Half Yearly Report

30 July 2014

Japan Residential Investment Company Limited

(the "Company")

Consolidated Financial Statements for the Six Months Ended 31 May 2014

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 unaudited consolidated financial results for the six months ended 31 May 2014.

Highlights

· Portfolio value increased 1.8% in Yen terms over the six months ended 31 May 2014 compared with 1.6% over the prior six month period. Investment property values rose 3.5% during the twelve months ended 31 May 2014 on a like-for-like basis.

· Unrealised valuation gains on investment property totalled £2.8 million (2.3% of NAV) for the 6 months ended 31 May 2014.

· Despite the Yen decline, which saw the average Yen rate against Sterling fall by 17.8% for the six months ended 31 May 2014 against the same period one year prior, underlying profit per share remained stable in Sterling terms. In Yen terms, underlying profit per share increased 20.8%.

· Gearing increased to 52.0% at period end, up from 37.1% at the financial year end.

· NAV per share was 58.9p at period end, up from 58.7p at the financial year end.

· Distribution of 1.8p per share in respect of the six months ended 31 May 2014.

The values of assets and liabilities are converted from Yen to Sterling at the period end exchange rate. Items in the Statement of Comprehensive Income are converted at the average exchange rate for the period.

(1) Total debt (as specified in note 9 to the financial statements) 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, foreign exchange and other capital and one-off items (see note 6). The Fund uses underlying profit in its internal financial reporting and provides this analysis as additional information.

Enquiries:

Chairman's Statement

We entered the first half of 2014 having successfully completed the Company's first expansionary equity capital raise since the Fund's launch in 2006. By March-end, proceeds together with surplus cash were fully deployed in the purchase of nine assets resulting in an increase of total assets under management ("AUM") of more than a third. This growth has resulted in increased earnings, greater asset diversification, and improved economies of scale.

The Japanese residential property market continues to represent a remarkable opportunity for income generation and capital appreciation. We believe that we have established a unique platform for allocating capital to this sector in a transparent, cost-efficient manner and in accordance with global investment management and corporate governance standards.

In June 2014, the Company announced a decision to pursue a listing of its shares on the premium segment of the Official List of the UK Listing Authority and admission to trading on the London Stock Exchange plc's Main Market for listed securities this calendar year. In light of its successful operational track record and continued growth, the Company believes that the Official List is the appropriate platform and will help to raise the profile of the Company, enhance liquidity and appeal to a broader range of investors.

Since establishment, regulatory and tax regimes in which the Fund operates have continued to evolve. This includes introduction of the Alternative Investment Fund Managers Directive ("AIFMD") and the Foreign Account Tax Compliance Act ("FATCA"). Having regard to these and similar developments, the Board has reviewed the Fund's structure and operation with the aim of optimising the position of the Company and its Shareholders while maintaining regulatory compliance and a robust operating structure. The Fund has established procedures to ensure compliance with FATCA; and, the required registrations have been completed. With respect to AIFMD, neither the Company nor the Manager is domiciled in the European Economic Area ("EEA"), so they will only be subject to the requirements of the AIFMD when seeking to market the Company's shares to investors within the EEA. The Company has procedures in place to ensure compliance with AIFMD requirements for the marketing of the Company's shares.

Results

Gross rental income for the six months ended 31 May 2014 was £8.4 million, down 2.6% from the same period one year prior due to the higher Sterling/Yen exchange rate over the period. New property acquisitions which contributed to higher gross rental income in Yen terms should continue to generate year-on-year ("YoY") income growth in the second half of the year. Profit for the period was £6.3 million, down £1.4 million from the comparative six month period ended 31 May 2013. Substantial reductions in interest and financing costs partially offset the absence of profits from asset disposal activity during the period as well as the fair value loss on an interest rate cap contract and increased taxation charges. Underlying profit increased 15.0% to £3.6 million for the period or 1.7p per share due largely to substantial reductions in interest and financing costs. In Yen terms, underlying profit per share increased 20.8%, but was largely unchanged in Sterling terms.

Net asset value per share increased by a modest 0.2p to 58.9p during the six months ended 31 May 2014. Contributions from underlying profit of 1.7p and gains on fair value adjustments of 1.2p were largely offset by dividends paid in the amount of 1.8p and a net foreign exchange loss of 0.9p. 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

Following the full deployment of surplus cash and proceeds from the recent equity capital raise, the Fund had bonds and loans payable in the amount of £158.0 million against investment property totalling £268.9 million as at 31 May 2014. The loan-to-value ("LTV") ratio was 59.4%, 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 52.0%. The weighted average annual interest cost was 0.91%. The Fund's weighted average debt maturity was 4.4 years.

The Fund assumed new debt totalling ¥6,850 million (£40.2 million) during the period. This debt was collateralised by nine properties with a total value of ¥11,110 million (£65.2 million) at the time of purchase. This seven-year debt financing had a blended average interest rate of 0.75% per annum. Of this debt, 19.7% was fixed rate and the balance was floating rate with a cap at 0.4% such that the total blended average interest rate on all this new debt will not exceed 0.90% over its seven-year tenor.

Credit markets in Japan remain robust as lending terms continue to improve for borrowers, including increased leverage, longer tenors and lower interest rate spreads. The Fund has no debt maturing prior to January 2017.

Distributions

The Board has approved an interim distribution of 1.8p per share in respect of the first six months of the financial year to 31 May 2014. This amount is 94.7% covered by underlying profit during the period with the shortfall being covered by cash reserves. The interim distribution will be paid on 8 September 2014 to shareholders on the register on 6 August 2014.

Income from a substantially enlarged portfolio with lower financing costs should support higher levels of underlying profit going forward and enable the Company to return to a fully covered dividend, assuming current foreign exchange rates are maintained. 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.

In accordance with policy established on admission of the Company to trading on AIM, the Directors do not intend to implement a policy of hedging the Yen against Sterling, the Company's presentation currency. Accordingly, shareholders should appreciate that the Company is essentially a Yen investment and that the net asset value in Sterling and the amount of income available for distribution in Sterling are directly affected by movements of Sterling against the Yen.

At the time of writing, the 2014 first interim distribution represents an annualised yield of 6.2% on the share price of 58.3p, compared with ten-year Japanese government bonds that currently yield 0.52%.

Outlook

Bank of Japan efforts to shake the economy out of a deflationary orbit appear to be working. The combination of low rates on Japanese government bonds and inflation which after adjusting for recent tax hikes is currently in the region of 1.3% has brought Japan into a period of negative real interest rates. This is causing a wide spectrum of investors from private individuals to large pension funds to begin shifting assets out of cash and government bonds and into risk assets including real estate.

The Fund holds a diversified portfolio of 58 high quality residential properties with a property level yield of 5.4%. The attractiveness of these assets is heightened by the low interest rate environment. With annual interest costs of 0.91%, the portfolio is able to generate substantial amounts of free cash flow. We believe that investors will continue to be drawn to this sector in search of high levels of current income and good prospects for capital growth.

The Company's current 6.2% dividend compares favourably to residential Japanese Real Estate Investment Trusts ("JREITs"), whose shares trade at a 4.1% dividend yield and at a price to book value multiple of 1.3x. The Board believes that the prospects for the Company would be enhanced by a move of the listing of its shares onto the Main Market and will submit this recommendation for the approval of shareholders. It is expected that the placing of its shares on the Official List would best enable the Company to build on its solid management track record, to continue its growth and to enhance the liquidity and rating of the Company's shares.

Raymond Apsey

Chairman

29 July 2014

Report of the Manager and the Investment Adviser

Market

Japan is demonstrating steady economic improvement, with GDP expected to grow 1.5% in 2014. A tightening labour market and higher incomes are supporting consumer sentiment. Unemployment was 3.5% in May, the lowest level since December 1997. The closely-tracked ratio of jobs to job seekers rose to 1.09, the highest level in 22 years. Signs of wage growth are emerging, with large companies increasing base salaries and bonuses and head-of-household earnings growing 1.1% year-on-year.

Following aggressive monetary stimulus, the Bank of Japan has made significant progress towards its 2.0% inflation target. Consumer prices increased 1.3% in June, excluding factors related to the consumption tax hike that came into effect in April. With yields on ten-year Japanese government bonds as low as 0.52%, negative real interest rates are pushing investors to increase allocations to risk assets, including equities and real estate.

To stimulate sustained growth, the government is targeting a reduction in corporate taxes. Other initiatives include corporate governance reform, labour reform and increased participation by females and foreigners in the work force.

Recovery in Japanese property values continues, supported by increased investor demand and readily available debt financing. Japanese real estate transaction volume increased 73% during the year ending 31 March 2014 to ¥4.6 trillion (£27.0 billion) due to heightened activity from JREITs, real estate companies and foreign funds. Real estate capital markets have remained strong, with residential JREITs currently trading at a 4.1% dividend yield and 1.3x price to book value.

Increased demand and a general scarcity of investment properties is compressing yields and putting upward pressure on asset prices. Land prices in major cities have risen, gaining 1.7% in the Tokyo 23 Wards and 1.0% in the six large cities for the year ending March 2014. Land values remain substantially below both recent and long-term peaks, down 13% from pre-GFC levels in the six large cities and down 67% from levels in 1990.

Sales prices on condominiums continue to rise in metropolitan Tokyo. Used condominium prices rose 5.0% for the year ending 31 May 2014. This compares with a decline of 1.0% over the same period one year prior. Supply is increasing to meet demand, but remains constrained by rising land prices and a shortage of construction workers. Rental housing construction starts in Greater Tokyo increased 15% to 129,000 units during the year ended 31 March 2014, but remain well below long term annual supply averages.

Portfolio

The Fund portfolio is substantially larger today following the acquisition of nine additional properties between 31 December 2013 and 31 March 2014, with a total value of ¥11,110 million (£65.2 million) at the time of purchase. The Fund currently holds 58 properties (2,717 rentable units). By value, 88% of the portfolio is located in the three largest regional markets of Tokyo, Osaka, and Nagoya.

Occupancy performance has been good, averaging 95.1% for the six months ending 31 May 2014. This is down from 95.8% during the period one year prior and roughly in line with the 95.2% occupancy rate achieved during the six months ended 31 May 2012. The portfolio occupancy rate was 93.9% as at 30 June 2014.

The Fund portfolio was externally valued at ¥45,852 million (£268.9 million) as at 31 May 2014. This represents an increase of ¥11,732 million (£68.8 million) or 34.4% over the portfolio valuation six months prior, reflecting both valuation gains on properties held and new acquisitions during the period. On a like-for-like basis, the investment property value growth rate was 3.5% for assets held during the year ended 31 May 2014, compared with a 3.9% increase over the prior twelve month period. The scarcity of assets and lower yields in Tokyo continue to support investment demand in regional markets. While the portfolio registered valuation gains in each of the major regional categories, the largest gains in percentage terms were in Nagoya (+4.0%) followed by Tokyo (+3.8%), Osaka (+3.3%) and Other (+2.3%). During the six months ended 31 May 2014, the growth rate increased to 1.8% on a like-for-like basis, compared with 1.6% over the prior six month period.

The unleveraged net yield of the portfolio (appraised net operating income over value) ended at 5.4% as at 31 May 2014, down from 5.6% six months prior. The falling yield reflects valuation gains throughout the portfolio as well as the higher allocation to Tokyo assets following recent acquisitions. The regional allocation of the property portfolio by value as at 31 May 2014 was: Tokyo 59%; Osaka 19%; Nagoya 10%; and Other 12%. (Regional allocation as at 30 November 2013 was: Tokyo 48%; Osaka 26%; Nagoya 13%; and Other 13%). With ten-year Japanese government bonds currently yielding 0.52%, property value growth expectations are supported by the substantial yield premium they offer over the risk-free rate.

At the property portfolio level, total return performance has outperformed industry benchmarks. The Fund portfolio recorded a total return of 10.0% in the year ending November 2013, outperforming the Investment Property Databank (IPD) Benchmark by 1.6%. The Fund portfolio was the second best performing portfolio in the IPD Universe in terms of total return over this period. Over the seven years ended November 2013, the Fund portfolio has outperformed the IPD Benchmark by 1.2% p.a..

Outlook

Despite the recent upturn in valuations, property prices remain substantially below recent and historic peak levels. The Fund portfolio, valued at a 5.4% yield, is currently 12% below purchase price. Assets sold in 2013 - albeit assets at the smaller, more liquid end of the portfolio spectrum - were sold at a 25% premium to appraised value. It is the view of the Manager and of the Investment Adviser that we are in the early stage of a sustained recovery cycle for residential property in Japan.

KK Halifax Management Limited KK Halifax Asset Management

Manager Investment Adviser

Condensed Interim Consolidated Statement of Comprehensive Income

For the six months ended 31 May 2014

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

The total comprehensive income/(loss) 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 2014

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 2014

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 2014

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 2014

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 2013.

Going concern

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 Directors have a reasonable expectation that the Fund has adequate resources to continue in operational existence for at least twelve months from the date of approval of this document. The Fund has high levels of liquidity and has refinanced all of its short-term debt such that it now has no further debt maturing until January 2017.

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 2013.

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 2013.

New accounting policies effective and adopted

The following new standards have been applied for the first time in these financial statements:

• IFRS 7 (amended), "Financial Instruments: Disclosures" (effective for periods commencing on or after 1 January 2013);

• IFRS 10, "Consolidated Financial Statements" (effective for periods commencing on or after 1 January 2013);

• IFRS 12, "Disclosures of Interests in Other Entities" (effective for periods commencing on or after 1 January 2013);

• IFRS 13, "Fair Value Measurement" (effective for periods commencing on or after 1 January 2013).

In addition, the IASB completed the 2009-2011 Cycle of its annual improvements project in May 2012. This project amended a number of existing standards and interpretations effective for accounting periods commencing 1 January 2013. In particular, IAS 34, "Interim Financial Reporting", has been amended to require interim financial statements to include certain specific disclosure requirements of IFRS 7, "Financial Instruments: Disclosures" and IFRS 13, "Fair Value Measurement".

The adoption of these standards and amendments has had no material impact on the financial statements of the Group, except that IFRS 13 will result in extended disclosures in the annual financial statements for the year ended 30 November 2014 in respect of the investment property portfolio.

2. 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.

The Directors of the Company received fees for their services. The total charge to the Statement of Comprehensive Income during the period was £79,000 (2013: £72,750) of which £42,625 (2013: £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 (2013: £25,000), of which £Nil (30 November 2013: £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 KK Halifax Asset Management Limited ("KKHAM") for its investment advisory services. The total charge to the Statement of Comprehensive Income during the period was £621,398 (2013: £689,735) of which £Nil (30 November 2013: £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 £4,802 (2013: £4,506) was paid to KKHAM by the Japan-domiciled firms in which the Company is the ultimate beneficiary.

The Japan-domiciled firms in 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 period was £175,973 (2013: £234,942) of which £Nil (30 November 2013: £Nil) was outstanding at the end of the period.

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, and that segment reporting is therefore not applicable. 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. 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 2013. There have been no changes in risk management policies since the year end.

Fair value hierarchy

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

Interest rate cap and swap contracts are valued on a mark-to-market basis, based on a price supplied by market participants. Similar contracts are traded in active markets and the values used reflect actual transactions in similar instruments.

There have been no transfers between levels of the fair value hierarchy in the current or comparative period.

5. Earnings per share

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

6. Underlying profit

Underlying profit excludes gains/(losses) from fair value adjustments, foreign exchange and other capital and one-off items. The Fund uses underlying profit in its internal financial reporting and provides this analysis as additional information.

7. Investment property

The total cost (purchase price plus acquisition costs) of the investment property held at the period end date was £310.9 million (¥53.0 billion) (30 November 2013: £248.8million (¥41.7 billion)).

All of the Fund's investment property is pledged as security for bonds and loans payable (see note 9). 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 include covenants that require LTV ratios to be maintained at or below 80% and minimum stressed debt service coverage ratio ("DSCR") tests of 1.2x 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. Derivative financial instruments

The Fund utilises interest rate cap contracts to hedge its exposure to cash flow interest rate risk associated with its floating rate bank loans, not for speculative purposes. Changes in the fair value of derivatives are recognised in the Statement of Comprehensive Income.

9. Bonds and loans payable

The bonds and loans payable are secured by investment properties with a fair market value of ¥45.9 billion (£268.9 million) (30 November 2013: ¥34.1 billion (£203.5 million)) at the period end date.

During the period, the Fund made the following additions to its portfolio:

· In March 2014, obtained debt financing in the amount of ¥5.5 billion (£32.3 million) in the form of a loan from Resona Bank, Ltd. The new debt matures in March 2021; and

· In March 2014, obtained further debt financing in the amount of ¥1.4 billion (£7.9 million). This loan has been extended by licensed lending businesses in Japan that are affiliates of US-based Prudential Financial, Inc. This new debt also matures in March 2021.

Total debt is stated net of unamortised finance costs. Gross debt is ¥27.2 billion (£159.8 million) (30 November 2013: ¥20.4 billion (£121.6 million)).

10. Taxation

Deferred tax liabilities

The taxation charge for the period of £457,000 (31 May 2013: £366,000) comprises withholding tax charged on undistributed income and interest payable of £457,000 (31 May 2013: £297,000) and Japanese corporate income tax of £Nil (31 May 2013: £69,000).

11. Commitments

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

12. Events after the reporting date

On 9 June 2014, the Company announced a decision, subject to shareholder approval, to pursue a listing of its entire listed share capital on the premium segment of the Official List of the UK Listing Authority and admission to trading on the London Stock Exchange plc's Main Market for listed securities this calendar year.

There were no other significant post period end events which require disclosure in these financial statements.