Half Yearly Report

22 July 2013

Japan Residential Investment Company Limited ("the Company")

Consolidated Financial Statements for the Six Months Ended 31 May 2013

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 presents its unaudited consolidated financial results for the six months ended 31 May 2013.

Highlights

·; Portfolio value growth rate accelerated to 3.9% YoY on a like-for-like basis. Property values rose 1.4% during the six months ended 31 May 2013.

·; Gain on investment property disposals totalled £949,000 following the sale in April of two non-core assets at a 20.2% premium to appraised value.

·; Earnings per share rose to 4.1p for the six months ended 31 May 2013, up from 2.2p for the same period one year prior on the back of valuation gains on investment property and realised gains on property disposals.

·; Portfolio occupancy increased to 95.8% for the six months ending 31 May 2013, from 95.2% over the same period one year prior.

·; Gearing(1) fell to 43.6% at period end, down from 45.9% six months prior.

·; NAV per share was 62.4p at period end, down from 69.7p six months prior following a sharp decline in the Yen/Sterling exchange rate.

·; Distribution of 1.8p per share in respect of the six months ended 31 May 2013.

Sterling denominated values of assets and liabilities as at 31 May 2013 are based on an exchange rate of ¥152.676/£1 (31 May 2012: ¥120.642/£1). Items in the Statement of Comprehensive Income are converted at the average exchange rate for the period of ¥144.730/£1 (31 May 2012: ¥125.410/£1).

(1) Total debt less cash and restricted reserves as a proportion of total assets less cash and restricted reserves.

(2) Profit excluding gains/(losses) from fair value adjustments, realised gains on disposal of investment property, foreign exchange and other capital items. The Fund uses underlying profit in its internal financial reporting and provides this analysis as additional information (see note 5).

Enquiries

Chairman's Statement

The Fund was established in 2006 with a simple goal of stable dividends and capital growth through investment in income-generating residential properties in major markets throughout Japan. Having successfully navigated the challenges in 2008 brought on by the contraction in credit markets, the Fund today benefits from a solid balance sheet, high stable occupancy and the ongoing reflation in underlying property values.

From this vantage point, I am pleased to report that the continuation resolution was successfully passed on 19 July 2013. The Board recognises the support from those shareholders that have been with us since the Fund's inception as well as the more recent investor endorsements of the Fund's property portfolio, business strategy, and management team.

The foundation of the Fund is a high quality, diversified portfolio with a resilient income stream. We intend to build upon this successful track record to enhance operating performance and position the Fund for growth. The Fund has a tripartite business strategy that includes (1) refinancing near term maturity loans at improved terms, (2) capital rotation to enhance portfolio quality and operating efficiency and (3) the pursuit of Fund growth through the issuance of new equity capital for greater liquidity and improved economies of scale.

Results

Profit for the period increased to £7.7m for the six months ended 31 May 2013, up from £4.1m for the same period 12 months prior, supported by unrealised valuation gains on investment properties and gains on property disposals. Earnings per share rose to 4.1p, up from 2.2p during the same period 12 months prior. Net rental income declined 12.4% to £6.7m as growth in Yen-based portfolio income failed to offset the lower Yen/Sterling exchange rate over the period. Administrative expenses were largely flat as translation gains from Yen-based administrative costs were offset by one-time charges and increased professional fees related to continuation. Taxation charges increased as taxable income rose following profitable asset sales and higher Yen-based operating income. Underlying profit after tax was £3.1m, down 17.9% from £3.8m during the same period 12 months prior.

Net asset value per share decreased by 7.3p to 62.4p during the six months ended 31 May 2013. Contributions from underlying profit of 1.7p, gains on property sales of 0.4p and gains on fair value adjustments of 1.7p were offset by dividends paid in the amount of 1.8p and negative net foreign exchange differences of 9.3p. The Fund's NAV and the amount of income available for distribution in Sterling are directly affected by movements in the Yen against Sterling.

Borrowings

At 31 May 2013, bonds and loans payable totalled £111.4 million against investment property totalling £213.6 million. The loan-to-value ('LTV') ratio was 52.1%, calculated as total debt as a proportion of appraised portfolio value. Gearing, calculated as total debt less cash and restricted reserves over total assets less cash and restricted reserves, was 43.6%. The weighted average annual interest cost was 1.82%. The Fund's weighted average debt maturity was 2.2 years.

The Fund has three loans totalling ¥9.0 billion (£58.8 million) - approximately half of total outstanding debt - maturing on or before 29 September 2014. This debt has a total LTV ratio of 48.3%, a weighted average outstanding maturity of 10 months, and an average annual interest rate of 2.1%. The Investment Adviser is currently engaged with lenders regarding this debt and is confident in the Fund's ability to achieve an early refinancing on favourable terms.

The Fund's two most recent loans were raised in February and June 2012 for 5 years with 60% LTV and have annual interest rates of approximately 1.6% fixed and 1.0% floating respectively. Based on this track record, the Investment Adviser believes that a reduction in interest expense and additional improvements in the debt profile of the Fund could be achieved by the early refinancing of its loans with near term maturity. Such a refinancing is expected to free up additional equity capital to make earnings accretive investments in new residential properties.

Distributions

The Board has approved an interim distribution of 1.8p per share in respect of the first 6 months of the financial year to 31 May 2013. This amount is 93.0% covered by underlying profit during the period with the shortfall being covered by cash reserves. The interim distribution will be paid on 30 August 2013 to shareholders on the register on 2 August 2013.

Underlying profit is expected to improve following the aforementioned debt refinancing, at which point the Fund intends to resume payment of a fully covered dividend. 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. The Directors do not currently intend to implement a hedging policy and, accordingly, the amount of income available for distribution will be affected by movements in Yen against Sterling.

At the time of writing, the 2013 first interim distribution represents an annualised yield of 5.7% over the share price of 63.0p, compared against 10-year Japanese government bonds that currently yield 0.8%.

Outlook

Continued strong operating performance and extended gains in underlying asset values are providing meaningful returns to shareholders. We expect this to continue as the recovery cycle in Japanese property markets gains its footing and the macro-level fiscal and monetary stimulus filters down to the property sector. Recent share price and trading activity demonstrates strong institutional demand for the Fund. The Investment Adviser continues to identify opportunities to purchase high quality, well-located residential properties at attractive prices. Fundamentals remain favourable for residential investment in major Japanese markets. We anticipate steady progress toward our investment goals and look forward to maintaining a close dialogue with investors as milestones are achieved.

Raymond Apsey

Chairman

19 July 2012

Report of the Manager and the Investment Adviser

Market

The Japanese economy is responding to strong fiscal and monetary stimulus. GDP growth of 1.6% is forecast for 2013. Business sentiment has improved on the back of increased private consumption and improved corporate outlook. Industrial production is up and firms are planning higher levels of capital investment. The consumer price index stopped falling in May. Though employers remain reluctant to increase base wages, a significant number have announced increases in summer bonuses.

Increased investor demand and fewer high quality properties on the market are helping push valuations higher. With a lower risk profile, broader anticipation of capital gains, and scarcity of investible product, investors are purchasing at lower yields. After rising sharply in 2009, residential property yields have since declined at an average rate of 15bps per year in the top three metropolitan markets of Tokyo, Osaka and Nagoya.

Falling yields are leading to increasing values on income-generating Japanese residential property. At the same time, owners of residential property are reluctant sellers given widely held expectations of further capital value growth. Currently, yields on residential properties range from 4.8% to 5.4% in Tokyo and 6.0% to 7.0% in Osaka and Nagoya.

Operating performance remains strong as steady demand and limited new supply are supporting rents and pushing occupancy rates higher. Rental housing supply in greater Tokyo was up 7.4% YoY in 2012, but remains at a near 25 year low and down 30% from pre-credit crisis levels. Residential rents in post-credit crisis Japan, down 3.5% nationwide since 2007, have been remarkably stable. The Investment Adviser expects moderate and sustained GDP growth going forward - conditions which should be accompanied by inflation and positive growth in rental income.

Lending to the Japanese property sector increased in 2012 for the first time since the credit crisis. In Q1 2013, new lending to real estate rose 16.1% YoY. The borrower's market for real estate collateralised debt continues to improve. Banks are currently lending up to 70% of property value for five years at interest rates in the range of 1% to 2%.

Portfolio

Since its launch in 2006, the Fund has assembled a modern, high quality Japanese residential property portfolio of 50 properties (2,206 rental units) in and around the major population centres. The portfolio is well-managed with total return outperforming the IPD (Investment Property Databank) Benchmark by 1.2% per annum over the five years ending October 2012.

The Fund portfolio was externally valued at ¥32,614 million (£213.6 million) as at 31 May 2013. During the six months ended 31 May 2013, portfolio value increased 1.4% on a like-for-like basis. The rate of property value growth rose to 3.9% for the year ended 31 May 2013 on a like-for-like basis, compared with a 0.1% increase over the same period one year prior. Property value gains totalled ¥1,225 million (£9.1 million) on a like-for-like basis during the period. Yield compression and reduced property operating expenses were the primary factors supporting valuation gains.

The unleveraged net yield of the portfolio (appraised net operating income over value) was 5.7% as at 31 May 2013, down from 5.9% at the same time one year prior. The Investment Adviser expects falling yields to continue to exert upward pressure on Japanese residential property prices driven by improving fundamentals, investor asset diversification requirements, and generous spreads between property income and financing costs.

Fund portfolio occupancy has been improving as steady demand and limited new supply have combined for a tighter leasing market. For the six months ending 31 May 2013, average occupancy increased to 95.8% from 95.2% over the same period one year prior. The Investment Adviser continues to press forward with new initiatives aimed at maintaining and increasing occupancy and rent levels. These include regular canvassing of local leasing brokers, model rooms, common area enhancements, and promotional campaigns.

As part of a capital rotation strategy, the Fund seeks to sell selected non-core assets, using the proceeds and moderate amounts of additional gearing to make new opportunistic purchases of high quality, attractively priced properties. This capital rotation strategy commenced in June 2012 with the purchase of a Tokyo Central 5 Ward asset for ¥955 million (£6.3 million) at a 5.6% prospective yield. This was followed by the sale in April 2013 of two Tokyo 23 Ward assets for a combined sale price of ¥930 million (£6.1 million), offering a 4.3% yield to purchasers and representing a 20.2% premium over November 2012 appraised value.

Over half of the Fund's portfolio properties are valued under ¥500 million (£3.3 million). Smaller assets such as these are in high demand from private investors seeking to allocate money to alternative investments for stable income, diversification and tax planning purposes. By divesting smaller assets and reinvesting into larger assets for improved efficiency and yield, this strategy is expected to be accretive from an earnings standpoint while helping to grow NAV and improve prospects for capital gains.

Outlook

The Investment Adviser has identified several strategic initiatives aimed at enhancing shareholder value. The refinancing of loans with near term maturities is expected to improve the Fund debt profile with longer average maturity and lower interest costs while releasing capital for reinvestment. The Fund will continue to execute on its stated capital rotation strategy, by disposing of non-core assets and reinvesting proceeds into select, high quality properties to enhance NAV and EPS growth. The third initiative of increasing the size of the Fund through an equity capital raise is expected to create greater economies of scale and liquidity in the Fund's shares, whilst enabling the Fund to target a wider range of strategic opportunities in the future.

Under the framework of "Abenomics", policy makers, with the support of the Bank of Japan, are determined to move the Japanese economy from the sidelines to centre stage in terms of global economic performance. The underlying property fundamentals are solid for the Japanese residential sector. Asset prices are low relative to historic values, long term affordability metrics and in light of the strong yield over financing costs. Property yields have been falling since 2009, yet remain attractive relative to the underlying risk profile of the asset class, the low cost of debt financing and the fact that values have been stable to increasing for 24 months.

The Japanese residential property market in general, and the Fund portfolio in particular, offer good total return prospects underpinned by high levels of in place income. In the view of the Manager, the sector is providing outsized returns relative to its underlying risk profile. In a global economic environment characterised by slow growth, we expect the attractiveness of this asset class and the high Yen-denominated yield it generates, will increasingly be recognised and support higher valuations in the future.

Condensed Interim Consolidated Statement of Comprehensive Income

For the six months ended 31 May 2013

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

The total comprehensive (loss)/income is attributable to shareholders of the Company. There are no minority interests.

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

Condensed Interim Consolidated Statement of Financial Position

As at 31 May 2013

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

Condensed Interim Consolidated Statement of Changes in Equity

For the six months ended 31 May 2013

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

Condensed Interim Consolidated Statement of Cash Flows

For the six months ended 31 May 2013

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

Notes to the Condensed Interim Consolidated Financial Statements

For the six months ended 31 May 2013

1. Basis of accounting

Basis of Preparation

These condensed interim consolidated financial statements ('the financial statements') have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting'.

The financial statements do not include all the information and disclosures required in annual financial statements, and should be read in conjunction with the Fund's annual financial statements for the year ended 30 November 2012.

Going concern

Further to disclosures made in the Company's Annual Report, on 19 July 2013 the shareholders of the Company voted in favour of a resolution releasing the Directors from the obligation to hold an extraordinary general meeting to wind up the Company. As a result the life of the Company is now indefinite, subject to a continuation vote to be held in 2018 and subsequently in every fifth calendar year thereafter.

The Fund has bonds and loans in the sum of £39.1 million maturing within one year of the reporting date, resulting in net current liabilities of £23.6 million. However, the Directors are confident in the Fund's ability to achieve an early refinancing on favourable terms.

Accordingly, the Directors are satisfied that it is appropriate to adopt the going concern basis in preparing the financial statements.

Significant accounting policies

Except as described below, the accounting policies applied by the Fund in these interim financial statements are the same as those applied by the Fund in its annual financial statements as at and for the year ended 30 November 2012.

Significant judgements and estimates

The preparation of the financial statements requires the Directors to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements. If in the future such estimates and assumptions, which are based on the Directors' best judgement at the date of the financial statements, deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.

In preparing the financial statements, the significant judgements made by management in applying the Fund's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the financial statements as at and for the year ended 30 November 2012.

New accounting policies effective and adopted

The following new standards, which have had no material effect on the Fund, have been applied for the first time in these financial statements:

·; IAS 1 (amended), "Presentation of Financial Statements" (effective for periods commencing on or after 1 July 2012); and

·; IAS 12 (amended), "Income Taxes" (effective for periods commencing on or after 1 January 2012).

2. Related party transactions

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

The Directors of the Company received fees for their services. The total charge to the Statement of Comprehensive Income during the period was £72,750 (2012: £72,750) of which £36,375 (2012: £36,375) was outstanding at the end of the period. There are no key personnel working on behalf of the Fund other than the Directors, Manager and Investment Adviser.

The Fund pays fees to KK Halifax Management Limited ('KKHML') for its management services. The total charge to the Statement of Comprehensive Income during the period was £25,000 (2012: £25,000), of which £12,500 (30 November 2012: £12,500) was outstanding at the end of the period.

The Japan-domiciled firms in which the Company is the ultimate beneficiary pay fees to CI for its accounting and administrative services. The total charge to the Statement of Comprehensive Income during the period was £234,942 (2012: £227,800) of which £Nil (30 November 2012: £Nil) was outstanding at the end of the period.

The Japan-domiciled firms in which the Company is the ultimate beneficiary pay fees to KK Halifax Asset Management Limited ('KKHAM') for its investment advisory services. The total charge to the Statement of Comprehensive Income during the period was £689,735 (2012: £797,384) of which £Nil (30 November 2012: £Nil) was outstanding at the end of the period. A reimbursement of office rent paid to Colliers International ('CI'), a sister company of KKHAM, on behalf of various Fund SPEs, of £4,506 (2012: £5,201), a financial advisory fee of £Nil (2012: £79,738) and a fee for preparation of summary due diligence documents of £35,929 (2012: £Nil) were paid to KKHAM by the Japan-domiciled firms in which the Company is the ultimate beneficiary.

3. Segment reporting

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

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

4. Financial risk management

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).

These financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Fund's annual financial statements as at 30 November 2012. There have been no changes in risk management policies since the year end.

5. Underlying profit

Investment property disposal adjustments include tax charges, financing costs and legal expenses related to disposals of investment property during the period. Profit on disposal of investment property is excluded from underlying profit, therefore these associated costs have also been excluded.

6. Earnings per share

The Fund does not have any share options, warrants or other potentially dilutive instruments currently in issue.

7. Investment property

The total cost (purchase price plus acquisition costs) of the investment property held at the period end date was £267.7 million (¥40.9 billion) (30 November 2012: £316.4 million (¥41.8 billion)).

All of the Fund's investment property is pledged as security for bonds and loans payable (see note 8). Income generated by the pledged investment properties 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 ('DSCR') tests of between 1.2x and 1.6x free cash flow at the date of this Interim Report. All debt is compliant with lender LTV and DSCR requirements. The Board monitors compliance with these requirements on a regular basis.

8. Bonds and loans payable

9. Taxation

Deferred tax liabilities

The taxation charge for the year of £366,000 (31 May 2012: £238,000) comprises withholding tax charged on undistributed income and interest payable of £297,000 (31 May 2012: £238,000) and Japanese corporate income tax of £69,000 (31 May 2012: £Nil).

The bonds and loans payable are secured by certain investment properties with a fair market value of ¥32.6 billion (£213.6 million) (30 November 2012: ¥32.9 billion (£249.4 million)) at the period end date.

10. Commitments

The Fund did not have any capital commitments at the period end date.

11. Events after the reporting date

On 21 June 2013 the Company was notified that on that day the Company's largest shareholder had sold its entire shareholding, representing 27.4% of the Company's issued share capital, to a number of new and existing institutional shareholders, at a price of 59.0p per share.

On 19 July 2013 the shareholders of the Company voted in favour of a resolution releasing the Directors from the obligation to hold an extraordinary general meeting, no later than 13 September 2013, to wind up the Company. As a result the life of the Company is now indefinite, subject to a continuation vote to be held in 2018 and subsequently in every fifth calendar year thereafter.