

Chairman

11 March 2013

Report of the Manager and the Investment Adviser

Market

The Japanese economy grew 2.0% in 2012 as strong first half growth was followed by a slowdown in global trade and contraction in domestic demand in the latter part of the year. Personal consumption in Japan has been resilient; however, export growth has been constrained by weak global demand.

In December 2012, Japan's Liberal Democratic Party won a landslide victory in national elections on a platform of more aggressive monetary easing and fiscal stimulus. The new government announced a ¥10.3 trillion (£78.0 billion) fiscal stimulus package in January 2013. The Bank of Japan ("BOJ") has maintained short-term interest rates near zero and steadily expanded its asset purchase programme to ¥101.0 trillion (£764.8 billion) by December 2013. In January, the BOJ adopted a 2% inflation target and an "open-ended" asset purchasing method to achieve this policy goal.

In anticipation of inflation, investors upped allocations to Japanese equities, with an emphasis on real estate companies. Over the 12 months ending February 2013, the TSE REIT Index is up 40% versus gains of 19% for the Nikkei 225. At February end, Japanese REITs were trading at a 26% premium to NAV and offering a 3.7% dividend yield. Initial and secondary offerings in the Japanese REIT ("JREIT") market totalled ¥500.0 billion (£3.8 billion), the third largest annual total on record. An additional ¥323 billion (£2.4 billion) has been raised since the start of 2013. JREIT transaction volume has responded in kind rising 15% YoY to ¥853.0 billion (£6.5 billion) for the six months ended September 2012.

Japanese property markets continue to recover, supported by an improved credit market and a stronger economic environment. Real estate lending is on the rise in Japan. The outstanding balance of real estate loans rose in Q2 2012 for the first time in four years. Lenders jockeying to deploy surplus funds are offering more debt at lower spreads. Banks are currently lending up to 70% of property value for five years at interest rates in the range of 1% to 2%. Japanese residential property market fundamentals remain positive as the sector's stable cash flow continues to draw investors and supply remains tight.

Rental housing construction starts in Japan rose last year for the first time since 2008. New supply in greater Tokyo was up 7.4% YoY in 2012, after reaching a 25-year low in the prior year. Annual supply remains down 30% from pre-credit crisis levels. In spite of a declining population nationwide, major cities including Tokyo, Osaka and Nagoya continue to benefit from net migration to these economic centres. Household formation, especially in the single and childless couple categories, continues to expand nationwide.

Residential property yields rose sharply in 2009 and have since declined at an average annual rate of 30bps in Tokyo, 15bps in Osaka and 10bps in Nagoya. Tokyo residential yields currently range from 4.8% to 5.7%. Lower yields and scarce supply in Tokyo have led to heightened investor activity in the regional markets, including Osaka and Nagoya, where property yields range from 6.0% to 7.0%. We expect falling yields in the Japanese residential property sector to continue to exert upward pricing pressure driven by improving fundamentals, investor asset diversification requirements and generous spreads between property income and financing costs. Unlevered income return on Japanese residential property is currently 5.7%, which represents a premium of 5.0% over the current Japanese ten-year government bond rate of 0.7%.

Portfolio

The Fund's portfolio was externally valued at ¥32.9 billion (£249.4 million) as at 30 November 2012. The rate of property value growth increased to 2.6% on a like-for-like basis during the financial year, compared with a 0.1% increase over the same period one year prior. The portfolio achieved net value gains in each of the major regional categories as the asset value reflation trend, which began with Tokyo in 2011, spread to Osaka, Nagoya and other areas.

The Investment Adviser arranged the purchase of a central Tokyo property, Lilienberg Mejiro Ichibankan, in June for ¥955 million (£7.2 million). This acquisition improves portfolio quality by increasing the allocation to the Tokyo Central 5 Wards. The property is currently valued at ¥1,050 million (£8.0 million).

Operating performance was strong throughout the year as average occupancy reached 95.2%, up 0.3% over the prior year. Investment Adviser initiatives to support occupancy include increasing use of leasing show rooms, open house events, regular canvassing of leasing brokers and close oversight of third party property management functions. The Investment Adviser is working to accelerate further the leasing process and shorten the unit vacancy period.

The Fund itself is well positioned to benefit from rising rents, rendering it a strong hedge against inflation. With standard two year lease terms, 60% of units in the portfolio are either re-let or have their leases renewed with existing tenants each year, thereby allowing the Fund to revise rents upward quickly in a rising market. Improved lease market conditions have helped boost occupancy and resulted in greater rental pricing power. The number of Fund units experiencing price increases is increasing YoY. The rate of decline in rents is falling and annual declines in rents moderated to 0.7% in 2012, down from 1.4% in the prior year.

Property operating expense increased, due primarily to the lower average Sterling/Yen exchange rate during the year, as lower property taxes and leasing costs helped offset higher repair and maintenance expenditures. Efforts to control operating expenses include reducing utility usage and renegotiation of property management, building management and leasing fees, as well as working with municipal authorities to reduce or eliminate off-site parking requirements.

The unleveraged net yield of the portfolio (appraised net operating income over value) ended at 5.8% as at 30 November 2012, down from 5.9% at the same time one year prior.

Summary Portfolio Characteristics

Regional Allocation: Asset locations are well diversified in and around the major Japanese population centres. Of all Fund properties, 86.5% by value are located in the three largest regional markets: Tokyo 46.9%, Osaka 26.1% and Nagoya 13.5%. The remaining 13.5% of properties are located in or within commuting distance to a "key city" with population over 1 million or in a prefectural capital city.

Asset Diversification: The Fund is well diversified with the 10 largest assets comprising less than half of total portfolio value. The largest single asset represents 10.9% of portfolio value. Portfolio diversification and liquidity is reflected in the small average property size of ¥633.3 million (£4.8 million).

Asset Quality: Due to a variety of characteristics including quality of construction, design, amenities and surrounding environment, portfolio assets are expected to remain competitive in the marketplace for the foreseeable future. All properties are held as fee simple ownership and have reinforced concrete structures. The majority of units are Single Type (studio or 1 bedroom) targeting the growing young, single demographic.

Tenant Risk: The portfolio offers very broad tenant diversification with 2,244 rentable units, and the greatest single tenant exposure representing a mere 0.4% of the total rentable area. Due to overall tenant quality and third party guarantees on the majority of leases, uncollectable rent has been limited to less than 0.1% of gross rental income. 

Affordability: Units are concentrated in mid-level rent markets offering broad tenant affordability and appeal. Average monthly rent on residential units was ¥97,000 (£734) as at 30 November 2012. 91.0% of the unit rents are priced below ¥150,000 (£1,136) per month.

Building Age: The Fund boasts a young portfolio with a weighted average property age of 6.6 years at the year end. The modern design and amenities make the properties competitive in the lease market and new properties enjoy lower repair and maintenance costs. No building was built prior to 1981 when the last major update in seismic architectural standards came into effect. The portfolio's oldest building, completed in March 1988, is 25 years old.

Access: All properties are located within walking distance (most within 10 minutes) of a train or subway station.

Outlook

Both the political leadership and the BOJ have voiced an unmitigated commitment to ending deflation in Japan. The outlook for Japanese property has improved as expectations of more aggressive monetary easing increase investor interest in equities and hard assets.

We believe the Fund is at an inflection point in terms of both capital values and income growth. Asset value declines began in 2008, accelerated in 2009, narrowed in 2010. The recovery in Fund asset values that began in 2011 accelerated in 2012. The Japanese residential property market now appears to be in the early stage of a recovery cycle.

Competition among lenders with surplus capital is reducing debt financing costs. Equity capital market gains have further reduced cost of capital for property companies. Land scarcity and low levels of residential construction in recent years have constrained supply. These trends are placing downward pressure on yields, leading to increased prices and improved liquidity.

Japanese residential property values remain low by historical standards, compared to peer cities around the world, and relative to average household income or to achievable rent. Though competition for assets has increased, the Investment Adviser continues to identify opportunities - including those related to lender foreclosures and debt or equity funding maturities - to purchase high quality assets at attractive prices. Based on the macroeconomic and sector fundamentals, we are optimistic for the prospects of income growth and continued reflation in asset values.

KK Halifax Management Limited KK Halifax Asset Management

Manager Investment Adviser

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2012

All items in the above statement are derived from continuing operations.

The profit is attributable to the shareholders of the Company. There are no minority interests.

The accompanying notes form an integral part of these financial statements.

Consolidated Statement of Financial Position

As at 30 November 2012

Consolidated Statement of Changes in Equity

For the year ended 30 November 2012

Consolidated Statement of Cash Flows

For the year ended 30 November 2012

Notes to the Consolidated Financial Statements

For the year ended 30 November 2012

1. General information

The Fund, which comprises the Company, its subsidiaries and the special purpose entities in which it has a beneficial interest, as defined in note 2, has been established to make and hold investments in residential property in Japan.

The Company is incorporated and domiciled in Guernsey. The Company is quoted on the AIM market of the London Stock Exchange.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied consistently from incorporation.

Basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), which comprise standards approved by the International Accounting Standards Board ("IASB") and interpretations approved by the International Financial Reporting Standards Interpretation Committee that remain in effect and The Companies (Guernsey) Law, 2008.

The financial statements have been prepared in Sterling, which is the presentation currency of the Fund, and under the historical cost convention, except for investment property and certain financial instruments which are carried at fair value.

3. Segment reporting

The Board of Directors is of the opinion that the Fund is engaged in a single segment of business, being residential investment property, in one geographical area, Japan. The Board considers that it is the Fund's Chief Operating Decision Maker.

The Fund receives no revenues from external customers, nor holds any non-current assets, in any geographical area other than Japan.

4. Critical accounting estimates and judgements

Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below.

(a) Investment property

The fair values of investment property are determined annually by independent qualified valuers using the income capitalisation basis and the discounted cash flow method.

In determining the fair values, consideration has been given to assumptions that are mainly based on market conditions existing at the year end date and appropriate capitalisation rates. These estimates are regularly compared to actual market data and actual transactions entered into by the Fund. In the event of a sale, the Fund might not realise the valuation price.

(b) Income taxes

The Fund is subject to income taxes in different jurisdictions. Significant judgement is required in determining the Fund's provision for income taxes and deferred taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. Tax provisions are determined based on the Fund's structure and tax legislation existing at the year end date. If a change in either one of these would result in significantly different amounts than those initially recorded, then any such change will impact the tax provisions in the period in which the change occurs. In recognising deferred taxes on revaluations of investment property, consideration has been given to their recoverability during the lifetime of the Fund based on current market data, historical experience and other factors.

(c) Going concern

The Board has exercised its judgement in determining that the Company is a going concern and that the financial statements should therefore be prepared on this basis. In the light of the forthcoming continuation vote, it has considered all the information available to it and has concluded that the going concern basis is appropriate. Should the outcome be to windup the Company, there can be no certainty that the realisation of the assets of the Company would be at the amounts shown in the financial statements. The financial statements do not include any adjustments that would result from the sale failing to realise full value.

5. Financial risk management objectives and policies

The Fund's activities expose it to a variety of financial risks in relation to the financial instruments it uses: liquidity risk, credit risk and market risk (including currency risk and cash flow interest rate risk). The financial risks relate to the following financial instruments: security deposits held, trade and other receivables, cash and cash equivalents, trade and other payables, restricted lender reserves, security deposits payable to tenants, bonds and loans payable, interest rate cap contracts and interest rate swap contracts.

The Fund's financial assets are categorised as either receivables or fair value through profit or loss in accordance with IFRS 7. Cash and cash equivalents, security deposits held, trade and other receivables and restricted lender reserves are categorised as loans and receivables.

The Fund's financial liabilities are categorised as either other liabilities or fair value through profit or loss in accordance with IFRS 7. Security deposits payable to tenants, bonds and loans payable and trade and other payables are categorised as other liabilities.

The Fund's derivative financial assets and liabilities, which comprise interest rate cap and swap contracts, are classified as financial assets at fair value through profit or loss.

(a) Liquidity risk

Liquidity risk is the risk that arises when the maturities of assets and liabilities do not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Fund monitors its risk exposure to shortage of funds using detailed cash flow reporting. This tool considers the maturity of both its cash resources and projected cash flows. Cash balances are placed with financial institutions on a short term basis reflecting the Fund's desire to maintain high levels of liquidity to enable timely completion of investment transactions and the payment of dividends.

The tables below summarise the maturity profile of the Fund's financial liabilities at 30 November based on contractual undiscounted payments:

(b) Credit risk

Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the year end date.

In the event of a default by a tenant, the Fund will suffer a rental shortfall and incur additional costs, including legal expenses in maintaining, insuring and re-letting the property. To mitigate tenant default risk, the Fund obtains third party rental guarantees for the vast majority of leases. Screening procedures are in place to qualify tenants and tenant deposits are obtained where appropriate. The Fund also utilises property managers to monitor the tenants in order to anticipate, and minimise the impact of, defaults by tenants in occupation. The large number of tenants and the existence of lease guarantees effectively mitigate exposure to tenant defaults. The theoretical impact of potential defaults by the master lessee at the year end date was £793,000 (2011: £873,000). The master lessee is a third party contractor that sub-leases the property to end tenants, maintaining deposits and collecting rent incomes from tenants.

With respect to credit risk arising from other financial assets of the Fund, which comprise cash at bank, restricted lender reserves, interest rate cap contracts and trade and other receivables, the Fund's exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying value of these instruments. The Directors believe that the financial institutions that hold these financial assets are financially sound and, accordingly, minimal credit risk exists to these financial assets. Trade and other receivables are neither concentrated nor impaired, with security deposits held by the Fund for rent receivables.

At the year end date, the Fund held its cash balances and restricted lender reserves at banks with a minimum long term credit rating of 'A' from a major internationally recognised credit rating agency. The Fund monitors the placement of cash balances on an on-going basis. At 30 November 2012, the Fund had allocated its cash and cash equivalents amongst various financial institutions and the majority of funds were kept at the following: 28.2% with Royal Bank of Scotland International with a credit rating of A; 18.6% with HSBC with a credit rating of AA-; 18.2% with Bank of Tokyo-Mitsubishi UFJ with a credit rating of A+; and 13.8% with Resona Bank with a credit rating of A (30 November 2011: 17.8% with Royal Bank of Scotland International, credit rating A; 5.6% with HSBC, credit rating AA-; 18.1% with Bank of Tokyo-Mitsubishi UFJ, credit rating A+; 0.0% with Resona Bank; 37.8% with Sumitomo Mitsui Banking Corporation, credit rating A+; and 12.0% with Mizuho Bank, credit rating A+).

(c) Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Financial instruments with floating rates expose the Fund to cash flow interest rate risk. Financial instruments with a fixed interest rate expose the Fund to fair value interest rate risk. The Fund monitors its exposure to interest rate risk on an on-going basis and has entered into interest rate swap contracts to minimise the cash flow interest rate risk related to a portion of its floating rate bonds and loans payable.

At the year end date 50.2% (2011: 11.2%) of the Fund's bonds and loans payable was fixed rate, 25.2% (2011: 20.1%) was floating rate, 24.6% (2011: 26.2%) was fixed with a swap and 0% (2011: 42.5%) was floating rate with a cap. Cash balances and restricted lender reserves are at floating rates.

The effect of a 10 basis point increase/decrease in the Yen interest rate, with all other variables held constant, would be a decrease/increase of £35,000 in total comprehensive income (2011: £15,000), based on the position at the year end date. This calculation takes into account the effect of the movement in interest rates on interest payments and on the fair valuation of the interest rate swap.

6. Fair values

The fair values of the Fund's financial assets and liabilities and their carrying amounts at the year end date are not materially different. The fair value of bonds and loans payable is £132 million (2011: £134 million), compared to their carrying amount of £132 million (2011: £134 million). Market interest rates prevailing at the year end date were applied to the discounted cash flow method to determine the fair value of the bonds and loans.

Fair value hierarchy

The following table analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

·; Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

·; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

·; Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

(e) Currency risk

Currency risk is the risk that the value of financial assets and liabilities will fluctuate due to changes in foreign exchange rates. Currency risk for the Fund arises when future commercial transactions and recognised financial assets and liabilities are denominated in a currency other than Yen, the Fund entities' functional currency. The Fund has some exposure to foreign exchange risk arising from various currency exposures primarily with respect to the Euro and Sterling. The Fund declares and pays dividends in Sterling and therefore the Fund's ability to maintain dividend streams is also exposed to foreign exchange risk as investments and income are in Yen.

The Directors have not implemented any currency hedging policies and do not propose to do so. Substantially all assets of the Fund, and its liabilities, are denominated in Yen. As a result, shareholders should be aware that, while the Fund's financial statements are reported and shares traded in Sterling, they in fact own a Yen-based instrument. The Board has no intention of managing any foreign exchange exposure to shareholders that may result from this.

The Fund's assets and liabilities were 97.4% (2011: 98.8%) Yen-denominated at the year end date and hence the Directors do not consider the operating currency risk to be material.

(f) Capital management

The Fund's objectives when managing capital are to safeguard the Fund's ability to provide returns for shareholders and to maintain an optimal capital structure to minimise the cost of capital.

The Fund actively monitors capital on the basis of the gearing ratio. Fund gearing calculated as net debt (borrowing less cash and cash equivalents and restricted lender reserves) divided by total assets was 43.1% as at 30 November 2012 (43.3% at 30 November 2011). The debt to equity ratio calculated as net debt (borrowings less cash and cash equivalents and restricted lender reserves) divided by total equity was 0.88x (0.88x at 30 November 2011). The Articles of Incorporation place no limit to the amount of borrowings the Fund may incur but restrict the Fund to borrowing up to a maximum of 85% of the value of each investment. Historically, on Admission, the Fund targeted a loan to value ("LTV") ratio of 70%, however in the current environment a more conservative policy has been adopted. The current LTV ratio is 53.5% (2011: 53.1%). The Fund is not subject to externally imposed capital requirements.

6. Significant agreements

The Fund has entered into the following significant agreements:

(a) The Company has entered into an agreement with KK Halifax Management Limited ("KKHML") whereby KKHML provides management services for a fee of £50,000 per annum.

(b) The Japan-domiciled firms of which the Company is the beneficiary have entered into agreements with KK Halifax Asset Management ("KKHAM") whereby KKHAM provides investment advisory services for a management fee of 0.5% of Gross Assets under management calculated and paid quarterly, which is subject to a minimum fee of ¥200 million (£1,595,000) per annum. KKHAM is also entitled to a performance fee equivalent to 20% of the performance of the investments in excess of 10% per annum, which will be calculated on the basis of the average annual return on a three year rolling basis. No performance fee was paid during the year (2011: £Nil).

7. Related party transactions

Transactions between the Company and its subsidiaries which are related parties have been eliminated on consolidation and are not disclosed in this note.

Directors' fees have been disclosed in the Directors' Report. Outstanding fees of £36,375 (2011: £36,375) were payable to Directors at the year end. There are no key personnel working on behalf of the Fund other than the Directors, Manager and Investment Adviser.

The Fund pays fees to KKHML for its management services. The total charge to the Statement of Comprehensive Income during the year was £50,000 (2011: £50,000), of which £12,500 (2011: £12,500) was outstanding at the end of the year.

The Japan-domiciled firms of which the Company is the beneficiary pay fees to KKHAM for its investment advisory services. The total charge to the Statement of Comprehensive Income during the year was £1,595,000 (2011: £1,555,000) of which £Nil (2011: £Nil) was outstanding at the year end. A reimbursement of office rent paid to Colliers International ('CI'), a sister company of KKHAM, on behalf of various Fund SPEs, of £10,000 (2011: £10,000) and a financial advisory fee of £160,000 (2011: £Nil) were paid to KKHAM by the Japan-domiciled firms of which the Company is the ultimate beneficiary.

The Japan-domiciled firms of which the Company is the beneficiary pay fees to CI for its accounting and administrative services. The total charge to the Statement of Comprehensive Income during the year was £464,000 (2011: £452,000) of which £Nil (2011: £Nil) was outstanding at the year end.

8. Underlying profit

9. Gross rental income

The Fund leases out its investment property under operating leases. All operating leases are for original terms of two years or more. Service and management charges include common area maintenance fee income, non-refundable deposits received and other income.

The future aggregate minimum rentals receivable under operating leases as at the year end date are as follows:

10. Property operating expenses

All property operating expenses relate to investment property that generated rental income.

11. Administrative and other expenses

Auditors' remuneration relates entirely to the provision of audit services. In addition, the following fees were earned by the auditors, PricewaterhouseCoopers CI LLP:

12. Taxation charge

The Company is exempt from Guernsey taxation on income derived outside Guernsey and bank interest earned inside Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989, as amended. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

The Fund's SPEs (see note 29) are subject to Japanese withholding tax on profit distributions and interest payments originating from Japan. Deferred taxes have been provided on the undistributed profits of the Japanese entities and interest receivable by the subsidiaries at the expected tax rate on the future payments by the Japanese entities.

The fair value adjustments of the investment property result in a temporary difference between the carrying value of the property and its tax basis. Deferred taxes on these differences are based on the expected tax rate on the future distributions made on disposal of the investment property.

The Fund is liable to Japanese taxation arising on activities of its Japanese operations. The Fund is liable to Dutch tax arising on the activities of its Dutch operations.

The charge for the year can be reconciled to the profit per the Statement of Comprehensive Income as follows:

The applicable country rate above is a blended rate of those applicable in different jurisdictions, weighted by the profits and losses arising therein. No deferred tax assets have been recognised in respect of losses due to the unpredictability of future taxable profits.

13. Earnings per share - basic and diluted

The Fund does not have any dilutive potential shares.

14. Investment property

The total cost (purchase price plus acquisition costs) of the investment property held at the year end date was £316.4 million (¥41.8 billion) (2011: £334.7 million (¥40.8 billion)).

Investment property consists of residential properties that are leased to third parties under operating leases. The fair value of the Fund's investment property at 30 November 2012 has been calculated on the basis of valuations carried out at that date by the following independent professionally qualified valuers with relevant recent experience:

The valuation basis has been fair market value as defined by Japanese Real Estate Appraisal Standards calculated using the income capitalisation approach. This approach consists of both the direct capitalisation method which applies a market capitalisation rate to net operating income ("NOI") and the discounted cash flow method which applies a discount rate to both NOI and a forecast terminal property value. NOI is calculated with reference to in place lease contracts as well as monthly reports of actual property income and expenses.

The Fund has pledged £249.4 million (2011: £246.8 million) of its investment property as security for bonds and loans payable (see note 20). Income generated by the pledged investment property is distributable subject to the Fund meeting its interest obligations on the bonds and loans payable. The bonds and loans payable also include covenants that require maintenance of maximum loan to value ("LTV") ratios ranging between 73% and 80% and minimum stressed debt service coverage ratio tests of between 1.2x and 1.6x.

Any changes in market conditions will directly affect the profit or loss reported through the Statement of Comprehensive Income. A 5% increase in the value of the investment property as at 30 November 2012 would have increased total comprehensive income for the year by £12.5 million (2011: £12.7 million). A decrease of 5% would have had an equal but opposite effect. It is expected that increases or decreases would be primarily the result of changes in capitalisation rates, the primary variables in the fair value calculations.

16. Interest rate derivatives

The Fund has utilised derivative financial instruments, in the form of interest rate cap contracts and interest rate swap contracts, to hedge its exposure to interest rate risk.

The interest rate cap contracts hedged the interest payments on the bonds issued to ORIX Corporation against movements in Japanese Yen LIBOR rates. These contracts expired on 21 May 2012.

An interest rate swap contract was taken out on 29 March 2010 in order to hedge floating rate interest payments on ¥4,327 million (£32.8 million) of the loan payable to Mizuho Corporate Bank. Under the terms of the contract the Fund pays interest quarterly at a fixed rate of 2.349%. The contract matures on 30 December 2013.

17. Trade and other receivables

All amounts are receivable within 90 days. A total of £74,000 (2011: £86,000) has been outstanding for more than 90 days, against which a provision of £16,000 (2011: £20,000) has been made for impairment in respect of amounts not expected to be recovered.

18. Restricted lender reserves

Restricted lender reserves, which belong to the Fund, comprise bank deposits that are held as reserves in lender-controlled accounts against future expenses and liabilities including interest, taxes, capital expenditure, insurance and tenants' deposits. The restricted lender reserves are governed by lender agreements that stipulate the terms under which the Fund may withdraw funds.

19. Cash and cash equivalents

20. Bonds and loans payable

The bonds and loans payable are secured by investment property with a fair market value of ¥32,933 million (£249.4 million) (2011: ¥30,088 million (£246.8 million)) at the year end date.

All floating interest rates are reset every three months based on the prevailing base rate (3 months TIBOR) at the time.

During the year the Fund made the following changes to its portfolio:

·; In February 2012, refinanced ¥7,000 million (£53.0 million) of debt outstanding to ORIX Corporation and DB Trust Bank with new loans from Resona Bank. The new debt matures in January 2017;

·; In June 2012, arranged a 5 year term loan in the amount of ¥1,205 million (£9.1 million) from Resona Bank against a newly purchased central Tokyo property and three previously unleveraged Fund assets. This loan matures in June 2017; and

·; Amortised ¥90 million (£0.7 million) of debt outstanding to Mizuho Bank, reducing the outstanding balance to ¥3,120 million (£23.6 million) at the year end.

Total debt is stated net of unamortised financing costs. Gross debt is ¥17,612 million (£133.4 million) (2011: ¥16,497 million (£135.3 million)).

21. Deferred tax assets and liabilities

Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through future taxable profits is probable.

The Fund did not recognise deferred income tax assets of ¥20 million (£148,000) (2011: ¥63 million (£516,000)) in respect of losses amounting to ¥46 million (£352,000) (2011: ¥150 million (£1,229,000)) that can be carried forward against future taxable income.

Losses amounting to ¥11 million (£82,000), ¥29 million (£220,000) and ¥6million (£50,000) expire in 2013, 2014 and 2015 respectively (2011: ¥107million (£876,000), ¥36 million (£299,000) and ¥7million (£54,000) expire in 2013, 2014 and 2015 respectively).

22. Trade and other payables

23. Share capital

The total authorised number of ordinary shares is 250 million, each with a par value of 10p. Ordinary shares carry no right to fixed income but are entitled to dividends as declared from time to time. Each ordinary share is entitled to one vote at meetings of the Company.

24. Share premium

On 12 January 2007, the Royal Court of Guernsey confirmed the reduction of the share capital of the Company by way of cancellation of the Company's share premium account, which under Guernsey company law at the time was an undistributable reserve. An amount of £85,067,000 was transferred to the special reserve, which is distributable. With effect from 1 July 2008, Guernsey company law no longer makes any distinction between distributable and non-distributable reserves, requiring instead that a company pass a solvency test in order to be able to make distributions to shareholders.

25. Special reserve

The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey company law, including the buy back of shares and the payment of dividends.

26. Distributions paid from special reserve

27. Commitments

The Fund did not have any capital commitments at the year end date (2011: Nil).

28. Contingent liabilities

The Fund did not have any contingent liabilities at the year end date (2011: Nil).

29. Fund entities

The Fund consists of the Company and the following entities:

30. Post year end events

There were no post year end events which require disclosure in these financial statements.

31. Copies of Annual Report and Consolidated Financial Statements

The Financial Statements for the year ended 30 November 2012 will be sent to shareholders in due course and will be available from the Company's registered office at Sarnia House, Le Truchot, St Peter Port, Guernsey GY1 4NA and on its website www.jricl.com.