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                    Challenger Kenedix Japan Trust
                    Annual Report 2008




                Challenger Kenedix Japan Trust
                (ARSN 124 068 971)
                Responsible Entity
                Challenger Listed Investments Limited
                (ABN 94 055 293 644)
                (AFSL 236887)
                  Contents
                  Highlights                                                1
                  Investment strategy                                       2
                  Chair’s letter                                            3
For personal use only

                  Fund Manager’s report                                     4
                  About Kenedix                                             7
                  Portfolio summary                                         8
                  Property summaries                                       10
                  About Challenger                                         17
                  Corporate governance statement                           18
                  Directors’ report                                        25
                  Financial report                                         34
                  Unitholder information                                   73
                  Additional information                                   76
                  Directory                                               IBC




                  Important notice
                  Challenger Listed Investments Limited            Nothing in this Report should be considered       Any past performance information provided
                  (ABN 94 055 293 644) (AFSL 236887)               a solicitation, offer or invitation to buy,       in this Report is not a reliable indication of
                  (CLIL) is the Responsible Entity of Challenger   subscribe or sell any, or a recommendation        future performance.
                  Kenedix Japan Trust (ARSN 124 068 971)           of, financial products.
                                                                                                                     CLIL does not receive any specific
                  (CKT).
                                                                   All reasonable care has been taken to             remuneration for any general advice which
                  CLIL, as the Responsible Entity of CKT,          ensure that the facts stated and opinions         may be provided to you in this Report.
                  has prepared this Annual Report (Report)         given in this Report are fair and accurate.       However, CLIL and CMSL receive trustee and
                  based on information available to it.            To the maximum extent permitted by law,           management fees as issuer and manager of
                  The information in this Report should be         the recipient releases CLIL, each member          CKT, respectively. For more details on fees,
                  regarded as general information only.            of the Challenger Group, their directors,         please refer to the Financial Report contained
                  Nothing contained in this Report constitutes     officers, employees, representatives and           in this Report and additional information
                  investment, legal, tax or other advice. It has   advisers from any liability (including, without   on the Australian Securities Exchange (ASX)
                  been prepared without taking account of          limitation, in respect of direct, indirect or     website www.asx.com.au. Financial advisers
                  any person’s objectives, financial situation      consequential loss or damage, or loss or          may receive fees or commissions if they
                  or needs. Recipients should, before acting       damage arising by negligence) arising in          provide advice to you or arrange for you to
                  on any such information, consider its            relation to any recipient relying on anything     invest in a Challenger product (including
                  appropriateness, having regard to their          contained in or omitted from this Report.         CKT). CLIL and its associates may have an
                  objectives, financial situation and needs, and                                                      interest in the financial products referred to
                                                                   Any forward looking statements included
                  seek the assistance of their financial or other                                                     in this Report and may earn fees or other
                                                                   in this Report involve subjective judgement
                  licensed professional adviser before making                                                        benefits as a result of transactions in any
                                                                   and analysis and are subject to significant
                  any investment decision.                                                                           such financial products.
                                                                   uncertainties, risks and contingencies,
                  Any investment in CKT is subject to              many of which are outside the control of,         Members of the Challenger Group and their
                  investment risk and other risks, including       and are unknown to, CLIL. In particular,          officers and directors may hold securities in
                  possible loss of income and principal            they speak only as of the date of these           CKT from time to time.
                  invested. None of CLIL, Challenger               materials, they assume the success of CKT’s
                  Management Services Limited                      business strategies, and they are subject to
                  (ABN 29 092 382 842) (AFSL 234678)               significant regulatory, business, competitive
                  (CMSL), Challenger Financial Services Group      and economic uncertainties and risks. Actual
                  Limited (ABN 85 106 842 371) (Challenger)        future events may vary materially from
                  or any other member of the Challenger            forward looking statements and assumptions
                  Group gives any guarantee or assurance as        on which those statements are based. Given
                  to the performance of CKT or the repayment       these uncertainties, recipients are cautioned
                  of capital.                                      not to place undue reliance on such forward
                                                                   looking statements.



                  Cover photo: Life Kema, Osaka, Japan
                                                                                                        Challenger Kenedix Japan Trust Annual Report 2008   1




                        Highlights
For personal use only


                        CKT delivered profit from            T t l assets at 30 June
                                                            Total     t t                         CKT continues to operate
                        operating activities of             2008 were $687 million.               comfortably within financial
                        $21.7 million in FY08 (first         Borrowings were ¥34.8 billion         covenants. Importantly, no
                        full year of operations since IPO   ($356 million). Fund gearing          covenants relate to market
                        in April 2007), underpinned         (debt to assets) was 49.3%, and       capitalisation or currency
                        by net property income of           interest cover ratio of 4.3 times.    movements, and CKT has no
                        $26.2 million. Net profit after      No debt facility refinancing           cash collateral requirements.
                        tax attributable to members         before April 2012.
                        was $17.0 million.




                        Hedging is effectively used for     CKT’s property portfolio grew         P      ti
                                                                                                  Properties are quality retail
                        risk management. While the A$       significantly in FY08 with the         properties in major urban and
                        exchange rate has ranged from       addition of 8 properties to           suburban locations across Japan,
                        around 92 Yen at IPO to over        take the total number to 20.          primarily focused on providing
                        100 Yen, CKT’s combination          Occupancy is 100% with a              services and non-discretionary
                        of income hedges with capital       weighted average lease expiry         goods such as fresh foods to
                        hedges of around 40% has            of 16.3 years.                        Japanese household consumers.
                        significantly reduced the impact                                           In CKT’s view, these properties
                                                            All properties independently
                        of FX movements.                                                          are well positioned to ride out
                                                            valued during FY08.
                                                                                                  economic cycles.
                        Net tangible assets (NTA) per       10 properties were revalued
                        unit of $1.91 at 30 June 2008.      as at 30 June 2008 with values
                                                            remaining steady. The full-year
                                                            impact of property revaluations
                                                            resulted in a gain of $7.8 million.




                              h                          i t ib ti     id
                        CKT has a unique and successful Distribution guidance for FY09
                        management platform and         of 17.2 cents per unit.
                        relationship with Kenedix, our
                        JV partner company on the
                        ground in Japan.
                                                                                                                               2




                  Investment strategy
For personal use only




                  CKT aims to provide investors with secure and
                  sustainable income returns and the potential
                  for capital growth through investments in, and
                  active management of, a portfolio of quality
                  Japanese retail properties sourced and managed
                  by Kenedix – a leading Japanese real estate
                  manager.
                                                           Lease expiry profile (by income)*




                  1. Assumes tenants do not terminate leases prior to specified lease term; some leases can be terminated at
                  the tenant’s option prior to the end of the specified lease term
                                                                                                           Challenger Kenedix Japan Trust Annual Report 2008   3




                        Chair’s letter

                        Dear unitholders                            In February 2008, CKT issued a              I would like to acknowledge the work
                                                                    distribution guidance for FY09 of           of the CLIL Board. I am fortunate to
For personal use only
                        Since taking on the role of Chair           17.2 cents per unit. This guidance          have around me a team of highly
                        of the board of Challenger Listed           was re-affirmed when CKT released            experienced executive and non-
                        Investments Limited (CLIL), the             its FY08 results on 22 August 2008.         executive Directors, focused on
                        responsible entity of Challenger            With the unit price of CKT closing          ensuring that CKT is positioned to
                        Kenedix Japan Trust (CKT), in               at 98.5 cents per unit on 22 August         maximise returns to its unitholders.
                        December 2007, much has changed             2008, the FY09 distribution represents      Further details on the activities of
                        within the financial and capital             a yield of 17.5% on the closing price.      the CLIL Board and its Committees
                        markets across the globe.                                                               can be found in the expanded
                                                                    The CKT management team and                 corporate governance section in
                        The year ended 30 June 2008 has             staff have worked diligently during         this Annual Report.
                        been described by commentators as           the past year to further strengthen
                        the worst in a quarter of a century.        the underlying fundamentals of the          Finally, I thank you for your continued
                        We have witnessed the cumulative            properties. I congratulate the team         support of CKT, and I look forward
                        impact of the sub-prime fallout, a          and thank them for the hard work            to reporting to you on the future
                        credit crisis, inflation spurred by rising   required to achieve such a result in        performance of our Fund.
                        oil prices, and rising interest rates       this challenging environment.
                        in Australia.                                                                           Brenda Shanahan
                                                                    Following eight acquisitions, the           Chair
                        The listed property trust (LPT) market      portfolio now consists of interests
                        was significantly impacted by these          in 20 quality properties located
                        global and domestic issues, and             in regional urban and suburban
                        investor confidence was dealt a              centres across Japan. The portfolio
                        further blow with the downfall of           has an occupancy rate of 100%
                        several high-profile domestic LPT            and a weighted average lease expiry
                        participants. The S&P/ASX200 LPT            duration of 16.3 years.
                        accumulation index fell 36.4% across
                        the year, while the S&P/ASX300              CKT is in sound financial shape and
                        LPT accumulation index fell 37.7%.          is well-positioned with borrowings
                        CKT fell 50.76% across the year.            of ¥34.8 billion ($356 million) and
                                                                    a gearing ratio (debt to total assets)
                        Whilst this fall in unit value is very      of 49.3%. CKT continues to operate
                        disappointing, the results and              within its financial covenants,
                        performance of CKT in its first full         and has no covenants linked to
                        year of operations were pleasing.           market capitalisation.
                        Profit from operating activities was
                        $21.7 million, and net profit after          I encourage all unitholders to read the
                        tax attributable to unitholders was         Fund Manager’s report that follows,
                        $17.0 million. CKT delivered a total        and to review the portfolio details
                        distribution to unitholders of 13.6         and financial reports also contained
                        cents per unit.                             in this document.




                                                                                                                    Bre
                                                                                                                       nda
                                                                                                                  Cha      Sha
                                                                                                                     ri       nah
                                                                                                                                 an
                                                                                                                                                                                4




                  Fund Manager’s report

                  Dear unitholder                                             $6.6 million and operating expenses                      close of FY07. Unitholder contributed
                                                                              of $4.7 million, CKT delivered a                         equity increased to $284.6 million
For personal use only
                  I am pleased to report to you again                         profit from operating activities of                       and includes the second instalment
                  this year on the performance of                             $21.7 million.                                           of 50 cents per unit paid in
                  Challenger Kenedix Japan Trust (CKT).                                                                                February 2008.
                                                                              After adjusting profit from operating
                  CKT reported profit from operating                           activities for unrealised movements,                     Capital management
                  activities of $21.7 million and net                         tax expenses and minority interests,                     At its initial public offering, CKT raised
                  profit after tax of $18.0 million1                           CKT recorded a net profit after                           equity of $300 million, with $225
                  for the 12 months ended 30 June                             tax attributable to unitholders of                       million available in the first instalment
                  2008 (FY08).                                                $17.0 million. Unrealised movements                      and a further $75 million (50 cents
                                                                              included a mark-to-market revaluation                    per unit) paid in February 2008.
                  This is a pleasing result for CKT in                        of interest rate and currency hedges                     Funds from the second instalment
                  our first full year of operations. It                        of ($6.1) million, and revaluation of                    were combined with Yen borrowings
                  highlights the strength of CKT’s                            investment properties of $7.8 million.                   to fund the settlement of acquisitions
                  portfolio, with properties well located                                                                              completed in the second half of FY08.
                  in good catchments with long-term                           CKT’s total realised income available
                  leases in place to established tenants                      for distribution was $20.4 million,                      CKT’s gearing (debt to total assets)
                  who predominantly focus on meeting                          equating to a distribution of 13.60                      ratio was 49.4% at 30 June 2008,
                  the non-discretionary needs of local                        cents per unit for the financial year.                    up from 45.9% in the prior year.
                  consumers. Despite challenging global                       CKT confirmed that the distribution                       However, CKT has surplus cash of
                  market conditions, we have exceeded                         for the half year ended 30 June 2008                     $12.4 million that if applied against
                  IPO expectations and have delivered                         of 7.55 cents per unit will be paid on                   the debt facilities would reduce
                  distributions in line with guidance.                        28 August 2008 to unitholders on the                     gearing to 48.4%. The current
                                                                              register at record date.                                 gearing level is marginally below
                  Through Kenedix’s knowledge of the                                                                                   CKT’s preferred range of 50-60%.
                  property market and its efforts on                          CKT has amended its distribution
                  the ground in Japan we have added a                         policy, now electing to pay                              At 30 June 2008, Japanese
                  total of ¥18.3 billion ($179.9 million2)                    distributions from profit from                            borrowings totalled ¥34.8 billion, and
                  in assets since listing, taking our                         operating activities after providing                     unused loan facilities were ¥1.5 billion.
                  portfolio from 12 properties at IPO to                      for maintenance capital expenditure.                     Importantly, no CKT borrowing facility
                  20 today. All properties were diligently                    FY09 maintenance capital is forecast                     expires until April 2012.
                  assessed to ensure full compliance                          to be around 0.12 cents per unit.
                  with our investment criteria.                               Noting this change, CKT has                              CKT has hedged 96% of its total
                                                                              reaffirmed its distribution guidance                      borrowings for a weighted average
                  Our distributions in FY08 totalled                          of 17.2 cents per unit which is fully                    term of 3.9 years through fixed
                  13.6 cents per unit. And we have                            paid from operating cash flows.                           interest facilities and interest rate
                  reaffirmed our distribution guidance                                                                                  derivatives. The weighted average
                  for FY09 of 17.2 cents per unit                             Financial position                                       all-in cost of borrowings is 1.96%.
                  underpinned by strong underlying     At 30 June 2008, CKT’s gross
                  portfolio performance and accretive  assets were $687.2 million, an                                                  Loan-to-valuation (LTV) and debt
                  acquisitions made since IPO in       increase of $217.9 million or 46%                                               service cover ratios apply to CKT’s
                  April 2007.                          from the prior year, reflecting the                                              borrowing facilities from both
                                                       expansion of the property portfolio                                             Japanese banks – Shinsei and SMBC.
                  Financial results                    from 12 to 20 properties. Net                                                   CKT is trading comfortably within
                  Financial performance3               assets attributable to unitholders                                              covenants and, with surplus cash
                  For FY08, CKT generated net property was $286.8 million (compared to                                                 applied against the Shinsei facility,
                  income of $26.2 million and other    $215.4 million at 30 June 2007),                                                headroom is capable of supporting a
                  income of $6.9 million – primarily   with net tangible assets (NTA)                                                  fall in property values of around 17%.
                  interest income on cross-currency    attributable to unitholders of $1.91
                  swaps. After borrowing costs of      per unit compared to $1.44 at the




                  1
                      All currency in Australian dollars unless stated otherwise.
                  2
                      Converted at 30 June 2008 spot rate of ¥101.7 to A$1.00.
                  3
                      CKT listed in April 2007. As this is the first full year reporting period, no prior full year comparatives are available.
                                                                                                                               Challenger Kenedix Japan Trust Annual Report 2008                                      5




                        Foreign currency hedging                                Property revaluations                                Distribution guidance of 17.2 cents
                        CKT enters into income and capital                      CKT revaluation policy is for 50%                    per unit for FY09
For personal use only
                        hedges to mitigate the volatility in                    (by value) of the property portfolio
                                                                                                                                                                                                               17.2
                        currency movements on both income                       to be revalued every half year.
                        distributions and unitholders’ equity.                  Consequently, all properties were                                                                     13.6
                                                                                                                                                                                                       12.19




                                                                                                                                      cents per unit
                        CKT does not speculate on foreign                       independently valued during FY08,                                                            11.64



                        exchange movements.                                     resulting in a gain of $7.8 million
                                                                                across the full year.
                        In line with CKT’s hedging policy,
                                                                                                                                                       1.42       1.42
                        foreign currency hedges are in place                    At 30 June 2008 10 properties were
                        over 100% of estimated distributions                    revalued. Valuation-to-valuation                                          FY07                   FY08                      FY09

                        for a period of five years, and a                        the net value of these properties                                             IPO forecast       Actual distribution      Guidance


                        further 90% for years six and seven.                    remained relatively unchanged with                    FY09 guidance assumes no further acquisitions

                        Capital hedges are also in place over                   the weighted average cap rate moving
                        approximately 40% of CKT’s net                          out to 4.88% from 4.85%. This result
                        investments in Japanese assets.                         reflects the quality of CKT’s property
                                                                                portfolio with their long lease terms,
                        Portfolio update                                        strong tenant covenants and steady
                        CKT’s portfolio comprises quality                       and predictable underlying cash flows.
                        neighbourhood shopping centres
                        located in urban and suburban                           Rent reviews
                        areas of Japan. This sector exhibits                    The first rent review within the
                        attractive investment characteristics,                  portfolio occurred in June this
                        with favourable risk-adjusted returns                   year. Rent for Life Asakusa remains
                        relative to other property investment                   unchanged as anticipated as a
                        classes, and with potential to create                   consequence of the review. No rent
                        value for unitholders through                           reviews are scheduled in FY09.
                        the application of Kenedix’s local
                        market knowledge and property                           Acquisitions
                        investment skills.                                      Focusing on maximising returns to
                                                                                CKT, Kenedix identified a number of
                        The portfolio is well diversified                        high-grade properties with potential
                        across a range of retailer types,                       for inclusion in the CKT portfolio.
                        tenants, cities and regions. It is                      Following extensive due diligence
                        100% leased to established anchor                       during FY08, CKT announced its
                        tenants, primarily focused on                           interest in eight acquisitions to take
                        supplying non-discretionary goods                       the portfolio from 12 properties
                        to Japanese households and capable                      at 30 June 2007 to 20 as at
                        of producing steady income through                      30 June 2008.
                        economic cycles.
                                                                                As outlined at the time of each
                        Properties are leased on a long-                        acquisition, each property has
                        term basis. The portfolio’s weighted                    attractive investment characteristics
                        average lease term to expiry (WALE)                     and is rented to an established
                        is 16.3 years4 compared to 16.0 at the                  Japanese retailer or service provider.
                        prior year-end.




                        4
                            Assumes tenants do not terminate leases prior to specified lease terms. Some leases can be terminated at the tenant’s option prior to the end of the specified
                            lease term.
                                                                                                                                                       6




                  Fund Manager’s report (continued)

                   Geographic diversification (by value)1    Outlook                                        In these challenging times of volatility
                   As at 30 June 2008                                                                       in the capital and financial markets,
                                                             Japan is not immune from current
For personal use only

                                                             global issues with recent indicators           our conservative approach to
                                                             pointing to a slowing economy.                 conducting business should provide
                                                             Despite this, Japan is reasonably              added security to investors seeking
                                                             well placed to manage a slowdown.              security with high-yielding returns.
                                                             Importantly, CKT’s portfolio is                Thank you for your ongoing support
                                                             weighted towards supermarket-                  of CKT, especially during these times
                                                             anchored neighbourhood shopping                of uncertainty in global markets.
                                                             centres focused on non-discretionary
                                                             expenditure (fresh food and daily      I look forward to working with

                  ■       39% Tokyo
                                                             needs) which typically generate steady CKT staff and our partner in Japan,
                                                             sales through the economic cycles.     Kenedix, to deliver strong results and
                  ■        4% Hiroshima
                                                                                                    attractive returns over the coming
                  ■        2% Sendai
                                                                                                    12 months.
                  ■       10% Saitama
                                                             CKT continues to perform to
                  ■        7% Kyushu
                                                             expectations and remains on target
                                                             to deliver its FY09 distribution               Yours sincerely
                  ■       15% Kansai
                  ■        5% Hokkaido
                                                             of 17.2 cents per unit. CKT’s
                                                             performance is underpinned by the              Brett McCarthy
                  ■       15% Chubu
                                                                                                            Fund Manager
                  ■        3% Hyogo
                                                             strength of its property portfolio
                                                             and the quality of its tenants. When
                                                             combined with CKT’s prudent income
                                                             and capital hedging policy, long
                                                             debt duration and available funding
                                                             capacity, CKT is able to offer investors
                                                             an attractive distribution outlook.



                  Tenant type diversification (by income)1
                  As at 30 June 2008




                  ■        7% Clothing
                  ■        8% Commercial Property Manager
                  ■       18% Fitness Chain
                  ■       14% General Merchandise Store
                  ■        4% Home Centre
                  ■        6% Mass Merchandiser
                  ■       43% Supermarket                                                     Brett McC
                                                                                                       arthy
                                                                                              Fund Man
                                                                                                         ager




                  1
                      Based on current annualised income.
                                                                                                                           Challenger Kenedix Japan Trust Annual Report 2008   7




                        About Kenedix

                        Kenedix, Inc. is a leading provider       Kenedix has a dedicated team of                                  Assets under management by sector
                        of real estate advisory, property         13 people committed to sourcing
                                                                                                                                              10%
For personal use only
                        management and asset management           acquisitions. The acquisitions
                        services in Japan. At 30 June             team is supported by a stringent
                                                                                                                                    12%
                        2008, Kenedix had assets under            investment committee process
                        management of over ¥840 billion           providing corporate governance and                                                              43%
                        ($8.3 billion), up 14% since              ensuring thorough due diligence.
                        December 2007.                            Part of Kenedix’s strength has been                               15%
                                                                  the network of relationships built
                        Kenedix has a strong track record of      up within the real estate sector.
                        acquiring and managing retail, office,     These relationships have helped                                                 20%
                        residential and logistics facilities,     ensure Kenedix has access to
                        being one of the first Japanese            acquisition opportunities (many of                                 Office    Residential
                        public companies to focus on real         them off market) and development                                   Retail    Logistics Other
                        estate funds management since             opportunities in conjunction with
                        listing on the Tokyo Stock Exchange       committed tenants.
                        in 2002. In FY2007, Kenedix made
                        ¥257.2 billion ($2.5 billion) of gross    Kenedix provides property
                        property acquisitions and ¥66.7 billion   management, asset management,
                        ($655 million) of property sales to       acquisition, debt management,
                        buyers outside Kenedix Group.             development management and
                                                                  property reporting services to CKT.
                        Kenedix has a proven track record
                        of generating strong returns for
                        investors in associated J-REITs,
                        pension funds and private funds           Kenedix assets under management growing – up 14% since Dec ‘07
                        through active asset management                         1,000
                        and by focusing on acquisitions that                                                                                                        840
                                                                  Yen billion




                                                                                 800                                                                      734.9
                        add value and increase fund investor
                                                                                 600                                                              544.4
                        returns. Kenedix also has extensive
                                                                                                                                          385.7
                        development experience across a                          400
                                                                                                                                  240.4
                        range of property asset classes.                         200                         83.8      105.9
                                                                                             19    68.5
                                                                                   0
                                                                                        00


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                                                                                                                                                                                 8




                  Portfolio summary

                                                                                                                                                     Remaining
                                                                                                                                                       specified
For personal use only
                                                                                                  NLA      Occupancy                     Lease       lease term               Date
                  Property name                           Location                              (sqm)            (%)                      type           (years)1          acquired
                  Retail
                  Carino Chitosedai                       Kanto area, Tokyo                      9,925              100       Fixed-term lease              14.5             Jun-07
                  Carino Tokiwadai                        Kanto area, Tokyo                      7,699              100         Standard lease              17.8             Apr-07
                  Izumiya Hakubaicho                      Kansai area, Kyoto                    16,525              100       Fixed-term lease              17.8             Apr-07
                  Unicus Ina                              Kanto area, Saitama                  13,044               100         Standard lease              18.2             Apr-07
                  Valor Toda                              Chubu area, Nagoya                    14,921              100       Fixed-term lease              17.3             Apr-07
                  Life Higashinakano                      Kanto area, Tokyo                      5,104              100         Standard lease              11.2             Apr-07
                  Life Asakusa                            Kanto area, Tokyo                      3,753              100         Standard lease              10.0             Apr-07
                  Osada Nagasaki                          Kyushu area, Nagasaki                10,330               100       Fixed-term lease              17.7             Apr-07
                  Yaoko Sakado Chiyoda                    Kanto area, Saitama                    5,492              100         Standard lease              13.2             Apr-07
                  Sunny Noma                              Kyushu area, Fukuoka                   2,887              100       Fixed-term lease              28.7             Apr-07
                  Kansai Super Saigo                      Kansai area, Osaka                     2,642              100         Standard lease              10.2             Apr-07
                  Kojima Nishiarai                        Kanto area, Tokyo                      3,755              100         Standard lease                3.1            Apr-07
                  DeoDeo Kure                             Chugoku area, Hiroshima               13,021              100       Fixed-term lease               8.8            Aug-07
                  Seiyu Miyagino                          Tohuku area, Sendai                    2,789              100         Standard lease                7.8           Sep-07
                  Valor Takinomizu                        Chubu area, Nagoya                    11,265              100       Fixed-term lease              17.5            Mar-08
                  Valor Ichinomiya                        Chubu area, Nagoya                     9,447              100       Fixed-term lease              19.2             Dec-07
                                                                                                                                                 2
                  Aeon Kushiro                            Hokkaido area                       134,682               100         Standard lease              22.2             Dec-07
                  Renaissance Fujimidai                   Kanto area, Tokyo                      3,121              100       Fixed-term lease              19.4             Feb-08
                  Life Nagata                             Kansai area, Kobe                      5,781              100       Fixed-term lease2             18.8             Feb-08
                  Life Kema                               Kansai area, Osaka                     4,813              100       Fixed-term lease2             19.2            Mar-08
                  Portfolio total/average                                                     280,996               100                                     16.3




                  1
                      Assumes tenants do not terminate leases prior to specified lease term. Some leases can be terminated at the tenant’s option prior to the end of the
                      specified lease term.
                  2
                      Land lease.
                                                                                                    Challenger Kenedix Japan Trust Annual Report 2008   9




                                    Indep-                                                                                       Gross
                 Purchase          endent                                                                         Cap     passing rent     Carrying
For personal use only
                     price       valuation    Valuation   Land    Building   Discount   Terminal      DCF         rate       (sqTsubo/        value
                 (million)        (million)        date    (%)         (%)   rate (%)   yield (%)    years         (%)     per month)          ($m)


                    ¥9,489         ¥10,550       Dec-07    71.7       28.3        4.4         4.7       10          4.5        ¥16,088        103.7
                    ¥6,029         ¥6,540        Jun-08    62.7       37.3        4.5         5.0       10          4.7        ¥12,312         64.3
                    ¥5,630          ¥5,820       Dec-07    67.9       32.1        4.9         5.1       10          4.9        ¥10,099         57.2
                    ¥4,666          ¥4,780       Jun-08    43.5       56.5        4.7         5.0       10          4.7         ¥5,771          47.0
                    ¥3,657          ¥3,700       Jun-08    58.0       42.0        5.1        5.6        10          5.4         ¥4,559         36.4
                    ¥2,659          ¥2,750       Dec-07    81.5       18.5        4.7         4.9       10          4.7        ¥12,625          27.0
                    ¥2,309          ¥2,310       Jun-08    83.0       17.0        4.8         5.0       10          4.8        ¥15,933         22.7
                    ¥1,750          ¥1,810       Dec-07    62.2       37.8        5.9        6.3        10          5.9         ¥3,746          17.8
                        ¥1,510      ¥1,530       Dec-07    65.4      34.6         4.9        5.2        10          4.9         ¥6,914         15.0
                        ¥1,417      ¥1,440       Jun-08    61.7      38.3         5.0        6.0        10          5.0         ¥9,877         14.2
                    ¥1,057          ¥1,110       Jun-08    80.5       19.5        5.1        5.4        10          5.1        ¥12,770         10.9
                         ¥837        ¥971        Dec-07    75.1       24.9        4.8        5.4        10          5.2        ¥16,546           9.6
                    ¥2,780          ¥2,780       Jun-08    45.6      54.4         5.2         5.5       10          5.2        ¥12,360          27.3
                         ¥875        ¥872        Jun-08    82.5       17.5        5.0         5.5       10          5.0        ¥16,263           8.6
                    ¥2,550          ¥2,700      Feb-08     62.6       37.4        4.3         4.7        7          4.5         ¥5,604         26.4
                    ¥2,620         ¥2,800        Jun-08    62.2       37.8        4.5        4.8        10          4.7         ¥5,538          27.5
                    ¥2,500          ¥2,550       Jun-08   100.0        0.0        5.5         5.7       10          5.5           ¥350          25.1
                    ¥2,510          ¥2,570      Feb-08     65.5      34.5         4.7         5.1       10          4.8        ¥12,711         25.3
                    ¥2,060          ¥2,150       Dec-07   100.0        0.0        5.0        5.2        10          5.0         ¥6,002         20.7
                    ¥2,430          ¥2,430      Mar-08    100.0        0.0        4.9         5.1       10          4.9         ¥8,013         24.4
                  ¥59,335         ¥62,163                  69.0       31.0       4.78        5.12      n/a        4.86          ¥8,241         611.1
                                                                                                                                                                                          10




                  Property summaries
For personal use only




                        Carino Chitosedai                                        Carino Tokiwadai                                         Izumiya Hakubaicho
                        Setagaya, Tokyo, Japan                                   Itabashi-ku, Tokyo, Japan                                Kyoto-shi, Kyoto, Japan



                  Property details                                            Property details                                         Property details
                  Property                           Land and buildings       Property                        Land and buildings       Property                        Land and buildings
                                          1                                                         1                                                        1
                  Ownership interest          97% (Economic interest)         Ownership interest        97% (Economic interest)        Ownership interest        97% (Economic interest)
                  Land area                                   4,939 sqm       Land area                                 4,511 sqm      Land area                                4,534 sqm
                  Net lettable area                           9,925 sqm       Net lettable area                         7,699 sqm      Net lettable area                       16,525 sqm
                  Car spaces                                          233     Car spaces                                       163     Car spaces                                       152
                  Occupancy                                        100%       Occupancy                                     100%       Occupancy                                     100%
                  WALE2                                        14.5 years     WALE2                                     17.8 years     WALE2                                     17.8 years
                  Lease type                            Fixed-term lease      Lease type                           Standard lease      Lease type                         Fixed-term lease
                  Date acquired                               June 2007       Date acquired                            April 2007      Date acquired                             April 2007
                  Purchase price                          ¥9,489 million      Purchase price                       ¥6,029 million      Purchase price                       ¥5,630 million
                  Valuation                              ¥10,550 million      Valuation                            ¥6,540 million      Valuation                            ¥5,820 million
                  Valuation date                     31 December 2007         Valuation date                        30 June 2008       Valuation date                  31 December 2007
                  Capitalisation rate                               4.5%      Capitalisation rate                            4.7%      Capitalisation rate                            4.9%
                  Book value                             ¥10,551 million      Book value                           ¥6,540 million      Book value                           ¥5,820 million
                  Initial NOI yield                                 5.0%      Initial NOI yield                              4.9%      Initial NOI yield                              5.2%
                  PML                                               7.6%      PML                                            4.8%      PML                                           14.4%

                  Property description                                        Property description                                     Property description
                  Carino Chitosedai is a neighbourhood retail                 Carino Tokiwadai is a neighbourhood retail               Izumiya Hakubaicho is a neighbourhood retail
                  centre with a net lettable area of 9,925 sqm                centre with a net lettable area of 7,699 sqm             centre with a net lettable area of 16,525 sqm
                  and car parking for 233 vehicles. Located in                and car parking for 163 vehicles. Located in             and car parking for 152 vehicles. Located in
                  Setagaya, Tokyo, the property was developed                 Itabashi-ku, Tokyo, the property has long-term           Kyoto, the property has a long-term lease in
                  by Kenedix to a high standard and has long-                 leases in place with fitness centre operator              place with general merchandise retailer Izumiya.
                  term leases in place with fitness centre operator            Central Sports Co and supermarket operator               Izumiya Hakubaicho is a one minute walk from
                  Central Sports Co and national clothing retailer            K.K. Santoku. Carino Tokiwadai is an eight               Kitano hakubaicho station on the Keifuku
                  UNIQLO. Carino Chitosedai is a 13 minute walk               minute walk from Tokiwadai station on the                Kitano Line.
                  from Chitosefunabashi station on the Odakyu-                Tobu-Tojo Line.
                  Odawara Line.

                  1
                      Remaining 3% economic interest held by Japanese Master TK operator; for further details refer to the CKT IPO Product Disclosure Statement (PDS) dated 19 March 2007.
                  2
                      Assumes tenants do not terminate leases prior to specified lease term. Some leases can be terminated at the tenant’s option prior to the end of the specified lease term.
                                                                                                                         Challenger Kenedix Japan Trust Annual Report 2008          11

For personal use only




                           Unicus Ina                                          Valor Toda                                          Life Higashinakano
                           Ina-machi, Saitama Pref, Japan                      Nagoya-shi, Chubu Area, Japan                       Nakano-ku, Tokyo, Japan



                        Property details                                    Property details                                    Property details
                        Property                       Land and buildings   Property                       Land and buildings   Property                       Land and buildings
                                              1                                                   1                                                   1
                        Ownership interest        97% (Economic interest)   Ownership interest        97% (Economic interest)   Ownership interest        97% (Economic interest)
                        Land area                            32,560 sqm     Land area                            16,438 sqm     Land area                              2,711 sqm
                        Net lettable area                    13,044 sqm     Net lettable area                     14,921 sqm    Net lettable area                      5,104 sqm
                        Car spaces                                   682    Car spaces                                   174    Car spaces                                    53
                        Occupancy                                  100%     Occupancy                                  100%     Occupancy                                  100%
                        WALE2                                  18.2 years   WALE2                                  17.3 years   WALE2                                  11.2 years
                        Lease type                         Standard lease   Lease type                       Fixed-term lease   Lease type                         Standard lease
                        Date acquired                          April 2007   Date acquired                          April 2007   Date acquired                          April 2007
                        Purchase price                     ¥4,666 million   Purchase price                     ¥3,657 million   Purchase price                     ¥2,659 million
                        Valuation                          ¥4,780 million   Valuation                          ¥3,700 million   Valuation                          ¥2,750 million
                        Valuation date                      30 June 2008    Valuation date                      30 June 2008    Valuation date                 31 December 2007
                        Capitalisation rate                        4.7%     Capitalisation rate                        5.4%     Capitalisation rate                        4.7%
                        Book value                         ¥4,780 million   Book value                         ¥3,700 million   Book value                         ¥2,750 million
                        Initial NOI yield                          4.9%     Initial NOI yield                          5.2%     Initial NOI yield                          5.0%
                        PML                                        5.6%     PML                                       12.2%     PML                                        6.5%

                        Property description                                Property description                                Property description
                        Unicus Ina is a neighbourhood retail centre         Valor Toda is a neighbourhood retail centre         Life Higashinakano is a neighbourhood retail
                        with a net lettable area of 13,044 sqm and car      with a net lettable area of 14,921 sqm and car      centre with a net lettable area of 5,104 sqm
                        parking for 682 vehicles. Located in Ina-machi,     parking for 174 vehicles (with access to over       and car parking for 53 vehicles. Located in
                        Saitama, the property has a long-term lease         800 in total). Located in Nagoya, Aichi, the        Nakano-ku, Tokyo, the property has a long-
                        in place with P&D Consulting and is currently       property has a long-term lease in place with        term lease in place with supermarket operator
                        operated as a supermarket based centre. Unicus      supermarket operator Valor Co. Valor Toda is        Life Corp. Life Higashinakano is a three minute
                        Ina is a six minute walk from Hanuki station on     a 10 minute walk from Haruta station on the         walk from Higashi-Nakano station on the
                        the New Shuttle Line.                               JR Kansai-Honsen Line.                              JR Sobu Line.
                                                                                                                                                                                          12




                  Property summaries (continued)
For personal use only




                        Life Asakusa                                             Osada Nagasaki                                           Yaoko Sakado Chiyoda
                        Taito-ku, Tokyo, Japan                                   Nishisonogi, Nagasaki Pref, Japan                        Saitama Pref, Japan



                  Property details                                            Property details                                         Property details
                  Property                           Land and buildings       Property                        Land and buildings       Property                        Land and buildings
                                          1                                                         1                                                        1
                  Ownership interest          97% (Economic interest)         Ownership interest        97% (Economic interest)        Ownership interest        97% (Economic interest)
                  Land area                                   1,278 sqm       Land area                               27,942 sqm       Land area                               10,025 sqm
                  Net lettable area                           3,753 sqm       Net lettable area                       10,330 sqm       Net lettable area                         5,492 sqm
                  Car spaces                                           12     Car spaces                                       519     Car spaces                                       256
                  Occupancy                                        100%       Occupancy                                     100%       Occupancy                                     100%
                  WALE2                                        10.0 years     WALE2                                     17.7 years     WALE2                                     13.2 years
                  Lease type                              Standard lease      Lease type                         Fixed-term lease      Lease type                           Standard lease
                  Date acquired                               April 2007      Date acquired                            April 2007      Date acquired                             April 2007
                  Purchase price                          ¥2,309 million      Purchase price                       ¥1,750 million      Purchase price                        ¥1,510 million
                  Valuation                               ¥2,310 million      Valuation                            ¥1,810 million      Valuation                            ¥1,530 million
                  Valuation date                           30 June 2008       Valuation date                  31 December 2007         Valuation date                  31 December 2007
                  Capitalisation rate                               4.8%      Capitalisation rate                            5.9%      Capitalisation rate                            4.9%
                  Book value                              ¥2,310 million      Book value                           ¥1,810 million      Book value                           ¥1,530 million
                  Initial NOI yield                                 5.1%      Initial NOI yield                              6.4%      Initial NOI yield                              4.9%
                  PML                                               8.4%      PML                                            2.6%      PML                                            8.2%

                  Property description                                        Property description                                     Property description
                  Life Asakusa is a neighbourhood retail centre               Osada Nagasaki is a neighbourhood retail                 Yaoko Sakado Chiyoda is a neighbourhood
                  with a net lettable area of 3,753 sqm and car               centre with a net lettable area of 10,330 sqm            retail centre with a net lettable area of
                  parking for 12 vehicles. Located in Taito-ku,               and car parking for 519 vehicles. Located in             5,492 sqm and car parking for 256 vehicles.
                  Tokyo, the property has a long-term lease in                Nishisonogi, Nagasaki, the property has a long-          Located in Sakado, Saitama, the property has
                  place with supermarket operator Life Corp.                  term lease in place with home centre retailer            a long-term lease in place with supermarket
                  Life Asakusa is a nine minute walk from                     Osada Ltd. Osada Nagasaki is a 30 minute bus             operator Yaoko. Yaoko Sakado Chiyoda is a
                  Tahara-machi station on the Ginza Line.                     ride from Nagayo station on the JR Nagasaki-             15 minute walk from Wakaba station on the
                                                                              Honsen Line.                                             Tobu-Tojo Line.




                  1
                      Remaining 3% economic interest held by Japanese Master TK operator; for further details refer to the CKT IPO Product Disclosure Statement (PDS) dated 19 March 2007.
                  2
                      Assumes tenants do not terminate leases prior to specified lease term. Some leases can be terminated at the tenant’s option prior to the end of the specified lease term.
                                                                                                                          Challenger Kenedix Japan Trust Annual Report 2008          13

For personal use only




                           Sunny Noma                                          Kansai Super Saigo                                   Kojima Nishiarai
                           Fukuoka Pref, Japan                                 Moriguchi-shi, Osaka, Japan                          Adachi-ku, Tokyo, Japan



                        Property details                                    Property details                                     Property details
                        Property                       Land and buildings   Property                       Land and buildings    Property                       Land and buildings
                                              1                                                   1                                                    1
                        Ownership interest        97% (Economic interest)   Ownership interest        97% (Economic interest)    Ownership interest        97% (Economic interest)
                        Land area                              5,973 sqm    Land area                              4,074 sqm     Land area                             2,082 sqm
                        Net lettable area                     2,887 sqm     Net lettable area                      2,642 sqm     Net lettable area                      3,755 sqm
                        Car spaces                                   130    Car spaces                                     71    Car spaces                                    42
                        Occupancy                                  100%     Occupancy                                  100%      Occupancy                                  100%
                        WALE2                                  28.7 years   WALE2                                  10.2 years    WALE2                                   3.1 years
                        Lease type                       Fixed-term lease   Lease type                         Standard lease    Lease type                         Standard lease
                        Date acquired                          April 2007   Date acquired                          April 2007    Date acquired                          April 2007
                        Purchase price                     ¥1,417 million   Purchase price                     ¥1,057 million    Purchase price                       ¥837 million
                        Valuation                          ¥1,440 million   Valuation                           ¥1,110 million   Valuation                            ¥971 million
                        Valuation date                      30 June 2008    Valuation date                      30 June 2008     Valuation date                 31 December 2007
                        Capitalisation rate                        5.0%     Capitalisation rate                         5.1%     Capitalisation rate                        5.2%
                        Book value                         ¥1,440 million   Book value                          ¥1,110 million   Book value                           ¥971 million
                        Initial NOI yield                          5.7%     Initial NOI yield                           6.0%     Initial NOI yield                          5.7%
                        PML                                        0.4%     PML                                        11.9%     PML                                        6.2%

                        Property description                                Property description                                 Property description
                        Sunny Noma is a neighbourhood retail centre         Kansai Super Saigo is a neighbourhood retail         Kojima Nishiarai is a neighbourhood retail
                        with a net lettable area of 2,887 sqm and car       centre with a net lettable area of 2,642 sqm         centre with a net lettable area of 3,755 sqm
                        parking for 130 vehicles. Located in Fukuoka,       and car parking for 71 vehicles. Located in          and car parking for 42 vehicles. Located in
                        the property has a long-term lease in place with    Moriguchi, Osaka, the property has a long-term       Adachi-ku, Tokyo, the property has a lease in
                        supermarket operator Sunny Co. Sunny Noma           lease in place with supermarket operator Kansai      place with mass merchandise retailer Kojima
                        is a nine minute walk from Takamiya station on      Super Market Ltd. Kansai Super Saigo is a 10         Co. Kojima Nishiarai is a seven minute walk
                        the Nishitetsu-Ohmuta Line.                         minute walk from Moriguchi-shi station on the        from Taishi-mae station on the Tobutaishi Line.
                                                                            Keihan-Honsen Line.
                                                                                                                                                                                          14




                  Property summaries (continued)
For personal use only




                        DeoDeo Kure
                        Life Asakusa                                             Seiyu Miyagino                                           Valor Takinomizu
                        Kure, Hiroshima, Japan
                        Taito-ku, Tokyo, Japan                                   Miyagino-ku, Sendai, Japan                               Midori Ward, Nagoya, Japan



                  Property details                                            Property details                                         Property details
                  Property                           Land and buildings       Property                        Land and buildings       Property                        Land and buildings
                                          1                                                         1                                                        1
                  Ownership interest          97% (Economic interest)         Ownership interest        97% (Economic interest)        Ownership interest        97% (Economic interest)
                  Land area                                   3,739 sqm       Land area                                3,722 sqm       Land area                                8,452 sqm
                  Net lettable area                          13,021 sqm       Net lettable area                        2,789 sqm       Net lettable area                       11,265 sqm
                  Car spaces                                          248     Car spaces                                        70     Car spaces                                       296
                  Occupancy                                        100%       Occupancy                                     100%       Occupancy                                     100%
                  WALE2                                         8.8 years     WALE2                                      7.8 years     WALE2                                     17.5 years
                  Lease type                            Fixed-term lease      Lease type                           Standard lease      Lease type                         Fixed-term lease
                  Date acquired                             August 2007       Date acquired                     September 2007         Date acquired                           March 2008
                  Purchase price                          ¥2,780 million      Purchase price                         ¥875 million      Purchase price                       ¥2,550 million
                  Valuation                               ¥2,780 million      Valuation                              ¥872 million      Valuation                            ¥2,700 million
                  Valuation date                           30 June 2008       Valuation date                        30 June 2008       Valuation date                     22 August 2007
                  Capitalisation rate                               5.2%      Capitalisation rate                            5.0%      Capitalisation rate                            4.5%
                  Book value                              ¥2,780 million      Book value                             ¥872 million      Book value                           ¥2,686 million
                  Initial NOI yield                                 5.3%      Initial NOI yield                              5.4%      Initial NOI yield                              4.9%
                  PML                                               5.5%      PML                                            2.6%      PML                                           11.9%

                  Property description                                        Property description                                     Property description
                  DeoDeo Kure is a neighbourhood retail                       Seiyu Miyagino is a neighbourhood retail centre          Valor Takinomizu is a supermarket based
                  centre with a net lettable area of 13,021                   with a net lettable area of 2,789 sqm and car            neighbourhood shopping centre and is located
                  sqm (including car parking for 248 vehicles).               parking for 70 vehicles. Located in Miyagino-ku,         in Midori Ward, a popular commuter suburb
                  Located in Kure, Hiroshima, the property has a              Sendai, the property has a long-term lease in            of Nagoya, the headquarters of Toyota.
                  long-term lease in place with electrical goods              place with supermarket operator Tohuku Seiyu.            Constructed in 1998 and refurbished and
                  retailer DeoDeo Corporation. DeoDeo Kure is a               Seiyu Miyagino is a seven minute walk from               extended in 2004, the property is located in a
                  10 minute walk from Kure station on the Kure                Tsutsujigaoka station on the Senseki Line.               fast-growing residential area, with good road
                  Line.                                                                                                                and rail access. The property is leased to Valor
                                                                                                                                       Co., Ltd, a dominant supermarket operator in
                                                                                                                                       the central Japan region.

                  1
                      Remaining 3% economic interest held by Japanese Master TK operator; for further details refer to the CKT IPO Product Disclosure Statement (PDS) dated 19 March 2007.
                  2
                      Assumes tenants do not terminate leases prior to specified lease term. Some leases can be terminated at the tenant’s option prior to the end of the specified lease term.
                                                                                                                         Challenger Kenedix Japan Trust Annual Report 2008           15

For personal use only




                           Valor Ichinomiya                                    Aeon Kushiro                                        Renaissance Fujimidai
                           Ichinomiya, Nagoya, Japan                           Kushiro, Hokkaido, Japan                            Nerima Ward, Tokyo, Japan



                        Property details                                    Property details                                    Property details
                        Property                       Land and buildings   Property                               Land only    Property                       Land and buildings
                                              1                                                   1                                                   1
                        Ownership interest        97% (Economic interest)   Ownership interest        97% (Economic interest)   Ownership interest        97% (Economic interest)
                        Land area                            16,736 sqm     Land area                           134,682 sqm     Land area                              1,729 sqm
                        Net lettable area                     9,447 sqm     Net lettable area                   134,682 sqm     Net lettable area                      3,121 sqm
                        Car spaces                                   442    Car spaces                                   n/a    Car spaces                        1 car + 62 bikes
                        Occupancy                                  100%     Occupancy                                  100%     Occupancy                                  100%
                               2                                                   2                                                   2
                        WALE                                   19.2 years   WALE                                   22.2 years   WALE                                   19.4 years
                        Lease type                       Fixed-term lease   Lease type                         Standard lease   Lease type                       Fixed-term lease
                        Date acquired                    December 2007      Date acquired                    December 2007      Date acquired                      February 2008
                        Purchase price                     ¥2,620 million   Purchase price                     ¥2,500 million   Purchase price                     ¥2,510 million
                        Valuation                          ¥2,800 million   Valuation                          ¥2,550 million   Valuation                          ¥2,570 million
                        Valuation date                      30 June 2008    Valuation date                      30 June 2008    Valuation date                   1 February 2008
                        Capitalisation rate                        4.7%     Capitalisation rate                        5.5%     Capitalisation rate                         4.8%
                        Book value                         ¥2,800 million   Book value                         ¥2,550 million   Book value                         ¥2,573 million
                        Initial NOI yield                          4.9%     Initial NOI yield                          5.7%     Initial NOI yield                           5.0%
                        PML                                       13.8%     PML                                          n/a    PML                                         9.1%

                        Property description                                Property description                                Property description
                        Valor Ichinomiya is a supermarket-anchored          Aeon Kushiro is a 134,682 sqm land parcel with      Renaissance Fujimidai is a 3,121 sqm fitness
                        neighbourhood shopping centre and is located        land leases in place to Japan’s largest general     centre located in Nerima Ward in Tokyo.
                        in Ichinomiya, a city of 374,000 people             merchandise store (GMS) operator, Aeon Co.,         Constructed in 2007, the centre is located in a
                        approximately 15 km north of Nagoya City            Ltd, which operates a 35,000 sqm GMS based          residential precinct alongside the high volume
                        in Aichi prefecture. The property is a modern       shopping centre on the site. The property           Seibu-Ikebukuro train line, and services a
                        centre which services a growing residential         is located in Kushiro City, a regional city in      growing population. Nerima Ward’s population
                        population. The property is 100% leased             eastern Hokkaido. Kushiro has a relatively high     grew 3.6% in the five years to 2006. The
                        to supermarket operator Valor Co., Ltd, a           proportion of young families compared with          property is 100% leased to Renaissance Co.,
                        dominant supermarket operator in the central        the national average.                               Ltd, a subsidiary of Dai Nippon Ink & Chemical,
                        Japan region and an existing tenant of two                                                              on a 20-year lease which commenced in
                        properties in which CKT is currently invested.                                                          December 2007.
                                                                                                                                                                                          16




                  Property summaries (continued)
For personal use only




                        Life Nagata                                              Life Kema
                        Hyogo Pref, Kobe, Japan                                  Miyakojima Ward, Osaka, Japan



                  Property details                                            Property details
                  Property                                     Land only      Property                                  Land only
                                          1                                                         1
                  Ownership interest          97% (Economic interest)         Ownership interest        97% (Economic interest)
                  Land area                                   5,781 sqm       Land area                                 4,813 sqm
                  Net lettable area                           5,781 sqm       Net lettable area                        4,813 sqm
                  Car spaces                                          n/a     Car spaces                                        n/a
                  Occupancy                                        100%       Occupancy                                     100%
                  WALE2                                        18.8 years     WALE2                                     19.2 years
                  Lease type                            Fixed-term lease      Lease type                         Fixed-term lease
                  Date acquired                           February 2008       Date acquired                          March 2008
                  Purchase price                          ¥2,060 million      Purchase price                       ¥2,430 million
                  Valuation                               ¥2,150 million      Valuation                            ¥2,430 million
                  Valuation date                     31 December 2007         Valuation date                      31 March 2008
                  Capitalisation rate                               5.0%      Capitalisation rate                            4.9%
                  Book value                              ¥2,106 million      Book value                           ¥2,487 million
                  Initial NOI yield                                 5.4%      Initial NOI yield                              5.1%
                  PML                                                 n/a     PML                                               n/a

                  Property description                                        Property description
                  Life Nagata is a 5,781 sqm land parcel located              Life Kema is a 4,813 sqm land parcel located
                  in Kobe City. Life Nagata is 100% leased to                 in Miyakojima Ward, Osaka. The land is leased
                  Life Corporation on a 20-year fixed-term land                to Life Corporation on a 20-year fixed-term
                  lease. Life Corporation, an existing CKT tenant             land lease. A three-story steel-framed building
                  and a major supermarket operator in Japan, has              and 89 car parking spaces have recently
                  built a supermarket-anchored neighbourhood                  been constructed on the property by Life
                  shopping centre on the site. The property                   Corporation. Life Corporation is a major
                  is located close to a high-density residential              supermarket operator, listed on the Tokyo Stock
                  area and within a few hundred metres of two                 Exchange, and has long-term leases on three
                  railway stations.                                           existing CKT properties.

                  1
                      Remaining 3% economic interest held by Japanese Master TK operator; for further details refer to the CKT IPO Product Disclosure Statement (PDS) dated 19 March 2007.
                  2
                      Assumes tenants do not terminate leases prior to specified lease term. Some leases can be terminated at the tenant’s option prior to the end of the specified lease term.
                                                                                                     Challenger Kenedix Japan Trust Annual Report 2008   17




                        About Challenger

                        Challenger Financial Services Group      Recognised as an innovative and
                        (Challenger) is a diversified financial    performance focused manager,
For personal use only
                        services company listed on the           Challenger has attracted a highly
                        Australian Securities Exchange.          skilled team with expertise in both
                                                                 the creation and management of
                        With a business model that provides      specialised funds. To complement
                        products and services to meet a          these skills, it has also invested to
                        broad range of financial needs,           attract industry professionals with
                        Challenger manages activities that       asset origination and management
                        span mortgage management, funds          capabilities across the core asset
                        management and asset management.         classes. Located in both Sydney and
                        At 30 June 2008, Challenger’s assets     London, these teams have highly
                        and loans under management and           skilled resources with deep industry
                        administration totalled $69.7 billion.   relationships and a proven track
                                                                 record in securing assets which
                        Asset Management                         deliver value.
                        Through its annuity products,
                        Challenger has built a strong            Challenger has a strong co-investment
                        reputation in the retirement income      philosophy, and has invested alongside
                        market. Challenger is the largest        investors in all of its specialised
                        provider of annuities in Australia       funds. This alignment of manager
                        and manages more than $5 billion         and investor is further enhanced
                        in assets for approximately 45,000       by the use of performance fees
                        annuitants.* Offering competitive        that reward relative rather than
                        rates, Challenger’s annuities are        absolute performance.
                        backed by a diversified portfolio
                        of high quality assets across
                        infrastructure, real estate and
                        fixed income.

                        The Asset Management team is
                        now applying the expertise and
                        investment disciplines developed in
                        these asset classes to an expanding
                        range of specialised funds. On behalf
                        of institutional and retail investors,
                        Challenger manages a further
                        $5 billion plus of assets via a range
                        of listed and unlisted vehicles.
                                                                                                                                                 18




                  Corporate governance statement

                  The Responsible Entity’s approach in the Board Charter, a copy of which                 appointed Challenger Management
                  to corporate governance           is available on CKT’s website:                        Services Limited to manage CKT.
For personal use only

                  The Board of the Responsible Entity                                                     Challenger Management Services
                                                             • approval of the strategy and
                  (the Responsible Entity) recognises its                                                 Limited and the Responsible Entity
                                                               annual budgets of the Trusts;
                  duties and obligations to stakeholders                                                  are wholly owned subsidiaries of
                  to implement and maintain a robust         • approval of accounting policies            Challenger Life Holdings Limited,
                  system of corporate governance.              and financial reports of the Trusts;        which is wholly owned by
                  The Responsible Entity believes that                                                    Challenger Financial Services
                                                             • approval of corporate governance
                  the adoption of good corporate                                                          Group Limited (CFSG).
                                                               structure and monitoring the
                  governance adds real value to                performance and effectiveness of
                  stakeholders and enhances                                                               The Board has delegated to CKT’s
                                                               the corporate governance policies
                  investor confidence.                                                                     Fund Manager the authority and
                                                               and procedures;
                                                                                                          powers necessary to implement the
                  The Responsible Entity determines          • oversight of the establishment             strategies approved by the Board for
                  the most appropriate corporate               and maintenance of effective               CKT and to manage the business
                  governance arrangements for                  risk management policies                   affairs of CKT within the policies and
                  Challenger Kenedix Japan Trust (CKT),        and processes;                             specific delegation limits specified by
                  taking into consideration Australian       • evaluation and approval of                 the Board from time to time.
                  and international standards. This            acquisitions and investments
                  statement reflects the Responsible            and other corporate actions                CKT’s constitution governs,
                  Entity’s corporate governance system         of the Trusts that are outside             among other things, how CKT will
                  as at August 2008.                           the authority delegated to the             operate, how the Responsible Entity
                                                               Investment Committees;                     remuneration will be calculated
                  This statement reports against the                                                      and the rights of unitholders. The
                                                             • the power to issue units                   Responsible Entity must also prepare
                  ASX Corporate Governance Council’s
                                                               in a Scheme;                               and lodge a compliance plan with the
                  ‘Corporate Governance Principles
                  and Recommendations’ released in           • the issuance of a PDS;                     Australian Securities and Investments
                  August 2007. As required by the ASX                                                     Commission (ASIC). The compliance
                                                             • monitoring the performance of              plan sets out the mechanism the
                  Listing Rules, this statement sets out
                                                               the Manager; and                           Responsible Entity has in place
                  the extent to which CKT has followed
                  the Principles or, where appropriate,      • the evaluation of the performance          to ensure compliance with CKT’s
                  indicates a departure from them with         of the Board, Board Committees             constitution and the Corporations Act.
                  an explanation.                              and individual Directors.
                                                                                                          Relationship with Challenger
                  Principle 1                                The Board has established                    Financial Services Group
                  Lay solid foundations for                  Committees to assist in carrying out         The corporate governance structure
                  management and oversight                   its responsibilities and to consider         adopted by the Responsible Entity
                  The role of the Responsible Entity         certain issues and functions in detail.      reflects its role as the responsible
                  and delegations                            The Board Committees are discussed           entity of CKT. In several ways, this
                  The role of the Responsible Entity is to   in Principle 2 below.                        will be different to the corporate
                  manage CKT in the unitholders’ best                                                     governance structure of a
                  interests in accordance with CKT’s         Non-executive Directors are issued           listed company.
                  constitution and the Corporations          with formal letters of appointment
                  Act 2001 (Cth) (Corporations Act).         governing their role and responsibilities.   CFSG has expertise in developing and
                  The Responsible Entity is accountable      The responsibilities of the Chair and        managing specialist investment funds
                  to unitholders for the activities and      the Directors are also set out in the        in areas of property and infrastructure.
                  performance of CKT by overseeing           Board Charter.                               The Responsible Entity makes extensive
                  the development of sustainable                                                          use of the resources available within
                  fund value within an appropriate           Management responsibility                    CFSG in managing CKT.
                  framework of risk, and regard for all      The Corporations Act empowers the
                  stakeholder interests. The Responsible     Responsible Entity to engage agents          The resources provided to assist
                  Entity has identified the key functions     on its behalf; however, it remains fully     the Responsible Entity to fulfil its
                  which it has reserved for itself. These    responsible for the actions of those         role include the services of senior
                  duties are outlined below and set out      agents. The Responsible Entity has           executives and responsible officers.
                                                                                                      Challenger Kenedix Japan Trust Annual Report 2008   19




                        CFSG, in consultation with the            Principle 2                               Nomination and appointment
                        Responsible Entity, may also appoint      Structure the Board                       of new Directors
For personal use only
                        appropriately skilled Independent         to add value                              The Responsible Entity is a wholly
                        Directors and executives to ensure        Membership of the Board                   owned subsidiary of CFSG. As a
                        that CKT continues to be managed to       The Board comprises Directors who         result, the Board has not appointed a
                        maximise returns to unitholders within    possess an appropriate range of skills,   formal nominations committee. This
                        CKT’s stated strategy and mandate.        experience and expertise to:              represents a departure from the ASX
                                                                                                            Principles. The Directors are appointed
                        Executive performance assessment          • have a proper understanding of,         by CFSG, having regard to maintaining
                        The performance of the Chief                and competence to deal with, the        a majority of Independent Directors
                        Executive, Asset Management and             current and emerging issues of          and to ensuring an appropriate balance
                        senior executives is reviewed at            the business;                           of skills, experience and competence
                        least annually against appropriately      • exercise independent judgement;         on the Board. All new Directors are
                        agreed and documented performance                                                   provided with an appropriate induction
                        objectives and measures, consistent       • encourage enhanced performance          into the Responsible Entity’s business.
                        with the Performance Management             of the Trust; and
                        framework that applies to all             • effectively review and challenge        Review of Board performance
                        Challenger employees. All Challenger        the performance of management.      The Board Charter sets out the
                        Group employees are also assessed                                               requirement for a formal review of the
                        against the Challenger Corporate          The Responsible Entity’s constitution Board’s performance at least every
                        Principles (refer Principle 3 below).     provides for a minimum of three       two years. A formal review of the
                                                                  Directors and a maximum of 12         Board’s performance was conducted
                        Performance evaluations for the           Directors. The table below summarises in March 2008. Each Director
                        Chief Executive, Fund Manager and         the current composition of the Board. completed an extensive questionnaire,
                        senior executives have taken place in     Background details of each Director   and responses were reviewed by
                        respect of the 2008 reporting period      are set out in the Directors’ report. the Chair and Company Secretary.
                        in accordance with the above process.                                           The outcomes of the review were
                                                                                                        provided for discussion by the Board.
                                                                                                        The review indicated that the Board is
                        Name                 Position                     Independent            First  performing soundly.
                                                                                            appointed
                                                                                                            Independent Directors
                        Brenda Shanahan      Chair                             Yes             2007
                                                                                                            The Responsible Entity has adopted
                        Russell Hooper       Non-executive Director            Yes             2005         an Independence Policy that states
                        Ian Martens          Non-executive Director            Yes             2003         that an Independent Director should
                                                                                                            be independent of management
                        Geoff McWilliam      Non-executive Director            Yes             2006         and free from any business or other
                        Ian Moore            Non-executive Director            Yes             2005         relationship that could materially
                                                                                                            interfere with, or could reasonably be
                        Brendan O’Connor Executive Director                    No              2008
                                                                                                            perceived to materially interfere with,
                        Rob Woods            Executive Director                No              2004         the independent exercise of
                                                                                                            their judgement.
                        The roles of Chair and Chief Executive are not exercised by the same person.
                                                                                                            The Board regularly considers and
                                                                                                            assesses the independence of each
                                                                                                            Director in light of the interests and
                                                                                                            information which Directors disclose.
                                                                                                            In accordance with the Corporations
                                                                                                            Act, Directors are required to advise
                                                                                                            the Responsible Entity of any material
                                                                                                            personal interests they have
                                                                                                            in a matter.
                                                                                                                                                 20




                  Corporate governance statement (continued)

                  In assessing independence, the Board       an independent director of CFSG and       establishes the meeting agendas
                  will have regard to whether the Director   Challenger Life No.2 Limited, and         to ensure adequate coverage of
For personal use only
                  has any of the following relationships     determined him to be an Independent       strategic, financial and material risk
                  with the Responsible Entity:               Director of the Responsible Entity by     areas throughout the year. The Fund
                                                             reason that Mr Hooper is cognisant        Manager and senior management
                  1. is a substantial shareholder
                                                             of potential conflict situations and       are invited to attend Board meetings
                     (as defined by section 9 of
                                                             has demonstrated that he is able          and are available for contact by Non-
                     the Corporations Act) of the
                                                             to exercise independent judgement.        executive Directors between meetings.
                     Responsible Entity, or is a director
                                                             While participating in Board meetings,    The Non-executive Directors hold a
                     or officer of, or otherwise
                                                             Mr Hooper takes appropriate               private session without any executive
                     associated directly with, a
                                                             governance steps such as abstaining       involvement at least annually.
                     substantial shareholder of the
                                                             from voting or leaving the meeting
                     Responsible Entity;
                                                             for any matters where a conflict of        Board access to information
                  2. is employed, or has previously          interest exists in respect of him being   and advice
                     been employed in an executive           a director of another Challenger          All Directors have unrestricted access
                     capacity, by a Challenger Group         Group company. While Mr Hooper            to the Responsible Entity’s records and
                     company, and there has not              derives a portion of his income from      information. The Company Secretary
                     been a period of at least three         Challenger Group directorships, the       provides Directors with guidance
                     years between ceasing such              Responsible Entity is satisfied that he    on corporate governance issues
                     employment and serving on               has sufficient financial independence       and developments and on all other
                     the Board;                              from the Challenger Group.                matters reasonably requested by the
                                                                                                       Directors and monitors compliance
                  3. has within the last three years
                                                             In accordance with the ASX                with the Board Charter. The Board or
                     been a principal of a material
                                                             Corporate Governance Guidance for         each individual Director has the right
                     professional adviser or a material
                                                             Independence, there is a majority of      to seek independent professional
                     consultant to the Responsible
                                                             Independent Directors on the Board.       advice at the Responsible Entity’s
                     Entity or another Challenger
                                                                                                       expense to assist them in discharging
                     Group company, or an employee
                                                             Conflicts of interest                      their duties. Whilst the Chair’s prior
                     materially associated with the
                                                            In accordance with the Board Charter       approval is required, it may not be
                     service provided;
                                                            and the Corporations Act, any              unreasonably withheld or delayed.
                  4. is a material supplier or customer     Director with a material personal
                     of the Responsible Entity or other     interest in a matter being considered      Board Committees
                     Challenger Group company, or an by the Board must declare such an                 To assist it in undertaking its duties,
                     officer of or otherwise associated      interest and may only be present           the Board has established the
                     directly or indirectly with a material when the matter is being considered        following Committees:
                     supplier or customer; and              at the Board’s discretion. Directors
                                                                                                       • the Audit and Compliance
                  5. has a material contractual             with a material interest may not vote
                                                                                                         Committee;
                     relationship with the Responsible      on any matter in which they have
                                                                                                       • the Property Investment
                     Entity or another Challenger Group declared a personal interest.
                                                                                                         Committee; and
                     company other than as a director.
                                                             Meetings of the Board
                                                                                                       • the Infrastructure Investment
                  The Responsible Entity will state its      During the year the Board generally
                                                                                                         Committee.
                  reasons if it considers a Director to      meets approximately every six weeks.
                  be independent notwithstanding             In addition, the Board may meet
                                                                                                       Each Committee has its own charter.
                  the existence of a relationship of the     whenever necessary to deal with
                                                                                                       A copy of the Audit and Compliance
                  kind referred to in paragraphs 1-5         specific matters needing attention
                                                                                                       Committee Charter is available
                  above. The Responsible Entity has          between scheduled meetings. The
                                                                                                       on CKT’s website at
                  considered Mr Hooper‘s position as         Chief Executive Asset Management,
                                                                                                       www.challenger.com.au/ckt
                                                             in consultation with the Chair,
                                                                                                      Challenger Kenedix Japan Trust Annual Report 2008   21




                        The charters specify the composition, responsibilities, duties, reporting obligations, meeting arrangements, authority
                        and resources available to the Committees and the provisions for review of the charter. Details of Directors’
For personal use only
                        membership of each Committee and their attendance at meetings throughout the period are set out below.


                        Directors’ meetings

                        Director                              Board               Audit and             Property               Infrastructure
                                                                                 Compliance            Investment                Investment
                                                                                 Committee             Committee                Committee*
                                                   Eligible to Attended Eligible Attended Eligible Attended Eligible Attended
                                                     attend             to attend         to attend         to attend
                        Brenda Shanahan                13             12         4         4
                        Russell Hooper                 16             14         5         5          11           10           8            7
                        Ian Martens                    16             16         9         9
                        Geoff McWilliam                16             15                              11           11
                        Ian Moore                      16             16         9         9                                    8            8
                        Brendan O’Connor                 8            8
                        Rob Woods                      16             16                                                        8            7
                        Peter Brook                      8            7
                        Stephen Gerlach                  4            4

                        * Not applicable to CKT.



                        Investment Committees                     Principle 3                              or the Board, including activities or
                        The Board has established the Property    Promote ethical and                      behaviour which may not comply
                        Investment Committee and the              responsible decision-making              with the Code of Conduct, other
                        Infrastructure Investment Committee                                                policies and procedures in place, or
                                                                  The Responsible Entity’s commitment
                        to assist the Board to review and                                                  other regulatory requirements or laws.
                                                                  to ethical and responsible decision-
                        monitor investments by the Trusts                                                  A copy of the Code can be found at
                                                                  making is reflected in the internal
                        including CKT.                                                                     www.challenger.com.au/ckt
                                                                  policies and procedures, underpinned
                                                                  by the Challenger Corporate
                        The Committees each consist of at                                                  Political donations policy
                                                                  Principles of:
                        least three members, including two                                                 Challenger Group has adopted
                        Non-executive Directors, one of           • Commercial ownership                   a policy of not making political
                        whom will act as Chair, and relevant                                               donations in any country or
                                                                  • Compliance
                        executives of the Challenger Group.                                                jurisdiction of operation.
                                                                  • Creative customer solutions
                        In accordance with their respective                                                Staff Trading Policy
                                                                  • Working together; and
                        charter, the Committees are                                                       Directors and staff of the Challenger
                        responsible for:                          • Integrity.                            Group are subject to restrictions
                                                                                                          under the law relating to dealing in
                        • reviewing and approving fund
                                                                  Code of Conduct                         securities, including the securities
                          investments within the authority
                                                                  Challenger has adopted a Code of        issued by the Challenger Group and
                          delegated by the Board;
                                                                  Conduct which applies to all Directors, listed funds, if they are in possession
                        • monitoring and reporting of             executives, management and              of insider information. The Board has
                          market, liquidity and credit            employees of the Challenger Group.      approved the Challenger Group’s
                          risk exposure;                          The Code of Conduct articulates         Staff Trading Policy which prescribes
                                                                  the standards of honest, ethical and    the manner in which staff can
                        • monitoring of investment policies
                                                                  law-abiding behaviour expected by       trade in the securities issued by the
                          and limits; and
                                                                  Challenger. Employees are actively      Challenger Group. A summary of the
                        • reporting on the above to               encouraged to bring any problems        policy is available on CKT’s website.
                          the Board.                              to the attention of management
                                                                                                                                              22




                  Corporate governance statement (continued)

                  The policy applies to all Directors         external auditor and reviews non-       Principle 5
                  and staff and places restrictions and       audit services provided by the external Make timely and
For personal use only
                  reporting requirements, including           auditor to confirm that they are         balanced disclosure
                  limiting trading to specific trading         consistent with maintaining external    Continuous Disclosure Policy
                  windows and in a specified manner.           audit independence.                     The Responsible Entity is committed
                  Those staff designated as potentially                                               to ensuring all investors have
                  having access to insider information are    A copy of the Audit and Compliance      equal and timely access to material
                  required to seek prior approval to trade    Committee Charter is available on       information concerning CKT and
                  in other securities. The policy prohibits   CKT’s website.                          that CKT’s announcements are
                  margin lending over Challenger Group                                                factual and presented in a clear
                  securities, including CKT.                  Declaration by the Fund Manager         and objective manner.
                                                              and Chief Financial Officer
                  Principle 4                                 The Fund Manager and Chief Financial      The Board has approved and
                  Safeguard integrity in                      Officer periodically provide formal        implemented a Continuous
                  financial reporting                          assurance statements to the               Disclosure Policy. The policy is
                  Integrity of financial reporting             Board that:                               designed to ensure compliance
                  The Board has the responsibility            • the Trust’s financial statements         with the Corporations Act and ASX
                  to ensure truthful and factual                present a true and fair view of         Listing Rules continuous disclosure
                  presentation of CKT’s financial                the Trust’s financial condition and      requirements. The Responsible
                  position. The Board has established           operational results; and                Entity has a Continuous Disclosure
                  an Audit and Compliance Committee                                                     Committee which is responsible for:
                  to assist the Board to focus on issues      • the risk management and
                                                                internal compliance and control         • making decisions on what should
                  relevant to the integrity of CKT’s
                                                                systems are sound, appropriate            be disclosed publicly under the
                  financial reporting. In accordance
                                                                and operating efficiently                  Continuous Disclosure Policy;
                  with its charter, the Audit and
                  Compliance Committee must have at             and effectively.                        • maintaining a watching brief on
                  least three members and is comprised        Independent external audit                  information; and
                  of all Non-executive Directors and a        The Board requires the independent        • ensuring disclosure is made in a
                  majority of independent members.            external audit to:                          timely and efficient manner.
                  The Committee is chaired by an
                  Independent Director, who is not            • provide stakeholders with
                  Chair of the Board. The background            assurance over the true and fair        Principle 6
                  details of the Audit and Compliance           view of the financial reports; and       Respect the rights
                  Committee members are set out in                                                      of investors
                                                              • ensure accounting practices
                  the Directors’ report. The Committee          comply with applicable accounting       The Responsible Entity recognises
                  typically meets at least six times a year     rules and policies.                     the importance of enhancing our
                  and additional meetings are scheduled                                                 relationship with investors by:
                  as required. The members’ names and         CKT’s independent external auditor        • communicating effectively; and
                  attendance at meetings are set out on       is Ernst & Young (E&Y). External
                  page 21 of the corporate governance                                                   • providing ready access to clear and
                                                              auditors are required to rotate the
                  statement.                                                                              balanced information about CKT.
                                                              engagement partner assigned to
                                                              the Challenger Group on a five-year
                  The Committee oversees the financial                                                   As set out in Principle 5, it is CKT’s
                                                              basis. Under this policy, the lead
                  reporting process, the system of                                                      policy that material information
                                                              audit engagement partner assigned
                  internal control and risk management,                                                 concerning the Trust will be
                                                              to the Challenger Group rotated at
                  the audit process and the Responsible                                                 announced to the market in a timely
                                                              the conclusion of the 2007 financial
                  Entity’s processes for monitoring                                                     and objective manner. Following
                                                              reporting period.
                  compliance with laws and regulations.                                                 release to the market, the Responsible
                  The Committee also assists the Board                                                  Entity publishes annual and half-
                                                              The external auditor will be invited to
                  in discharging its responsibilities under                                             yearly reports, announcements,
                                                              attend general meetings of CKT and
                  the Compliance Plan adopted by the                                                    media releases and other relevant
                                                              be available to answer questions in
                  Responsible Entity. The Committee                                                     information on its website at
                                                              relation to the conduct of its audit.
                  works on behalf of the Board with the                                                 www.challenger.com.au/ckt.
                                                                                                        Challenger Kenedix Japan Trust Annual Report 2008   23




                        Internet web-casting is provided           Operational, licence (compliance),         reports from Internal Audit at least
                        for market briefings to encourage           credit, market, funding and liquidity      quarterly and monitors management’s
For personal use only
                        participation from all stakeholders,       risks are driven through centralised       responsiveness to internal audit
                        regardless of their location. CKT also     teams providing both scale and             findings and recommendations.
                        encourages greater use of electronic       knowledge concentration benefits.           The internal audit function is
                        media by providing investors with          The central functions have direct          independent of the external auditor.
                        greater access to the electronic           line of sight into the businesses          The internal audit function reports
                        receipt of reports and meeting             with reporting and oversight for           directly to the Audit and Compliance
                        notices. CKT also provides a facility      functions within the businesses,           Committee.
                        to ask questions about the Trust and       focused on their specific activities.
                        have them answered directly via            Management are accountable for             Assurance
                        electronic means.                          strategic, investment and business risk    During the period, the Board has
                                                                   management within the delegated            received formal assurance from the
                        The Responsible Entity is not required     authority framework established by         Chief Executive and Chief Financial
                        to hold annual general meetings            the Challenger Group Board. The            Officer of Asset Management, that:
                        for CKT; however, it may convene           framework is underpinned with a
                                                                                                              • CKT’s financial statements present
                        general meetings from time to              robust set of policies, delivery plans
                                                                                                                a true and fair view of the financial
                        time. Where the Responsible Entity         and procedures.
                                                                                                                condition and operational
                        convenes a general meeting for CKT,
                                                                                                                results; and
                        unitholders are encouraged to attend       The framework and policies are
                        and participate in such meetings.          developed and approved by                  • the risk management and
                        The Responsible Entity will provide        management, reviewed and approved            internal compliance and control
                        unitholders with details of any            by the Responsible Entity’s Audit and        systems are sound, appropriate
                        proposed meeting well in advance           Compliance Committee, and made               and operating efficiently and
                        of the relevant date.                      available to all staff of the Challenger     effectively.
                                                                   Group. The Challenger Group Risk
                        Principle 7                                Management functions have day to           This assurance forms part of
                        Recognise and manage risk                  day responsibility for monitoring the      the process by which the Board
                        Risk management and compliance             implementation of the framework            determines the effectiveness of
                        The management of risks is                 and policy with regular reporting          its risk management and internal
                        fundamental to the Trust’s business        provided to the Responsible Entity’s       control systems in relation to financial
                        and to building unitholder value.          Audit and Compliance Committee             reporting risks.
                        The Responsible Entity recognises the      on the adequacy and effectiveness
                        broad range of risks which apply to        of management controls for material        Principle 8
                        CKT as a participant in the property       business risk. The Committee provides      Remunerate fairly
                        industry, including, but not limited       reporting to the Board on compliance       and responsibly
                        to, market risk, funding and liquidity     with the framework and policies.           Remuneration
                        risk, credit risk, investment, strategic   A summary of the Challenger Group  The Responsible Entity is entitled to
                        and business risk, reputation, licence     Risk Framework can be found at the be paid fees under the terms of the
                        (compliance) and operational risk.         Trust’s website.                   constitution for managing CKT. The
                        The Responsible Entity is responsible                                         details of fees paid in the period are
                        for determining the Trust’s risk        The Audit and Compliance Committee set out in the notes to the financial
                        management strategy. Management         reviews the effectiveness of the risk statements on page 67.
                        is responsible for implementing the     management and internal control
                        Responsible Entity’s strategy and       system on an annual basis.            All executives involved in the
                        for developing policies and procedures                                        management of CKT are employees
                        to identify, manage and mitigate risks  Internal Audit                        of the Challenger Group and are not
                        across the whole of CKT’s operations.   The Responsible Entity has appointed remunerated by CKT.
                                                                PricewaterhouseCoopers (PwC) to
                        The Responsible Entity has adopted      provide Internal Audit services for
                        a Risk Management Framework. The        CKT. The Audit and Compliance
                        Responsible Entity utilises centralised Committee oversees the scope of
                        risk management functions to support the Internal Audit and monitors the
                        business managers to manage             progress of the internal audit work
                        and mitigate risks across the Trust.    program. The Committee receives
                                                                                                      24




                  Corporate governance statement (continued)

                  As CKT does not pay any                   Non-executive Director fees
                  remuneration directly to executives       Non-executive Directors are paid
For personal use only
                  of the Responsible Entity, the            an annual fee for their service on
                  Responsible Entity considers that         the Board and all Committees of
                  the requirement to disclose its           the Board. Non-executive Directors
                  remuneration policies, to establish       are not entitled to participate in
                  a remuneration committee and to           incentive schemes. There are no
                  distinguish the nature of executive       termination payments to Non-
                  remuneration from that of non-            executive Directors on their retirement
                  executives are not relevant to CKT.       from office other than payments
                  In addition, CKT does not have equity     accruing from superannuation
                  based executive remuneration in           contributions comprising part of their
                  operation and thus the disclosure         remuneration. All Non-executive
                  required by Principle 8 is not relevant   Director remuneration is paid by
                  to CKT. These represent departures        the Responsible Entity and is not
                  from the ASX Principles.                  an expense of CKT.

                  Management Fees                           The staff trading policy prohibits
                  Management Fees and Performance           any executive or staff member from
                  Fees are payable to Challenger            entering into a transactions that
                  Management Services Limited in            is designed or intended to hedge
                  accordance with the management            that component of their unvested
                  agreement. The details of fees paid in    remuneration which is constituted by
                  the period are set out in the notes to    Challenger securities.
                  the financial statements on page 67.
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   25




                        Directors’ report

                        The Directors of Challenger Listed           Directors’ summary                            Directors
                        Investments Limited (CLIL), the              The following persons held office as           Brenda Shanahan
For personal use only
                        Responsible Entity of the Challenger         Directors of CLIL during the year and up      BComm, FAICD
                        Kenedix Japan Trust (herein known by         to the date of this report:                   Chair
                        its ASX code ‘CKT’), submit their report                                                   Independent, Non-executive Director
                        together with the financial report for        •   Brenda Shanahan – Chair
                        CKT, for the year ended 30 June 2008.            (appointed 5 December 2007)

                        Principal activities                         •   Stephen Gerlach
                                                                         (resigned 5 December 2007)
                        The principal activity of CKT during the
                        period was investment in a retail property   •   Peter Brook
                        portfolio in Japan.                              (resigned 12 March 2008)

                        Trust information                            •   Russell Hooper
                        CKT is an Australian registered managed      •   Ian Martens
                        investment scheme. CLIL, the Responsible
                        Entity of CKT, is incorporated and           •   Geoff McWilliam
                        domiciled in Australia. The registered       •   Ian Moore
                        office of the Responsible Entity is located                                                 M Sh      h i G d t f M lb
                                                                                                                   Ms Shanahan is a Graduate of Melbourne
                        at Level 15, 255 Pitt Street, Sydney NSW     •   Brendan O’Connor                          University in Economics and Commerce
                        2000.                                            (appointed 12 March 2008)                 and a Fellow of the Institute of Directors.
                                                                                                                   She has a research and institutional
                                                                     •   Robert Woods
                                                                                                                   background in finance in Australia and
                                                                     Qualifications, experience                     overseas economies and share markets.
                                                                     and special responsibilities of               She has held executive positions in stock
                                                                     Directors and Key Management                  broking, investment management and an
                                                                     Personnel                                     actuarial firm.
                                                                     CLIL has considerable expertise in the        Ms Shanahan is a non-executive director
                                                                     infrastructure, property and funds            of JM Financial Group Limited and
                                                                     management sectors as illustrated by          non-executive Chairman of Clinuvel
                                                                     the experience of its Directors.              Pharmaceuticals Ltd. Ms Shanahan is a
                                                                     The names and details of the Directors        former director of Challenger Financial
                                                                     in office at the date of this report           Services Group Limited. Ms Shanahan
                                                                     are as follows.                               is currently Chair of both St Vincent’s
                                                                                                                   Health and St Vincent’s Medical Research
                                                                                                                   Institute in Melbourne.

                                                                                                                   Ms Shanahan is a member of the CLIL
                                                                                                                   Audit and Compliance Committee.
                                                                                                                                                    26




                  Directors’ report (continued)

                  Directors
                  Russell Hooper                                Ian Martens                                Geoff McWilliam
For personal use only

                  FAICD, FCPA, FFin                             FCA, FAICD                                 BE (Civil)
                  Independent, Non-executive Director           Independent, Non-executive Director        Independent, Non-executive Director




                  Mr Hooper h extensive experience in
                  M H          has        i        i            Mr M
                                                                M Martens is a chartered accountant
                                                                             i    h       d                M M Willi      h h d
                                                                                                           Mr McWilliam has had an extensive i
                  financial services, including over 13 years    and was senior partner at BDO Chartered    career in the Australian property
                  at St.George Bank Limited and Advance         Accountants (SA), where he is now          investment industry. Most recently, Mr
                  Bank Limited, where he held senior            a consultant. Throughout his career,       McWilliam spent 10 years building the
                  management positions in life insurance,       Mr Martens has advised a broad range of    Commonwealth Bank’s property funds
                  wealth management and listed investment       public and private companies on financial   management division, Colonial First State
                  trusts, including the role of Chief General   measurement and reporting, strategy        Property. As head of this business, he
                  Manager, Funds Management.                    development and evaluation and merger      was responsible for the management and
                                                                and acquisitions activities.               performance of over $16 billion in listed
                  Mr Hooper is also a director of Challenger,
                                                                                                           and unlisted property funds. Prior to this,
                  Challenger Life and Century Australia         Mr Martens retired as Chairman of
                                                                                                           Mr McWilliam spent 23 years with Lend
                  Investments Limited, and was previously       RAA Insurance Ltd in March 2008 and is
                                                                                                           Lease Corporation in a variety of senior
                  a director of (and Chairman of the            currently a director of RAA Investments
                                                                                                           management roles.
                  Audit Committee for) Commonwealth             Pty Ltd and the Royal Automobile
                  Insurance Limited, a subsidiary of the        Association of SA Inc.                     Mr McWilliam is a director of Lend Lease
                  Commonwealth Bank. Mr Hooper is                                                          Funds Management Limited, Lend Lease
                                                                Mr Martens is Chairman of the CLIL Audit
                  a Fellow of the Australian Institute of                                                  Asian Retail Investments Limited, Lend
                                                                and Compliance Committee.
                  Company Directors, the Australian Society                                                Lease Real Estate Investments Limited,
                  of Certified Practising Accountants                                                       St Laurence Limited (NZ), Dunmore
                  and the Financial Services Institute                                                     Lang College Limited, the Gandel Group
                  of Australasia.                                                                          Limited and the Dusseldorp Skills Forum
                                                                                                           Incorporated, and is a Fellow of the
                  Mr Hooper is a member of the CLIL
                                                                                                           Australian Property Institute.
                  Property Investment Committee and the
                  CLIL Infrastructure Investment Committee.                                                Mr McWilliam is Chairman of the CLIL
                                                                                                           Property Investment Committee.
                                                                                                           Challenger Kenedix Japan Trust Annual Report 2008   27




                        Directors
                        Ian Moore                                   Brendan O’Connor                             Robert Woods
For personal use only

                        BA, FIA, FIAA                               BBus, CA, GAICD                              BComm
                        Independent, Non-executive Director         Executive Director                           Executive Director




                        M M        h         i         i
                        Mr Moore has extensive experience           Mr O’Connor i the Chi f Fi
                                                                    M O’C                               i lO
                                                                                   is h Chief Financial Officer   M W d i Chi f E             i A
                                                                                                                 Mr Woods is Chief Executive, Asset
                        in investment banking and structured        for Challenger’s Asset Management            Management at Challenger. In this role,
                        finance. Mr Moore was Head of Corporate      division. Mr O’Connor joined Challenger      Mr Woods is responsible for managing
                        Finance at Bankers Trust Investment Bank    in June 2006, and is responsible for         Challenger’s $10 billion portfolio
                        where he was responsible for all forms      overseeing the financial management           of investments in direct property,
                        of corporate debt, project debt and asset   and reporting for the Asset Management       infrastructure and fixed income. The Asset
                        backed debt financings.                      division’s specialist funds, including       Management business manages assets for
                                                                    the Challenger Kenedix Japan Trust.          third party investors, policyholders and
                        Mr Moore is currently a director of
                                                                    Mr O’Connor has over 13 years’               shareholders, generating spread and fee
                        Artesian Capital Management and a
                                                                    experience in financial services including    based income.
                        Fellow of the Institute of Actuaries of
                                                                    senior finance roles within Westpac
                        Australia and the Institute of Actuaries                                                 Prior to joining Challenger, Mr Woods
                                                                    Banking Corporation.
                        in London.                                                                               was a founder of Zurich Capital Markets
                                                                                                                 Asia, where he was responsible for the
                        Mr Moore is a member of the CLIL
                                                                                                                 alternative asset business. Prior to this,
                        Audit and Compliance Committee and
                                                                                                                 Mr Woods spent 11 years with Bankers
                        Chairman of the CLIL Infrastructure
                                                                                                                 Trust in investment banking.
                        Investment Committee.
                                                                                                                 Mr Woods is a member of the CLIL
                                                                                                                 Infrastructure Investment Committee.
                                                                                                               28




                  Directors’ report (continued)

                  Key Management Personnel
                  Trent Alston                                 Brett McCarthy
For personal use only

                  BBuild (Hons), GMQ, AMP                      BA (Hons), GDipBus
                  Head of Real Estate                          Fund Manager, CKT




                  M Alston j i d Ch ll
                  Mr Al                         i February
                             joined Challenger in F b          Mr M C h joined Challenger
                                                               M McCarthy j i d Ch ll
                  2006. As head of Real Estate, Mr Alston      in September 2006 in the role of
                  is responsible for Challenger’s property     Fund Manager. Mr McCarthy has
                  funds management and investment              specific responsibility for the ongoing
                  strategy, and for the management and         management of CKT. This includes
                  performance of all Challenger wholesale      responsibility for strategy, financial and
                  property vehicles.                           investment performance and transaction
                                                               evaluation and execution.
                  Prior to joining Challenger, Mr Alston
                  spent seven years at Colonial First State,   Prior to joining Challenger, Mr McCarthy
                  most recently in the role of General         was a director at UBS Investment Bank in
                  Manager, Wholesale Funds in the              Japan and Australia, holding roles over a
                  property division. In this role, Mr Alston   seven-year period including structuring
                  was responsible for the management and       and marketing of Japanese real estate
                  performance of a portfolio of unlisted       investment trusts, global real estate
                  funds and client mandates valued at in       securities market analysis and Australian
                  excess of $8.0 billion.                      listed property trust analysis.

                  Mr Alston has over 20 years’ experience      Mr McCarthy has 17 years’ experience in
                  in the property investment industry,         the property industry, and has worked in
                  including roles in property funds            commercial property valuation and sales
                  management, corporate real estate,           positions in Knight Frank, Richard Ellis and
                  development and project management           Raine & Horne Commercial. Mr McCarthy
                  with Colonial First State and Lend Lease.    has lived for a total of nine years in Japan,
                                                               and speaks and reads Japanese fluently.
                                                                                                          Challenger Kenedix Japan Trust Annual Report 2008   29




                        Company secretary
                        Chris Robson                               Suzie Koeppenkastrop
For personal use only

                        BA, LLB (Hons), LLM                        BComm, LLB, LLM
                        General Counsel and                        Company Secretary
                        Group Company Secretary




                        Mr Robson is a qualified solicitor and      Ms Koeppenkastrop is a qualified solicitor
                        is the Group Company Secretary and         and head of the company secretariat
                        General Counsel of the Challenger          team at Challenger. Ms Koeppenkastrop
                        Financial Services Group. He is also a     has over 13 years’ experience in legal and
                        non-independent director of certain        company secretarial roles in the financial
                        subsidiaries of the Challenger Group.      services industry.
                        His responsibilities include leading the
                        legal and company secretariat teams
                        within the Business Services division of
                        the Challenger Group.
                                                                                                                                                          30




                  Directors’ report (continued)

                  Corporate governance
                  In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of CLIL support and
For personal use only
                  have adhered to substantially all of the ASX Corporate Governance Principles and Recommendations. The corporate governance
                  statement is contained in the Corporate governance section of the Annual Report.

                  Review and results of operations
                  The consolidated profit after tax for the year ended 30 June 2008 attributable to the unitholders of CKT was $16.98 million
                  (2007 $34.23 million). The following table provides an analysis of the result:
                                                                               Consolidated         Consolidated                 Trust                Trust
                                                                                Year ended         5 March 2007           Year ended         5 March 2007
                                                                               30 June 2008      to 30 June 2007         30 June 2008      to 30 June 2007
                                                                                      $’000                $’000                $’000                $’000

                  Revenue from operating activities                                  39,814                4,873               19,304                2,447
                  Profit from operating activities
                  (before fair value movements and tax)                               21,747               3,032               16,211                2,039
                  Fair value movements                                                 1,741              34,058                (2,611)            20,404
                  Income tax expense                                                  (5,537)              (2,829)              (1,441)                   –
                  Net profit after tax attributable to
                  unitholders of CKT                                                 16,978               34,234               12,159              22,443
                  Distribution to unitholders (2008: 13.60 cents
                  per unit, 2007: 1.42 cents per unit)                                20,413                2,131              20,413                2,131

                  Distributions
                  On 19 June 2008, CKT announced an estimated distribution to the ASX of 7.55 cents per unit. The distribution amount of
                  $11.33 million (2007: $2.13 million) will be paid on 28 August 2008.
                                                                               Consolidated         Consolidated                 Trust                Trust
                                                                               30 June 2008         30 June 2007         30 June 2008         30 June 2007
                                                                                      $’000                $’000                $’000                $’000

                  (a) Distributions declared and paid
                      during the year to unitholders
                        Interim distribution (2008: 6.05 cents per
                        unit paid on 28 February 2008, 2007: Nil)                      9,081                    –               9,081                     –

                  (b) Distributions proposed and
                      recognised as a liability
                        Final distribution (2008: 7.55 cents per
                        unit payable on 28 August 2008,
                        2007: 1.42 cents per unit paid on 30 August 2007)             11,332                2,131              11,332                2,131
                  Total distribution (2008: 13.60 cents
                  per unit, 2007: 1.42 cents per unit)                               20,413                 2,131              20,413                2,131

                  Units on Issue
                  150,097,328 of fully paid units of CKT were on issue at 30 June 2008. On 17 December 2007, CKT announced the second
                  instalment call of $75.05 million to partially fund the acquisition of interests in six Japanese retail properties. The second instalment
                  of $0.50 per unit (150,097,328 units) was paid on 4 February 2008. No further units were issued or withdrawn during the year.

                  Earnings per unit
                  Basic earnings per unit amounts are calculated by dividing the net profit after tax attributable to ordinary unitholders by the
                  weighted average number of securities outstanding during the period.
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   31




                        The following reflects the income and security data used in the basic earnings per unit computations.
                                                                                                                            Consolidated         Consolidated
For personal use only

                                                                                                                            30 June 2008         30 June 2007

                        Net profit attributable to unitholders ($’000)                                                             16,978              34,234
                        Time weighted average number of units for basic and diluted
                        earnings per unit at year end (number of units in thousands)                                             150,097             150,097
                        Basic and diluted earnings per unit for net profit attributable
                        to unitholders (cents per unit)                                                                             11.31               22.81

                        Trust assets
                        At 30 June 2008, CKT held assets to a total value of $687.16 million (2007: $469.30 million). The basis for valuation of the assets is
                        disclosed in Note 2 to the financial statements.

                        Fees paid to the Responsible Entity and associates
                        The attached table discloses all fees paid or payable by CKT to Challenger Listed Investments Limited (CLIL) and Challenger
                        Management Services Limited (CMSL) under the Trust Constitution and to CMSL under the Management Agreement with CLIL.
                                                                                    Consolidated        Consolidated                 Trust               Trust
                                                                                    30 June 2008        30 June 2007        30 June 2008         30 June 2007
                                                                                           $’000               $’000               $’000                $’000

                        (a) Base Responsible Entity fees paid or                              73                    8                  73                   8
                            payable to CLIL, equating to 5% of the
                            base management fee.
                        (b) Management fees paid or payable to                             1,391                 157                1,391                 157
                            CMSL, equating to 95% of the base
                            management fees plus all other fees
                            payable.
                        (c) Performance fees payable to CLIL,                                 98                    –                  98                    –
                            equating to 50% of the asset
                            performance fee.
                        Total fees as per the Income statement                             1,562                 165                1,562                 165

                        (d) Acquisition service fees and due diligence                      1,118                   –               1,118                    –
                            fees in relation to further acquisition
                            of properties and debt placement fees
                            for arranging the borrowings, paid or
                            payable to CLIL (Balance Sheet).
                        Total fees paid or payable at balance date                         2,680                 165               2,680                  165

                        Total expenses paid by CKT to reimburse CMSL for the year ended 30 June 2008 in respect of costs paid on behalf of CKT were
                        $348,986 (2007: $2,233,020).

                        Base responsible entity fees payable for the six months ended 30 June 2008 of $813,228 (2007: $164,793) will be paid two months
                        after 30 June 2008.

                        All transactions were at arm’s length.

                        Interests held in CKT by the Responsible Entity and its associates
                        The following related entity of CLIL holds interests of 5% or more in CKT:

                        •   Challenger Life No.2 Limited – 5% (7,504,961 units).

                        Challenger Life No.2 Limited and CLIL are wholly owned subsidiaries of Challenger Financial Services Group Limited.

                        Significant changes in the state of affairs
                        There were no significant changes to the state of affairs of CKT during the year, other than those changes identified in the financial
                        statements for the year ended 30 June 2008.
                                                                                                                                                            32




                  Directors’ report (continued)

                  Significant events after the balance date
                  There has been no matter or circumstance that has arisen since the end of the year that has significantly affected, or may
For personal use only
                  significantly affect:

                  (a) CKT’s operations in future financial years; or

                  (b) the results of those operations; or

                  (c) CKT’s state of affairs in future financial years.

                  Likely developments and expected results
                  Further information on likely developments on the operation of CKT and the expected results of those operations have not been
                  included in this report because the Responsible Entity believes it would be likely to result in unreasonable prejudice to CKT.

                  Environmental regulation and performance
                  The operations of the CKT are not subject to any particular or significant environmental regulation under a law of the
                  Commonwealth or of a State or Territory. There have been no known significant breaches of any other environmental requirements
                  applicable to CKT.

                  Indemnification and insurance of Directors and officers
                  The Responsible Entity has insured the Directors and officers against liabilities incurred in their role as Directors and officers of the
                  Responsible Entity. The Responsible Entity is prohibited by the insurance contract itself from disclosing the nature of the liabilities
                  covered and the amount of the premium. The auditors of CKT are not indemnified out of the assets of CKT.

                  Fund Manager and Chief Financial Officer declaration
                  The Fund Manager and Chief Financial Officer have given a declaration to the Board of Directors that in their opinion the financial
                  records of CKT have been properly maintained in accordance with section 286 of the Corporations Act 2001, and the financial
                  statements and notes for the financial year ended 30 June 2008 comply with accounting standards and give a true and fair view.

                  Rounding of amounts in the Directors’ report and the financial report
                  CKT is a registered trust that is of a kind referred to in Class Order 98/0100, issued by ASIC, relating to the ‘rounding off’ of
                  amounts in the Directors’ report and financial report. Amounts in the Directors’ report and financial report have been rounded off to
                  the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated.

                  Auditor’s Independence Declaration
                  We have obtained an independence declaration from our auditor, Ernst & Young, as set out on page 33.

                  This report is made in accordance with a resolution of Directors of Challenger Listed Investments Limited.




                  Brenda Shanahan
                  Chair

                  Sydney
                  21 August 2008
                                                      Challenger Kenedix Japan Trust Annual Report 2008   33




                        Auditor’s independence declaration
For personal use only
                                                                                                                                                          34




                  Income statement
                  For the year ended 30 June 2008



                                                                                    Consolidated            Consolidated           Trust              Trust
                                                                                     Year ended             5 March 2007     Year ended       5 March 2007
For personal use only
                                                                                    30 June 2008          to 30 June 2007   30 June 2008    to 30 June 2007
                                                                      Notes                $’000                    $’000          $’000              $’000

                  Property income
                  Rental income                                                            32,903                  3,671               –                 –
                  Less: Property-related expenses                          4               (6,734)                  (574)              –                 –
                  Net property income                                                      26,169                  3,097               –                 –

                  Other income
                  Interest income                                                             558                     52            384                 52
                  Interest income on cross currency swaps                                   4,968                  1,150          4,968              1,150
                  Gain on foreign currency contracts                                          938                      –            938                  –
                  Other income                                                                447                      –               –                 –
                  Distribution income                                                            –                     –         13,014              1,245
                  Total other income                                                        6,911                  1,202         19,304              2,447

                  Other trust expenses
                  Finance costs                                                            (6,587)                  (516)          (136)                 –
                  Responsible Entity’s and Manager’s fees             23(d)                (1,562)                  (165)         (1,562)             (165)
                  Asset Manager’s fees                                23(e)                (1,425)                  (150)              –                 –
                  Unrealised foreign exchange loss                                            (111)                    –           (446)                 –
                  Other expenses                                                           (1,648)                  (436)          (949)              (243)
                  Profit from operating activities                                          21,747                  3,032         16,211              2,039

                  Fair value movements
                  Net gain/(loss) on revaluation
                  of financial derivatives                                21                (6,099)                22,557          (2,611)          20,404
                  Net gain/(loss) from investment
                  properties revaluations                             12(a)                 7,840                 11,501               –                 –
                  Net profit before tax                                                    23,488                  37,090         13,600            22,443
                  Japanese witholding tax expense                          6               (2,562)                  (256)         (1,441)                –
                  Deferred tax expense                                     6               (2,975)                (2,573)              –                 –
                  Income tax expense                                                       (5,537)                (2,829)        (1,441)                 –
                  Net profit after tax                                                      17,951                34,261          12,159            22,443
                  Net profit attributable to
                  minority interests                                                         (973)                   (27)              –                 –
                  Net profit attributable to
                  unitholders of CKT                                                       16,978                34,234          12,159            22,443
                  Basic earnings per unit (cents)                          7                11.31                  22.81            8.10             14.95
                  Diluted earnings per unit (cents)                        7                11.31                  22.81            8.10             14.95


                  The above Income Statement should be read in conjunction with the accompanying notes.
                                                                                                                       Challenger Kenedix Japan Trust Annual Report 2008   35




                        Distribution statement
                        For the year ended 30 June 2008



                                                                                           Consolidated           Consolidated               Trust               Trust
                                                                                             Year ended          5 March 2007         Year ended        5 March 2007
For personal use only
                                                                                            30 June 2008       to 30 June 2007       30 June 2008     to 30 June 2007
                                                                             Notes                 $’000                 $’000              $’000               $’000

                        Net profit attributable to unitholders of CKT                              16,978               34,234              12,159             22,443
                        Earnings per unit (cents)                                                   11.31               22.81                8.10               14.95
                        Adjusted for transfers (to)/from reserves:
                        Fair value gain on investment properties                                   (7,840)             (11,501)                  –                   –
                        Fair value loss/(gain) on derivatives                                      6,099              (22,557)              2,611             (20,404)
                        Deferred tax expense                                                        2,975               2,573                    –                   –
                        Amortisation of borrowing costs                                               601                    –                 17                    –
                        Performance fee                                                               200                    –                 98                    –
                        Minority interest share of fair value
                        movements, deferred tax expense
                        and amortisation of borrowing costs                                           366                    –                   –                   –
                        Gain on foreign currency contracts
                        (mature in August 2008) relating to
                        the 30 June 2008 period                                                     1,034                    –              1,034                    –
                        Total transfers (to)/from reserves                                         3,435              (31,485)              3,760            (20,404)
                        Total realised income available
                        for distribution                                                          20,413                2,749              15,919               2,039
                        Less: Current year undistributed income
                        carried forward                                                                  –               (618)              4,494                  92
                        Distribution to unitholders                               5               20,413                2,131              20,413               2,131
                        Distribution per unit (cents)                                               13.60                1.42               13.60                1.42


                        The above Distribution Statement should be read in conjunction with the accompanying notes.
                                                                                                                                                36




                  Balance sheet
                  As at 30 June 2008



                                                                                     Consolidated      Consolidated          Trust          Trust
                                                                                     30 June 2008      30 June 2007   30 June 2008   30 June 2007
For personal use only
                                                                      Notes                 $’000             $’000          $’000          $’000

                  Current assets
                  Cash and cash equivalents                                8                29,796          12,093          3,249          3,167
                  Trade and other receivables                              9                 2,440           7,459          6,719          1,287
                  Derivative financial instruments                         21                 9,814           5,966          9,814          5,966
                  Other assets                                            10                   442           1,086              –              –
                  Total current assets                                                     42,492           26,604         19,782         10,420

                  Non-current assets
                  Other financial assets                                   11                     29             29        279,881        208,814
                  Derivative financial instruments                         21                10,130          18,574         10,045         15,588
                  Tenant deposits held by Trust Bank                                        23,417          17,771              –              –
                  Investment properties                                   12              611,090          406,320              –              –
                  Total non-current assets                                                644,666         442,694         289,926       224,402
                  Total assets                                                            687,158         469,298        309,708        234,822

                  Current liabilities
                  Trade and other payables                                13                 9,059           8,451          1,648          2,913
                  Derivative financial instruments                         21                 1,228             864              –              –
                  Provision for distribution                              14                11,332           2,131         11,332          2,131
                  Current tax liabilities                                 15                 1,240             256              –              –
                  Total current liabilities                                                22,859           11,702         12,980          5,044

                  Non-current liabilities
                  Interest bearing liabilities                            16              339,083          215,263              –              –
                  Deferred tax liabilities                                17                 5,496           2,534              –              –
                  Tenant deposits                                                           23,417          17,771              –              –
                  Total non-current liabilities                                           367,996          235,568              –              –
                  Total liabilities                                                       390,855          247,270         12,980          5,044
                  Net assets                                                              296,303          222,028       296,728         229,778

                  Unitholders’ equity
                  Contributed equity                                      18              284,640          209,466       284,640        209,466
                  Undistributed income                                                         618             618         (4,586)           (92)
                  Reserves                                                19                 1,513           5,339         16,674         20,404
                  Total equity attributable to
                  unitholders of the parent                                               286,771          215,423       296,728         229,778

                  Minority interest                                                          9,532           6,605              –              –
                  Total equity                                                            296,303          222,028       296,728         229,778
                  Net tangible assets ($)                                 22                   1.97           1.48           1.98           1.53
                  Net tangible assets attributable to CKT
                  unitholders (excluding 3% minority interest) ($)        22                   1.91           1.44           1.98           1.53


                  The above Balance Sheet should be read in conjunction with the accompanying notes.
                                                                                                                          Challenger Kenedix Japan Trust Annual Report 2008   37




                        Statement of changes in equity
                        For the year ended 30 June 2008



                        Consolidated                                                                      Attributable to unitholders of CKT

                                                                     Contributed      Undistributed           Reserves                          Minority
For personal use only
                                                                          equity            income           (Note 19)             Total        interest           Total
                        2008                                               $’000              $’000              $’000             $’000          $’000            $’000

                        Balance as at 1 July 2007                        209,466                 618             5,339          215,423            6,605        222,028
                        Net profit/(loss) after tax                                –          16,978                   –           16,978             973          17,951
                        Total recognised income and
                        expense for the period                           209,466             17,596              5,339          232,401            7,578        239,979
                        Currency translation differences                          –                 –             (391)             (391)               –           (391)
                        Equity issue costs released/(paid)                     125                  –                 –              125                –            125
                        Contributions of equity                            75,049                   –                 –          75,049            2,142          77,191
                        Transfers to/(from) reserves                              –            3,435            (3,435)                 –               –               –
                        Distributions to unitholders                              –          (20,413)                 –          (20,413)           (188)        (20,601)
                        Balance as at 30 June 2008                       284,640                 618             1,513          286,771            9,532        296,303



                        Consolidated                                                                      Attributable to unitholders of CKT

                                                                     Contributed      Undistributed           Reserves              Total       Minority
                                                                          equity            income           (Note 19)                          interest           Total
                        2007                                               $’000              $’000              $’000             $’000          $’000            $’000

                        Balance as at 5 March 2007                                –                 –                 –                 –               –               –
                        Net profit/(loss) after tax                                –          34,234                   –          34,234               27          34,261
                        Total recognised income and
                        expense for the period                                    –          34,234                   –          34,234               27          34,261
                        Currency translation differences                          –                 –          (26,146)          (26,146)               –        (26,146)
                        Equity issue costs paid                           (15,680)                  –                 –          (15,680)               –        (15,680)
                        Contributions of equity                           225,146                   –                 –         225,146            6,578         231,724
                        Transfers to/(from) reserves                              –         (31,485)           31,485                   –               –               –
                        Distributions to unitholders                              –           (2,131)                 –            (2,131)              –          (2,131)
                        Balance as at 30 June 2007                       209,466                 618             5,339          215,423            6,605        222,028


                        The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.
                                                                                                                                                           38




                  Statement of changes in equity (continued)
                  For the year ended 30 June 2008



                  Trust                                                                             Attributable to unitholders of CKT

                                                               Contributed      Undistributed           Reserves                         Minority
For personal use only
                                                                    equity            income           (Note 19)          Total          interest     Total
                  2008                                               $’000              $’000              $’000          $’000            $’000      $’000

                  Balance as at 1 July 2007                        209,466                  (92)         20,404         229,778                –    229,778
                  Net profit/(loss) after tax                                –           12,159                  –        12,159                –     12,159
                  Total recognised income and
                  expense for the period                           209,466             12,067            20,404         241,937                –    241,937
                  Equity issue costs released                            125                  –                 –           125                –        125
                  Contributions of equity                            75,049                   –                 –        75,049                –     75,049
                  Transfers to/(from) reserves                              –            3,760            (3,730)            30                –         30
                  Distributions to unitholders                              –          (20,413)                 –       (20,413)               –    (20,413)
                  Balance as at 30 June 2008                       284,640              (4,586)           16,674        296,728                –    296,728


                  Trust                                                                             Attributable to unitholders of CKT

                                                               Contributed      Undistributed           Reserves           Total         Minority
                                                                    equity            income           (Note 19)                         interest     Total
                  2007                                               $’000              $’000              $’000          $’000            $’000      $’000

                  Balance as at 5 March 2007                                –                 –                 –              –               –           –
                  Net profit/(loss) after tax                                –          22,443                   –        22,443                –     22,443
                  Total recognised income and
                  expense for the period                                    –          22,443                   –       22,443                 –    22,443
                  Equity issue costs paid                           (15,680)                  –                 –       (15,680)               –    (15,680)
                  Contributions of equity                           225,146                   –                 –       225,146                –    225,146
                  Transfers to/(from) reserves                              –         (20,404)           20,404                –               –           –
                  Distributions to unitholders                              –           (2,131)                 –         (2,131)              –      (2,131)
                  Balance as at 30 June 2007                       209,466                  (92)         20,404         229,778                –    229,778


                  The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.
                                                                                                                        Challenger Kenedix Japan Trust Annual Report 2008   39




                        Cash flow statement
                        For the year ended 30 June 2008



                                                                                          Consolidated             Consolidated               Trust               Trust
                                                                                           Year ended           5 March 2007           Year ended        5 March 2007
For personal use only
                                                                                          30 June 2008        to 30 June 2007         30 June 2008     to 30 June 2007
                                                                            Notes                $’000                  $’000                $’000               $’000

                        Cash flows from operating activities
                        Rental income received                                                   34,299                  5,741                    –                   –
                        Foreign exchange realised gain
                        on currency contracts                                                       938                       –                938                    _
                        Interest received                                                         5,056                     52               4,435                  52
                        Distributions received                                                          –                     –              5,772                    –
                        Consumption tax refund on
                        property acquisitions                                                     6,338                       –                   –                   –
                        Borrowing costs paid                                                     (5,237)                 (2,129)              (136)                   –
                        Payments to suppliers                                                    (11,471)               (6,575)             (1,507)                (96)
                        Withholding tax paid                                                      (1,577)                     –                   –                   –
                        Net cash flows from/(used in)
                        operating activities                                  8(a)              28,346                  (2,911)              9,502                 (44)

                        Cash flows from investing activities
                        Acquisition of investment in
                        Master TK Group                                                                 –                     –            (71,033)           (208,814)
                        Purchase of investment properties                                      (189,468)              (445,075)                   –                   –
                        Property acquisition costs                                                (5,735)               (4,008)                   –                   –
                        Capital expenditure                                                            (7)                    –                   –                   –
                        Net cash flows from/(used in)
                        investing activities                                                  (195,210)               (449,083)            (71,033)          (208,814)

                        Cash flows from financing activities
                        Proceeds from issue of units                                             75,049                225,146              75,049             225,146
                        Net contributions from minority interest                                  1,954                  6,605                    –                   –
                        Issue costs paid                                                         (2,224)                (13,121)            (2,224)             (13,121)
                        Distribution paid                                                        (11,212)                     –            (11,212)                   –
                        Proceeds from borrowings                                                134,712                246,812             10,000                     –
                        Repayment of borrowings                                                  (18,181)                     –            (10,000)                   –
                        Net cash flows from financing activities                                 180,098                465,442               61,613            212,025

                        Net increase in cash and cash equivalents                                13,234                 13,448                  82               3,167
                        Cash and cash equivalents at
                        the beginning of the period                                              12,093                       –              3,167                    –
                        Effects of foreign exchange                                               4,469                  (1,355)                  –                   –
                        Cash and cash equivalents at
                        the end of the period                                    8               29,796                 12,093               3,249               3,167


                        The above Cash Flow Statement should be read in conjunction with the accompanying notes.
                                                                                                                                                         40




                  Notes to the financial statements
                  For the year ended 30 June 2008



                  Note 1 – Trust information
                  The financial report for the year ended 30 June 2008 was authorised for issue in accordance with a resolution of the Directors of the
For personal use only

                  Responsible Entity dated 21 August 2008.
                  Challenger Kenedix Japan Trust (herein known by its ASX code ‘CKT’) is an Australian registered managed investment scheme and is
                  a publicly traded trust on the Australian Securities Exchange (ASX).
                  The principal activity of CKT during the year was investment in a retail property portfolio in Japan.


                  Note 2 – Summary of significant accounting policies
                  The accounting policies which have been adopted in the preparation of the financial statements are stated to assist in a general
                  understanding of this report.
                  (i) Basis of preparation
                  The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the
                  Constitution, Corporations Act 2001 and applicable Australian Accounting Standards.
                  The financial report has been prepared on an historical cost basis, except for investment properties and derivative financial
                  instruments that have been measured at fair value.
                  The accounting policies adopted in preparing these consolidated financial statements have been consistently applied by CKT unless
                  otherwise specified.
                  The financial report is presented in Australian Dollars and all values are rounded to the nearest thousand dollars ($’000) unless
                  otherwise stated under the option available to the Trust under ASIC Class Order 98/100. The trust is an entity to which the class
                  order applies.
                  The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued
                  by the International Accounting Standards Board.
                  A summary of the significant accounting policies of CKT under IFRS is disclosed below.
                  (ii) New reporting standards issued and/or applied during the year
                  The following standards, interpretations and amendments were available for early adoption but have not been applied by CKT in
                  these financial statements:
                  • AASB 8: Operating Segments. This is applicable for annual reporting periods beginning on or after 1 April 2009. The standard
                    requires the Group to adopt the ‘management approach’ to disclosing information about reportable segments. The current
                    Group segment report is not significantly different to management presentations and so no major change is expected from the
                    introduction of this standard in the 2009 accounts.
                  • AASB 101: Presentation of Financial Statements and AASB 2007-08: Amendments to Australian Accounting Standards arising
                    from AASB 101. These are applicable for annual reporting periods beginning on or after 1 January 2009. The standard requires
                    the presentation of a statement of comprehensive income which replaces the Income Statement and makes changes to the
                    Statement of Changes in Equity. Any changes made with respect to a prior period adjustment or reclassification in the financial
                    statement will require a third Balance Sheet as at the beginning of the comparative periods to be disclosed. The Group will need
                    to reformat its Income Statement and Statement of Changes in Equity for its 30 June 2010 financial statements.
                  • AASB 3: Business Combinations and AASB 127: Consolidated and Separate Financial Statements and AASB 2008-3 Amendments
                    to Australian Accounting standards arising from AASB 3 and AASB 127 (effective from 1 July 2009). The revisions to the
                    standards apply prospectively to business combinations and will be effective for the 30 June 2010 financial year end. The main
                    changes under the standards are that:
                        – acquisition-related costs are recognised as an expense in the Income Statement in the period they are incurred;
                        – earn-outs and contingent considerations will be measured at fair value at the acquisition date, however, remeasurement in the
                          future will be recognised in the Income Statement;
                        – step acquisitions, impacting equity interests held prior to control being obtained, are remeasured to fair value, with gains and
                          losses being recognised in the Income Statement. Similarly, where control is lost, any difference between the fair value of the
                          residual holding and its carrying value is recognised in the Income Statement; and
                        – while control is retained, transactions with minority interests would be treated as equity transactions.
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   41




                        (iii) Basis of Consolidation
                        The consolidated financial information of CKT incorporates the beneficial interest in 100% of the assets and liabilities arising from
For personal use only
                        the contractual relationship (Master Tokumei Kumiai Agreement) with Godo Kaisha Kenedix Master TK which is the Tokumei Kumiai
                        (TK) Operator. This relationship is known under Japanese Commercial law as a TK. Under the contractual relationship, CKT is entitled
                        to 97% of the profits and losses of the business of the TK. The Master TK Operator has invested in the business of two Sub TK
                        Operators, Godo Kaisha Sub TK One and Godo Kaisha Sub TK Two, under other TK Agreements (Sub TK Agreements). The Sub TK
                        Operators have used the invested funds to acquire the Trust Beneficiary Interests of the Investment Properties.

                        The 3% of TK profit payable to the Master TK Operator is shown as minority interests in the Income Statement.

                        The consolidated financial report of CKT will incorporate the results of its interest in the TK from the date the TK agreements were
                        signed.

                        All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated
                        in full.

                        (iv) Comparatives
                        Where necessary, comparative figures have been reclassified to conform with changes in presentation in these financial statements.
                        CKT was registered on 5 March 2007. As a result, the financial report for the year ended 30 June 2008 represents CKT’s first full
                        year financial reporting period. Comparative figures have been prepared for the reporting period 5 March 2007 to 30 June 2007.

                        (v) Revenue
                        Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that
                        the economic benefits will flow to CKT and the revenue can be reliably measured. Revenue brought to account but not received at
                        balance date is recognised as a receivable.

                        Rental income from operating leases is recognised on a straight-line basis over the lease term.

                        Contingent rental income is recognised as income in the financial year that it is earned.

                        Fixed rental increases which do not represent direct compensation for the underlying cost increases or capital expenditure are
                        recognised on a straight-line basis over the term of the lease until the next market review date.

                        Lease incentives granted are recognised in the Income Statement as an integral part of rental income.

                        Interest income is recognised as the interest accrues using the effective interest method.

                        Incidental revenues (and related costs) derived from an investment property undergoing construction or development, but not
                        directly related to bringing an asset to the location and working condition of an investment property, are recognised in the Income
                        Statement as they are earned.

                        Distribution income is recognised when CKT’s right to receive the payment is established.

                        (vi) Expense recognition
                        Responsible entity and manager fees payable to the Responsible Entity and Manager are recognised as expenses when the services
                        are received.

                        Performance fee is payable in accordance with the Trust Constitution when performance criteria for the fee are met.

                        Fees relating to specific events or transactions are expensed upon completion or occurrence of a relevant service or event.

                        Property expenditure, including rates, taxes, insurance, and other costs associated with the upkeep of a building, are brought to
                        account on an accruals basis. Repair costs are expensed when incurred. Other amounts that improve the condition of the investment
                        are capitalised.

                        Recovery of outgoings as specified in lease agreements are accrued on an estimated basis and adjusted at period end.

                        (vii) Depreciation
                        In accordance with Accounting Standard AASB 140: Investment Property, investment properties are not depreciated. Taxation
                        allowances for buildings or plant and equipment depreciation are claimed by CKT and are declared as tax advantaged and are
                        included as tax deferred components of distributions.
                                                                                                                                                            42




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 2 – Summary of significant accounting policies (continued)
                  (viii) Income tax
For personal use only

                  Under current income tax legislation, CKT will not be subject to income tax provided all of its unitholders are presently entitled to the
                  income of CKT each year. Any taxable income of CKT, including any taxable capital gains derived from the sale of an asset, is fully
                  distributed to unitholders.
                  Non-refundable Japanese withholding tax payable on the distribution of profits under a TK agreement is recognised as an expense
                  as incurred.
                  For Australian tax purposes this withholding tax paid on the distribution from the TK Operator to CKT would not be deductible to
                  CKT; instead, unitholders may be entitled to a foreign tax credit for the withholding tax incurred. These foreign tax credits may be
                  credited against the unitholder’s Australian income tax payable on certain types of foreign source income, including distributions
                  from CKT (depending on their personal tax position).
                  A deferred tax liability or asset and related deferred tax expense or credit is recognised on differences between the carrying values
                  of assets and liabilities in the Consolidated Balance Sheet and their tax cost base, principally due to property revaluations, interest
                  rate derivatives fair values and Japanese accounting depreciation. Whilst accounting for deferred tax gives rise to a tax expense in
                  the Consolidated Income Statement, it will not impact on cash flows from operations nor the cash distribution paid to unitholders.
                  Any deferred tax liability or asset is calculated using the current Japanese withholding tax rate of 20% applicable to the distribution
                  of profits under a TK agreement.

                  (ix) Distributions
                  In accordance with the Trust’s Constitution, CKT fully distributes its distributable income to unitholders by cash. In addition to the
                  distributable income, as provided for in the Trust’s Constitution, CKT may distribute a portion of capital. Distributions determined by
                  the Responsible Entity are paid every six months for the periods ended 31 December and 30 June where distributable income exists.
                  A provision for distribution is recognised where the distribution has been declared prior to the balance date.

                  (x) Cash and cash equivalents
                  Cash and cash equivalents in the Balance Sheet comprise cash at bank and short-term deposits with an original maturity of three
                  months or less.
                  For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net
                  of outstanding bank overdrafts.

                  (xi) Trade and other receivables
                  Trade receivables, which generally have 15-30 day terms, are recognised and carried at original invoice amount less an allowance for
                  impairment. An impairment provision is recognised when there is objective evidence that CKT will not be able to collect the debts.
                  Individual debts that are known to be uncollectible are written off when identified.

                  (xii) Investment properties
                  Initially, investment properties are measured at cost including all transaction costs. Subsequent to initial recognition the
                  investment property is stated at fair value. The fair value represents the amount at which the assets could be exchanged between
                  a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction at the date of the valuation, in
                  accordance with Australian Valuation Standards. Gains or losses arising from changes in the fair value of the investment property are
                  included in the Income Statement in the year in which it arises.
                  CKT obtains independent valuations for all investment properties once a year from suitably qualified valuers, unless the Directors
                  determine that a valuation is to be obtained in the intervening period. Such valuations are reflected in the financial statements of
                  CKT. Notwithstanding, the Directors of the Responsible Entity assess the carrying value of the investment property at each reporting
                  date to ensure that its carrying value does not materially differ from its fair value. Where the carrying value differs from fair value,
                  that asset is adjusted to its fair value.
                  In determining fair value, the expected net cash flows have been discounted to their present value using a market determined risk-
                  adjusted discount rate applicable to the respective asset.
                  Expenditure capitalised to properties includes the cost of acquisition, capital and refurbishment additions, and during development
                  includes financing charges, related professional fees incurred and other directly attributable transaction costs.
                  Investment properties are derecognised when they have either been disposed of or when the investment is permanently withdrawn
                  from use and no future benefit is expected at its disposal. Any gains or losses on derecognition of an investment property are
                  recognised in the income statement in the period of derecognition.
                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008   43




                        (xiii) Leased assets
                        Leases where the lessor retains substantially all the risk and benefits of ownership are classified as operating leases. Leasing fees in
For personal use only
                        relation to the initial leasing of the investment property after a redevelopment are capitalised to the carrying value of the property as
                        a cost of bringing the investment property to completion and intended use.

                        Incentives may be provided to tenants to enter into an operating lease. These incentives may be in the form of cash, rent free
                        periods, lessee or lessor owned fit-outs. The incentive is amortised over the term of the lease as a reduction in rental income.
                        The unamortised carrying amount of the incentive is reflected in the carrying value of the investment property.

                        Leasing fees that are directly associated with the negotiation and execution of a lease agreement (including commissions, legal fees
                        and costs of preparing and processing documentation) are capitalised as part of the carrying value of the property and recognised as
                        an expense over the lease term, on the same basis as rental income.

                        (xiv) Trade and other payables
                        Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent
                        liabilities for goods and services provided to CKT prior to the end of the financial year that are unpaid and arise when CKT becomes
                        obliged to make future payments in respect of the purchase of the goods and services.

                        (xv) Goods and services tax (GST) and Japanese consumption tax (consumption tax)
                        Revenue, expenses and assets (with the exception of receivables) are recognised net of the amount of GST or consumption tax to
                        the extent that the GST is recoverable from the Australian Taxation Office or Japanese tax authority. Where GST or consumption tax
                        is not recoverable, it is recognised as part of the cost of acquisition of the asset, or as an expense, as applicable.

                        Receivables and payables are stated inclusive of GST or consumption tax. The net amount of GST recoverable from or payable to the
                        Australian Taxation Office or Japanese tax authority is included in the Balance Sheet as a receivable or payable.

                        Cash flows are included in the Cash Flow Statement on a gross basis. The GST component of cash flows arising from investing and
                        financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

                        (xvi) Interest bearing loans and borrowings
                        All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable
                        transaction costs.

                        After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective
                        interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

                        Gains and losses are recognised in net profit or loss when the liabilities are derecognised or impaired.

                        (xvii) Borrowing costs
                        Borrowing costs are recognised as an expense in the period in which they are incurred except for borrowing costs that are directly
                        attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial
                        period of time to get ready for its intended use or sale. Such borrowing costs are capitalised as part of the cost of that asset.
                        Investment income earned on the investment of specific borrowings pending their expenditure on qualifying assets is deducted from
                        the borrowing costs eligible for capitalisation.

                        (xviii) Contributed equity
                        Issued and paid up capital is recognised at the fair value of the consideration received by CKT.

                        Any transaction costs arising on the issue of ordinary units are recognised directly in equity as a reduction of the unit
                        proceeds received.

                        (xix) Earnings per unit (EPU)
                        Basic EPU is calculated as net profit attributable to ordinary equity holders of the parent entity, divided by the weighted average
                        number of ordinary units. Diluted EPU is calculated as net profit attributable to ordinary equity holders of the parent entity divided
                        by the weighted average number of ordinary units adjusted for the effects of all dilutive potential ordinary units.

                        (xx) Derivative financial instruments and hedging
                        CKT uses derivative financial instruments such as foreign currency contracts and interest rate swaps to hedge its risks associated with
                        interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date
                        on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when
                        their fair value is positive and as liabilities when their fair value is negative.
                                                                                                                                                           44




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 2 – Summary of significant accounting policies (continued)
                  (xx) Derivative financial instruments and hedging (continued)
For personal use only

                  Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify as effective cash flow hedges,
                  are taken directly to net profit or loss for the year.
                  The fair value of forward exchange contracts is calculated by an internal investment management system which generates a fair
                  market value based on market source data. The fair market value is compared to the counterparty valuation. The fair value of interest
                  rate swap contracts is determined by reference to market values for similar instruments.
                  For the purposes of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes
                  in the fair value of a recognised asset or liability; or cash flow hedges where they hedge exposure to variability in cash flows that is
                  either attributable to a particular risk associated with a recognised asset or liability or a forecast transaction.
                  In relation to cash flow hedges to hedge firm commitments which meet the conditions for special hedge accounting, the portion
                  of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the
                  ineffective portion is recognised in the Income Statement.
                  CKT has elected not to undertake the hedge accounting treatment available under AASB 139 for its derivative financial instruments
                  and treats any changes in fair value of derivatives directly through its Income Statement.
                  (xxi) Segment reporting
                  A business segment is a distinguishable component of the entity that is engaged in providing products or services that are subject
                  to risks and returns that are different to those of other business segments. A geographical segment is a distinguishable component
                  of the entity that is engaged in providing products or services within a particular economic environment and is subject to risks and
                  returns that are different than those of segments operating in other economic environments.
                  (xxii) Significant accounting judgements, estimates and assumptions
                  The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events.
                  Other than the estimation of fair values described in Note 12 and the process for determining fair value of investment properties as
                  described in Note 2(xii), there are no key estimates and assumptions that have a significant risk of causing a material adjustment to
                  the carrying amounts of the CKT Group’s assets and liabilities within the next annual reporting period.
                  (xxiii) Foreign currency translation
                  Translation of foreign currency transactions
                  The functional and presentation currency of CKT is the Australian Dollar.
                  Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of the
                  transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the
                  balance sheet date.
                  All differences in the consolidated financial report are taken to the Income Statement with the exception of differences on foreign
                  currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the
                  disposal of the net investment, at which time they are recognised in the Income Statement.
                  A non-monetary item that is measured in terms of historical cost in a foreign currency is translated using the exchange rate at the
                  date of the transaction.
                  A non-monetary item that is measured at fair value in a foreign currency is translated using the exchange rates at the date when the
                  fair value was determined.
                  Foreign interest
                  As the TK Operator is self-sustaining, the beneficial interest in the assets and liabilities arising from the TK is translated into the
                  presentation currency of CKT at the rate of exchange ruling at the balance sheet date and the income statements are translated at
                  the weighted average exchange rates for the year. The exchange differences arising on the retranslation are taken directly to the
                  foreign currency translation reserve.
                  Exchange rates used
                  The following exchange rates are used in translating foreign currency transactions, balances and financial statements:
                                                                                                                        Year ended          25 April 2007
                                                                                                                       30 June 2008      to 30 June 2007
                                                                                                                                  ¥                     ¥

                  Weighted average exchange rate                                                                           98.6048             101.2825
                  Spot rate at the balance date                                                                            101.7277            104.7732
                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008     45




                        (xxiv) Tenant deposits
                        Tenant deposits are recognised at fair value as an asset held by the Trust Bank, with a corresponding liability for the obligation to
For personal use only
                        return the deposits to tenants.

                        (xxv) Rounding of amounts
                        CKT is a registered trust that is of a kind referred to in Class Order 98/0100, issued by the ASIC, relating to the ‘rounding off’ of
                        amounts in the directors’ report and financial report. Amounts in the Directors’ report and financial report have been rounded off
                        to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated.

                        (xxvi) Impairment of assets
                        CKT assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or
                        when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s
                        recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless
                        the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the asset’s
                        value in use cannot be estimated to be close to its fair value. In such cases the asset is tested for impairment as part of the cash-
                        generating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount,
                        the asset or cash-generating unit is considered impaired and is written down to its recoverable amount.

                        In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects
                        current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing
                        operations are recognised in those expense categories consistent with the function of the impaired asset unless the asset is carried at
                        revalued amount (in which case the impairment loss is treated as a revaluation decrease).

                        An assessment is also made at each reporting date as to whether there is any indication that previously recognised impairment losses
                        may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised
                        impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount
                        since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable
                        amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no
                        impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried
                        at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the depreciation charge
                        is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its
                        remaining useful life.

                        Note 3 – Financial risk management
                        CKT’s activities expose it to a variety of financial risks:
                        •   market risk (including currency risk and interest rate risk);
                        •   credit risk; and
                        •   liquidity risk.

                        The Responsible Entity believes that the management of financial risks is fundamental to CKT’s operations and to building unitholder
                        value. The Board is responsible for CKT’s risk management strategy and management is responsible for implementing the Board’s
                        strategy and for developing policies and procedures to identify, manage and mitigate risks across CKT’s operations.

                        The Responsible Entity as a subsidiary of the Challenger Financial Services Group (CFSG) is subject to periodic review by the CFSG
                        internal audit function.

                        The Board has adopted the CFSG Operational Risk Framework and formal policies in respect of compliance and operational risk
                        management. Risks at both the Responsible Entity and CKT level are managed through the CFSG Operational Risk Framework
                        and include:
                        •   regulatory and reporting risks;
                        •   financial risks (such as liquidity, interest rate, currency and investment);
                        •   legal risks (such as contract enforceability, covenants);
                        •   operational risks (such as people, processes, infrastructure, technology); and
                        •   reputation risk (such as investor relations, media management).
                                                                                                                                                             46




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 3 – Financial risk management (continued)
                  At the time of approving the financial statements of CKT, the Board requires representation letters from management addressing
For personal use only

                  risk management and internal compliance and controls relevant to risk.

                  Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the CKT’s business. Derivative financial
                  instruments are used to hedge exposures to fluctuations in foreign exchange rates and interest rates. Instruments used include
                  forward foreign exchange contracts, cross currency swaps and interest rate swap contracts.

                  All derivative financial instruments held within CKT are stated at fair value with any gains or losses arising from changes in fair
                  value being taken directly to the Income Statement for the year. CKT has elected not to undertake the hedge accounting treatment
                  available under AASB 139 for its derivative financial instruments.

                  Financial risks impact the financial assets and liabilities of CKT. CKT’s principal financial instruments, other than derivatives, comprise
                  cash and cash equivalents, receivables, payables and interest bearing liabilities.

                  Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement
                  and the basis on which income and expenses are recognised, in respect of each class of financial instruments are disclosed in Note 2.

                  (a) Market risk
                  Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
                  factors. Market risk comprises (amongst others) various types of risk including currency risk (due to fluctuations in foreign exchange
                  rates) and interest rate risk (due to fluctuations in interest rates).

                  (i) Currency risk
                  The consolidated entity’s exposure to foreign currency risk relates primarily to revenue, expenses and borrowings that are
                  denominated in Japanese Yen.

                  Economic income hedge
                  CKT has a policy to undertake foreign exchange hedging (using financial instruments) of the expected distributions of the TK
                  Business to insulate against movements in exchange rates, both favourable and unfavourable. The policy is to arrange foreign
                  exchange hedges on a rolling basis equivalent to 80-100% of CKT’s estimated distributions for five years and up to 90% for years six
                  to ten. The Responsible Entity has hedged 100% of estimated distributions for the first five years and 90% of estimated distributions
                  for years six and seven. CKT has not entered into any income hedges for years eight to 10.

                  Economic capital hedge
                  With respect to the equity capital of CKT, the policy is to arrange foreign exchange hedges for up to 50% of its net investment in
                  Japanese assets, for periods of up to six years. CKT has hedged 39% of its net equity investment in the investment properties for
                  Australian Dollars, with staggered settlement dates with a weighted duration of 3.9 years.

                  The net receipts under the cross currency swaps will be brought to account in the Consolidated Income Statements over the life
                  of the contracts.

                  Natural capital hedge
                  CKT Group borrows in Yen which mitigates balance sheet volatility on converting assets acquired in Yen to AUD at each
                  reporting date.

                  (ii) Interest rate risk
                  Interest rate risk is the risk to CKT’s earnings arising from movements in the interest rates, including changes in the absolute levels
                  of interest rates, the shape of the yield curve, the margin between the different yield curves and the volatility of the interest rates.

                  Financial instruments with floating rate interest expose CKT to cash flow interest rate risk.

                  It is CKT’s policy to manage the impact of interest rate movements on its debt servicing capacity, profitability and business
                  requirements by entering into interest rate derivatives.

                  The purpose of using derivative financial instruments is to minimise financial risk from movements in interest rates. CKT’s exposure to
                  interest rate risk arises predominantly from liabilities bearing variable interest rates.

                  Hedging activity is performed using interest rate swaps. A swap transaction obliges the two parties to the contract to exchange a
                  series of cash flows at specified intervals known as payment or settlement dates.
                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008      47




                        CKT’s policy is to hedge interest rate exposure through fixed interest facilities or interest rate derivatives to protect approximately
                        90% of its floating rate borrowings denominated in Yen from exposure to movements in interest rates in Japan. The contracts
For personal use only
                        require settlement of net interest receivable or payable on a quarterly basis. These derivative instruments are fair valued with
                        changes in value recognised in the Income Statement. Currently 96% of debt is hedged either through fixed interest facilities or
                        interest rate derivatives.

                        (b) Credit risk
                        Credit risk is the risk that one party to a financial instrument will cause financial loss to the other party by failing to discharge an
                        obligation. CKT aims to ensure that at all times it has appropriate credit risk management in place and that the Board and senior
                        management are appropriately informed of the credit risks.

                        CKT’s approach to credit management utilises a credit risk framework to ensure that the following principles are adhered to:
                        • independence from the fund manager;
                        • appropriate segregation practices in place to avoid conflicts of interest;
                        • credit exposures are systematically controlled and monitored;
                        • credit exposures are regularly reviewed in accordance with existing credit procedures;
                        • credit personnel are appropriately qualified and experienced; and
                        • credit exposures include such exposures arising from derivative transactions.

                        CKT makes primary use of both external and internal ratings. Internal ratings are expressed on the basis of S&P rating definitions.
                        Where an external rating is available (predominantly from Japanese based credit rating agencies, Standard & Poor’s, Moody’s or
                        Fitch), the internal rating will ordinarily be no greater than the lowest external rating assigned.

                        The credit risk in respect of derivative transactions is mitigated by entering into trades with counterparties with A rating or above.

                        CKT minimises concentration of credit risk in relation to trade receivables by ensuring no more than 30% of the property portfolio
                        shall be let by one tenant and providing leases only to tenants who are considered creditworthy third parties. It is CKT’s policy that
                        all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, rent receivable balances are
                        monitored on an ongoing basis to ensure the CKT group’s exposure to bad debts is managed through normal payment terms and
                        review of any rental in arrears. There have been no bad debts in CKT group since the IPO.

                        (c) Liquidity risk
                        Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet cash commitments associated with financial
                        instruments. This may result from either the inability to recover or settle financial assets at their face values or at all; or a counterparty
                        failing on repayment of a contractual obligation; or the inability to generate cash inflows as anticipated.

                        CKT aims to ensure that it has sufficient liquidity to meet its obligations on a short-term and medium-term basis. In setting the level of
                        sufficient liquidity, CKT considers new asset purchases and equity origination in addition to current contracted obligations. In summary
                        it considers: minimum cash requirements; cash flow forecasts; acquisition and disposal pipeline and cash mismatches by maturity.


                        Note 4 – Property-related expenses
                                                                                      Consolidated         Consolidated                  Trust                Trust
                                                                                       Year ended         5 March 2007           Year ended          5 March 2007
                                                                                      30 June 2008      to 30 June 2007         30 June 2008       to 30 June 2007
                                                                                             $’000                $’000                $’000                 $’000

                        Property-related expenses comprise:
                        – Rates and property-related taxes                                    1,914                  108                     –                    –
                        – Maintenance, repairs, consumables and
                          other property expenses                                             3,945                  350                     –                    –
                        – Property management fees                                              722                   87                     –                    –
                        – Insurance expenses                                                    153                   29                     –                    –
                        Total property-related expenses                                      6,734                   574                     –                    –
                                                                                                                                      48




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 5 – Distributions paid and proposed
For personal use only
                                                                            Consolidated    Consolidated           Trust          Trust
                                                                            30 June 2008    30 June 2007    30 June 2008   30 June 2007
                                                                                   $’000           $’000           $’000          $’000

                  (a) Distributions declared and paid
                      during the year to unitholders
                        Interim distribution (2008: 6.05 cents per
                        unit paid on 28 February 2008, 2007: Nil)                 9,081                –          9,081              –

                  (b) Distributions proposed and
                      recognised as a liability
                        Final distribution (2008: 7.55 cents per
                        unit payable on 28 August 2008,
                        2007: 1.42 cents per unit paid on 30 August 2007)        11,332           2,131          11,332          2,131
                  Total distribution (2008: 13.60 cents
                  per unit, 2007: 1.42 cents per unit)                           20,413           2,131          20,413          2,131



                  Note 6 – Income tax expense
                                                                            Consolidated    Consolidated           Trust          Trust
                                                                            30 June 2008    30 June 2007    30 June 2008   30 June 2007
                                                                                   $’000           $’000           $’000          $’000

                  (a) Income tax expense
                  Current Japanese withholding tax                                2,562             256           1,441              –
                  Deferred Japanese tax                                           2,975           2,573               –              –
                                                                                  5,537           2,829           1,441              –

                  (b) Reconciliation of tax expense
                  Profit for the period                                           23,488          37,090          13,600         22,443
                  Tax at 30%                                                     (7,046)         (11,127)        (4,080)        (6,733)
                  Non-assessable amounts                                          7,046           11,127          4,080          6,733
                  Income tax expense – statutory                                       –               –              –              –

                  Distributions received/receivable from Master TK               13,917           1,210           7,205              –
                  Withholding tax on distributions at 20%                         2,783             242           1,441              –
                  Foreign currency translation differences                         (221)             14               –              –
                  Japanese withholding tax on distributions                       2,562             256           1,441              –
                  Fair market value of investment properties (Note 12)          611,090         406,320               –              –
                  Acquisition costs incurred outside the MTK Business              (574)               –              –              –
                  Fair market value of derivatives                                (1,144)              –              –              –
                  Fair market value of investment properties
                  and derivatives                                               609,372         406,320               –              –
                  Cost base of investment properties and derivatives
                  at Master TK Business level                                  (581,894)       (393,649)              –              –
                  Deferred tax on difference between fair market value
                  and cost base at 20%                                            5,495           2,534               –              –
                  Opening balance at beginning of the period                     (2,573)               –              –              –
                  Foreign currency translation differences                           53              39               –              –
                  Deferred Japanese tax                                           2,975           2,573               –              –
                  Income tax expense                                              5,537           2,829           1,441              –
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008     49




                        Note 7 – Earnings per unit
For personal use only
                                                                                    Consolidated        Consolidated                 Trust                  Trust
                                                                                     Year ended         5 March 2007          Year ended        5 March 2007
                                                                                    30 June 2008      to 30 June 2007        30 June 2008     to 30 June 2007

                        Basic earnings per unit (cents)                                     11.31              22.81                 8.10               14.95
                        Diluted earnings per unit (cents)                                   11.31              22.81                 8.10               14.95

                        The diluted earnings per unit is the same as basic earnings per unit as no dilutionary potential ordinary units have been issued.

                        Basic earnings per unit and diluted earnings per unit amounts are calculated by dividing net profit after tax for the period
                        attributable to the ordinary unitholders of CKT by the weighted average number of ordinary units outstanding during the year.

                        The following reflects the income and unit data used in the calculations of basic and diluted earnings per unit computations:
                                                                                    Consolidated        Consolidated                 Trust                  Trust
                                                                                     Year ended         5 March 2007          Year ended        5 March 2007
                                                                                    30 June 2008      to 30 June 2007        30 June 2008     to 30 June 2007

                        Net profit attributable to unitholders ($’000)                     16,978              34,234               12,159              22,443
                        Weighted average number of ordinary units
                        for basic and diluted earnings per unit                     150,097,328          150,097,328         150,097,328         150,097,328



                        Note 8 – Cash and cash equivalents
                                                                                    Consolidated        Consolidated                 Trust                  Trust
                                                                                    30 June 2008        30 June 2007         30 June 2008        30 June 2007
                                                                                           $’000               $’000                $’000               $’000

                        Cash at bank                                                      17,059               5,583                3,249               3,167
                        Conditional cash reserves                                          1,656                    –                    –                     –
                        Cash held by Trust Bank                                           11,081                6,510                    –                     –
                        Total cash and cash equivalents                                   29,796              12,093                3,249               3,167

                        Conditional cash reserves are insurance premium and trust fee reserves required to be maintained as part of borrowing facilities.

                        (a) Reconciliation of operating profit to the net cash flow from operations:
                                                                                    Consolidated        Consolidated                 Trust                  Trust
                                                                                     Year ended         5 March 2007          Year ended        5 March 2007
                                                                                    30 June 2008      to 30 June 2007        30 June 2008     to 30 June 2007
                                                                                           $’000                $’000               $’000               $’000

                        Net profit after tax attributable to unitholders of CKT            16,978              34,234               12,159              22,443
                        Unrealised gain/(loss) from revaluation
                        of financial derivatives                                            6,099              (22,557)              2,611             (20,404)
                        Unrealised gain/(loss) from investment
                        property revaluations                                             (7,840)             (11,501)                   –                     –
                        Amortisation of debt establishment costs                             600                   40                    –                     –
                        Equity costs classified as investing activities                     2,224                    –               2,224                      –
                        Minority interest classified as financing activities                   973                    –                    –                     –
                        Change in assets and liabilities
                        Decrease/(Increase) in trade and other receivables                 5,019               (7,459)             (5,433)              (1,287)
                        Increase/(Decrease) in trade and other payables                      608                3,778               (1,142)                 354
                        Decrease/(Increase) in other assets                                  644               (1,086)                   –                     –
                        Increase in interest receivables                                     (917)             (1,150)               (917)              (1,150)
                        Increase in tax liabilities                                        3,958                2,790                    –                     –
                        Net cash flows from operating activities                           28,346               (2,911)              9,502                    (44)
                                                                                                                                                                                   50




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 9 – Trade and other receivables
For personal use only
                                                                                           Consolidated            Consolidated                      Trust                     Trust
                                                                                           30 June 2008            30 June 2007            30 June 2008            30 June 2007
                                                                                                  $’000                   $’000                   $’000                   $’000

                  Trade receivables                                                                   251                       15                       –                        –
                  Allowance for impairment loss 1                                                        –                       –                       –                        –
                                                                                                      251                       15                       –                        –

                  Consumption tax and GST receivable                                                1,033                   7,403                       43                        –
                  Distribution receivable – related party 2                                              –                       –                  6,676                      1,210
                  Other receivables                                                                 1,156                       41                       –                       77
                  Total trade and other receivables                                                 2,440                   7,459                   6,719                  1,287

                  1
                      Trade receivables are non-interest bearing and are generally on 15-30 day terms. A provision for impairment loss is recognised when there is objective
                      evidence that an individual trade receivable is impaired. There was no impairment loss in the consolidated entity and Trust during the financial year.
                  2
                      Details of related party receivables are set out in Note 23.




                  Note 10 – Other assets
                                                                                           Consolidated            Consolidated                      Trust                     Trust
                                                                                           30 June 2008            30 June 2007            30 June 2008            30 June 2007
                                                                                                  $’000                   $’000                   $’000                   $’000

                  Prepayments                                                                         442                   1,086                        –                        –



                  Note 11 – Other financial assets
                                                                                           Consolidated            Consolidated                      Trust                     Trust
                                                                                           30 June 2008            30 June 2007            30 June 2008            30 June 2007
                                                                                                  $’000                   $’000                   $’000                   $’000

                  Investment in Master TK – at cost 1                                                    –                       –               279,881                 208,814
                  Other investments                                                                     29                      29                       –                        –
                  Total other financial assets                                                           29                      29              279,881                 208,814

                  1
                      Under the contractual relationship with Godo Kaisha Kenedix Master TK (Master Tokumei Kumiai Agreement), CKT is entitled to 97% of the profits and losses
                      of the Master TK business. The Master TK Operator has invested in the business of two Sub TK Operators, Godo Kaisha Sub TK One and Godo Kaisha Sub TK
                      Two under other TK Business (Sub TK Agreements). The Master TK Operator is entitled to 99.9% of the profits and losses of the Sub TK businesses.



                  Note 12 – Investment properties
                                                                                           Consolidated            Consolidated                      Trust                     Trust
                                                                                           30 June 2008            30 June 2007            30 June 2008            30 June 2007
                                                                                                  $’000                   $’000                   $’000                   $’000

                  Investment properties at fair value                                            611,090                 406,320                         –                        –


                  (a) Reconciliation of carrying amounts
                  Carrying amount beginning of period                                            406,320                         –                       –                        –
                  Additions:
                  – Acquisitions                                                                 195,210                 415,233                         –                        –
                  – Capital expenditure                                                                  7                       –                       –                        –
                  Net gains from fair value adjustments to
                  investment properties                                                             7,840                  11,501                        –                        –
                  Foreign currency translation differences                                          1,713                 (20,414)                       –                        –
                  Carrying amount at end of period                                               611,090                406,320                          –                        –
                                                                                                               Challenger Kenedix Japan Trust Annual Report 2008      51




                        (b) Details of investment properties
                                                                      Original
For personal use only
                                                                   acquisition
                                                                           cost
                                                                    (including
                                                                  transaction                                            Additions,
                                                                         costs)                                         acquisitions Consolidated Consolidated
                                                                    translated                                                  and       30 June      30 June
                                                                  at spot rate        Latest                              disposals          2008         2007
                                                                       balance      external                Valuation          since     Carrying     Carrying
                                                    Acquisition           date     valuation                 amount       valuation         value        value
                        Investment property               date           $’000          date      Valuer        $’000         $’000         $’000        $’000

                        Carino Chitosedai           26-Jun-07         93,970      31-Dec-07        TOEI      103,708               7     103,7151       95,444
                        Carino Tokiwadai            25-Apr-07         59,709      30-Jun-08        TOEI       64,289               –      64,289         62,421
                                                                                                                                                   1
                        Izumiya Hakubaicho          25-Apr-07         55,825      31-Dec-07 Hiro & Reas        57,212              –      57,212        54,594
                        Unicus Ina                  25-Apr-07         46,276      30-Jun-08 Hiro & Reas       46,988               –      46,988         45,622
                        Valor Toda                  25-Apr-07         36,342      30-Jun-08        TOEI        36,372              –      36,372         35,314
                                                                                                                                                   1
                        Life Higashinakano          25-Apr-07         26,363      31-Dec-07 Hiro & Reas        27,033              –      27,033         25,961
                        Life Asakusa                25-Apr-07         22,923      30-Jun-08 Hiro & Reas        22,708              –      22,708        22,048
                        Osada Nagasaki              25-Apr-07         17,397      31-Dec-07 Hiro & Reas        17,793              –      17,7931        16,703
                        Yaoko Sakato Chiyoda        25-Apr-07         14,984      31-Dec-07 Hiro & Reas        15,040              –      15,0401        14,603
                        Sunny Noma                  25-Apr-07          14,133     30-Jun-08 Hiro & Reas        14,155              –      14,155         13,744
                        Kansai Super Saigo          25-Apr-07         10,585      30-Jun-08 Hiro & Reas        10,911              –      10,911         10,594
                        Kojima Nishiarai            25-Apr-07           8,351     31-Dec-07        TOEI         9,545              –       9,5451         9,272
                        DeoDeo Kure                 02-Aug-07         27,908      30-Jun-08 Hiro & Reas        27,328              –      27,328                  –
                        Seiyu Miyagino              07-Sep-07          8,837      30-Jun-08 Hiro & Reas         8,572              –       8,572                  –
                        Aeon Kushiro                21-Dec-07          25,115     30-Jun-08        TOEI        25,067              –      25,067                  –
                        Valor Ichinomiya            21-Dec-07         26,286      30-Jun-08        TOEI        27,524              –      27,524                  –
                        Life Nagata                 15-Feb-08         20,699      18-Jan-08 Hiro & Reas        20,699              –      20,6991                 –
                        Renaissance Fujimidai       15-Feb-08         25,289      01-Feb-08        TOEI        25,289              –      25,2891                 –
                                                                                                                                                   1
                        Valor Takinomizu            19-Mar-08         26,401      18-Feb-08        TOEI        26,401              –      26,401                  –
                        Life Kema                   31-Mar-08         24,449      11-Mar-08 Hiro & Reas       24,449               –      24,4491                 –
                        Total properties                            591,842                                  611,083               7     611,090       406,320

                        1
                            Directors’ valuation.

                        The fair value represents the amount at which the assets could be exchanged between a knowledgeable willing but not anxious
                        buyer and a knowledgeable willing but not anxious seller in an arm’s length transaction at the date of valuation, based on current
                        prices in an active market for similar properties in the same location and condition and subject to similar leases. In determining fair
                        value, the independent valuers or the Directors have discounted the expected net cash flows applicable to each property to their
                        present value using a market determined, risk-adjusted discount rate applicable to the respective asset.

                        CKT holds an indirect interest in the investment properties arising from the contractual relationship between CKT and the Master TK
                        Operator. The beneficial legal ownership of the investment properties is held in the name of the Sub TK Operators.

                        Assets pledged as security
                        First mortgages have been granted as security for bank loans (Note 16) over all investment properties, except Life Kema. The carrying
                        value pledged as security is $586.64 million (2007: $406.32 million). The terms of the first mortgages preclude the assets being sold
                        or being used as security for further mortgages without the permission of the first mortgage holder.
                                                                                                                                                         52




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 13 – Trade and other payables
For personal use only
                                                                                  Consolidated     Consolidated                 Trust                Trust
                                                                                  30 June 2008     30 June 2007         30 June 2008         30 June 2007
                                                                                         $’000            $’000                $’000                $’000

                  Trade creditors and accruals                                          3,072              4,753                 737                2,748
                  Rent paid in advance                                                  3,017              2,069                    –                    –
                  Interest payable                                                      1,210                461                    –                    –
                  Other liabilities                                                          –               820                    –                    –
                  Amounts payable to related parties 1                                  1,760               348                  911                  165
                  Total trade and other payables                                        9,059             8,451                1,648                2,913

                  1
                      Details of related party payables are set out in Note 23.




                  Note 14 – Provisions
                  Distributions payable represent a final distribution of 13.60 cents per unit for the year ended 30 June 2008 (2007: 1.42 cents per unit).
                                                                                  Consolidated     Consolidated                 Trust                Trust
                                                                                  30 June 2008     30 June 2007         30 June 2008         30 June 2007
                                                                                         $’000            $’000                $’000                $’000

                  Distributions payable                                                11,332              2,131              11,332                2,131


                  Distributions to unitholders
                  Opening balance at beginning of the period                            2,131                  –                2,131                    –
                  Distributions proposed during the year                               11,332              2,131              11,332                2,131
                  Payment of distributions                                              (2,131)                –               (2,131)                   –
                  Balance at end of year                                               11,332              2,131              11,332                2,131



                  Note 15 – Current tax liabilities
                                                                                  Consolidated     Consolidated                 Trust                Trust
                                                                                  30 June 2008     30 June 2007         30 June 2008         30 June 2007
                                                                                         $’000            $’000                $’000                $’000

                  Japanese withholding tax                                              1,240                256                    –                    –
                                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008            53




                        Note 16 – Interest bearing liabilities
For personal use only
                                                                                                  Consolidated            Consolidated                      Trust                   Trust
                                                                                                  30 June 2008            30 June 2007            30 June 2008             30 June 2007
                                                                                                         $’000                   $’000                   $’000                    $’000

                        Current
                        Bank loans – unsecured 1                                                                –                       –                       –                        –

                        Non-current
                        Bank loans – secured 1                                                          341,942                 217,069                         –                        –
                        Less: Unamortised borrowing costs                                                 (2,859)                 (1,806)                       –                        –
                        Total non-current interest bearing liabilities                                 339,083                  215,263                         –                        –
                        Total interest bearing liabilities                                             339,083                 215,263                          –                        –

                        1
                            Total bank loans at balance date were $341.94 million (30 June 2007: $217.07 million). All loans are denominated in Yen (2008: ¥34.79 billion
                            (2007: ¥22.74 billion)). The Sub TK Operators have entered into loan facilities with Sumitomo Mitsui Banking Corporation (SMBC) and Shinsei Bank Limited.
                            The SMBC facility comprises one tranche (¥24.93 billion ($245.02 million)) expiring on 27 April 2012. The Shinsei facility comprises one tranche (¥9.86 billion
                            ($96.92 million)) expiring on 7 September 2012. The SMBC facility fixed components of the loans comprise fixed interest rate swap contracts calculated at
                            a base rate plus a margin. The Shinsei facility is fully fixed. The loans are secured by way of first ranking mortgages over the investment properties of the
                            Sub TKs.
                            The weighted average term of the loans is 3.9 years as at 30 June 2008. After interest rate swaps, 96% of the loans are fixed at a rate of 1.97% per annum.
                            The remaining 4% is floating debt with a current rate of 1.59% per annum.
                            Unless otherwise disclosed, the carrying amount of CKT’s current and non-current borrowings approximate their fair value.
                            During the current and prior year, there were no defaults or breaches on any of the loans.


                        Financing facilities available
                        At reporting date, the following financing facilities had been negotiated and were available
                                                                                                  Consolidated            Consolidated                      Trust                   Trust
                                                                                                  30 June 2008            30 June 2007            30 June 2008             30 June 2007
                                                                                                         $’000                   $’000                   $’000                    $’000

                        Total facilities:
                        Bank loans                                                                     356,365                  250,971                         –                        –

                        Facilities used at reporting date:
                        Bank loans                                                                      341,942                 217,069                         –                        –

                        Facilities unused at reporting date:
                        Bank loans                                                                       14,423                  33,902                         –                        –

                        The following table sets out the carrying amount, by maturity, of CKT’s bank loans and facilities as at balance date:
                                                              <1                   >1-<2                   >2-<3                   >3-<4                      >4                    Total
                        Year ended                          year                    years                   years                   years                  years
                        30 June 2008                       $’000                   $’000                   $’000                   $’000                   $’000                   $’000

                        Consolidated
                        Bank loans                              –                       –                       –               245,017                  96,925                 341,942
                        Effective interest rate                                                                                  1.98%                    1.86%

                        Facilities unused                       –                       –                       –                13,467                      956                 14,423
                        Total facilities                        –                       –                       –              258,484                   97,881                 356,365


                        Trust
                        Bank loans                              –                       –                       –                       –                       –                        –

                        Facilities unused                       –                       –                       –                       –                       –                        –
                        Total facilities                        –                       –                       –                       –                       –                        –
                                                                                                                                                                                   54




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 16 – Interest bearing liabilities (continued)
                  Financing facilities available (continued)
For personal use only

                                                        <1                  >1-<2                   >2-<3                   >3-<4                       >4
                  Year ended                          year                   years                   years                   years                   years                   Total
                  30 June 2007                       $’000                  $’000                   $’000                   $’000                    $’000                   $’000

                  Consolidated
                  Bank loans                              –                       –                       –                       –               217,069                 217,069
                  Effective interest rate                                                                                                          1.64%
                  Facilities unused                       –                       –                       –                       –                33,902                  33,902
                  Total facilities                        –                       –                       –                       –              250,971                 250,971


                  Trust
                  Bank loans                              –                       –                       –                       –                       –                       –
                  Facilities unused                       –                       –                       –                       –                       –                       –
                  Total facilities                        –                       –                       –                       –                       –                       –



                  Note 17 – Deferred tax liabilities
                                                                                            Consolidated            Consolidated                      Trust                   Trust
                                                                                            30 June 2008            30 June 2007            30 June 2008            30 June 2007
                                                                                                   $’000                   $’000                   $’000                   $’000

                  Deferred tax liabilities 1                                                        5,496                   2,534                         –                       –
                  Total deferred tax liabilities                                                    5,496                   2,534                         –                       –

                  1
                      Deferred tax liabilities are attributable to investment properties, representing the withholding tax payable on the difference between the Japanese tax written
                      down value versus fair value of investment properties and interest rate derivatives, and depreciation.
                                                                                                                                Challenger Kenedix Japan Trust Annual Report 2008   55




                        Note 18 – Contributed equity
For personal use only
                                                                                                    Consolidated         Consolidated                 Trust               Trust
                                                                                                    30 June 2008         30 June 2007         30 June 2008        30 June 2007
                                                                                                           $’000                $’000                $’000               $’000

                        Issued units opening balance                                                      209,466                      –          209,466                     –
                        Ordinary units issued 1                                                            75,049             225,146               75,049             225,146
                        Costs associated with the issue
                        of units released/(paid)                                                                  125          (15,680)                125             (15,680)
                        Issued units closing balance                                                     284,640              209,466             284,640             209,466

                                                                                                      Number of            Number of            Number of           Number of
                                                                                                       securities           securities           securities          securities
                                                                                                     Whole units          Whole units          Whole units         Whole units

                        Ordinary units on issue at the beginning
                        of the period                                                                150,097,328                       –      150,097,328                     –
                        Ordinary units issued                                                                       –    150,097,328                      –       150,097,328
                        Total units on issue at end of the year                                     150,097,328          150,097,328          150,097,328         150,097,328

                        1
                            All units in CKT are fully paid and ranked equally with each other in all respects.


                        Capital management
                        CKT manages its capital to ensure the Trust will be able to continue as a going concern while maximising optimal returns to
                        unitholders through the optimisation of debt and equity balances. Management also aims to maintain a capital structure that
                        ensures the lowest cost of capital available to the entity.

                        The capital structure of CKT consists of debt which includes borrowings disclosed in Note 16, cash and cash equivalents disclosed in
                        Note 8, issued capital disclosed above, and reserves and retained profits in Note 19. CKT’s management reviews the capital structure
                        regularly and balances its overall capital structure through payment of distributions, new unit issues and unit buy-backs as well as
                        the drawing of new debt or repayment of existing debt.

                        Hedging is utilised to minimise risk exposure. Details of hedges are contained in Note 21.

                        Capital risk is monitored against policies, guidelines and externally imposed covenants:1


                                                                          Policy                                                              30 June 2008        30 June 2007

                        Gearing                                           Not exceeding 60% of drawn debt                                          49.35%              45.95%

                        Interest rate risk                                To fix the interest on greater than 90% of drawn debt                        96%                 92%

                        Foreign currency risk                             Income hedging
                                                                          – Distribution next five years: 80% to 100%                                100%                100%
                                                                          – Distribution years six to 10: Up to 90% 2                                90%                 90%

                                                                          Capital hedging
                                                                          – Up to 50% of net investment in Japanese assets                            39%                 39%

                        1
                            During the current and prior year, the financial covenants under the borrowing facilities were complied with.
                        2
                            Distribution years six to seven only.
                                                                                                                                                                     56




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 19 – Reserves
For personal use only
                                                                                        Consolidated           Consolidated                      Trust           Trust
                                                                                        30 June 2008           30 June 2007           30 June 2008        30 June 2007
                                                                                               $’000                  $’000                  $’000               $’000

                  Unrealised gains reserve                                                     28,050                 31,485                    16,674         20,404
                  Foreign currency translation reserve                                        (26,537)               (26,146)                        –              –
                                                                                                 1,513                 5,339                    16,674         20,404

                  (a) Unrealised gains reserve
                  The unrealised gains reserve represents
                  unrealised gains that have not been distributed.

                  Movements in reserve
                  Opening balance at beginning of the period                                   31,485                        –              20,404                  –
                  Transfers gain/loss from undistributed income:
                  – Fair value movements on investment properties                               7,840                 11,501                         –              –
                  – Fair value movements on derivatives                                        (6,099)                22,557                    (2,611)        20,404
                  – Deferred tax                                                                (2,975)               (2,573)                        –              –
                  – Amortisation of borrowing costs                                               (601)                      –                     (17)             –
                  – Performance fee1                                                              (200)                      –                     (98)             –
                  – Minority interest share of fair value movements,
                    deferred tax expense and amortisation of
                    borrowing costs                                                               (366)                      –                       –              –
                  – Gain on foreign currency contracts                                          (1,034)                      –                  (1,034)             –
                  Total transfers gain/loss from
                  undistributed income                                                         (3,435)                31,485                    (3,760)        20,404
                  Transfer from FCTR to Income Statement                                              –                      –                     30               –
                  Balance at end of year                                                       28,050                 31,485                    16,674         20,404


                  (b) Foreign currency translation reserve
                  The foreign currency translation reserve is used to
                  record exchange differences arising from the translation
                  of the financial statements of the interests in
                  self-sustaining foreign operations.

                  Movements in reserve
                  Opening balance at beginning of the period                                  (26,146)                       –                       –              –
                  Gain/(loss) on translation of foreign operations                                (391)              (26,146)                        –              –
                  Balance at end of year                                                      (26,537)               (26,146)                        –              –

                  1
                      Performance fees are payable to Challenger Listed Investments Limited ($98,000) and the Japan Asset Manager ($102,000).



                  Note 20 – Segment information
                  CKT operates in one geographical segment in Japan and in one business segment being retail property.
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   57




                        Note 21 – Financial instruments
                        Derivative financial instruments
For personal use only

                        The following table sets out CKT’s outstanding derivative financial instruments as at the balance date:
                                                                                    Consolidated        Consolidated                Trust               Trust
                                                                                    30 June 2008        30 June 2007        30 June 2008        30 June 2007
                                                                                           $’000               $’000               $’000               $’000

                        Current assets
                        Interest receivable on cross currency swaps                        2,067               1,150               2,067                1,150
                        Cross currency swaps at fair value                                 2,350               3,710               2,350                3,710
                        Foreign currency income hedges at fair value                       5,397               1,106               5,397                1,106
                        Total current assets                                               9,814               5,966               9,814               5,966

                        Non-current assets
                        Cross currency swaps at fair value                                 3,044               5,755               3,044                5,755
                        Interest rate swaps at fair value                                     85               2,986                    –                   –
                        Foreign currency income hedges at fair value                       7,001               9,833               7,001               9,833
                        Total non-current assets                                          10,130              18,574              10,045              15,588
                        Total assets                                                     19,944              24,540               19,859              21,554


                        Current Liabilities
                        Cross currency swaps at fair value                                      –                   –                   –                   –
                        Interest rate swaps at fair value                                 (1,228)               (864)                   –                   –
                        Foreign currency income hedges at fair value                            –                   –                   –                   –
                        Total current liabilities                                         (1,228)               (864)                   –                   –

                        Non-current liabilities
                        Cross currency swaps at fair value                                      –                   –                   –                   –
                        Interest rate swaps at fair value                                       –                   –                   –                   –
                        Foreign currency income hedges at fair value                            –                   –                   –                   –
                        Total non-current liabilities                                           –                   –                   –                   –
                        Total liabilities                                                 (1,228)               (864)                   –                   –

                        Summary of unrealised gain/(loss) on
                        revaluation of financial derivatives
                        Fair value movements
                        – Cross currency swaps                                            (4,071)              9,465               (4,071)             9,465
                        – Interest rate swaps                                             (3,265)              2,122                    –                   –
                        – Foreign currency income hedges                                   1,459              10,939               1,460              10,939
                        Foreign currency translation differences                            (222)                 31                    –                   –
                        Fair value movements (per Income Statement)                       (6,099)             22,557               (2,611)            20,404

                        Currency risk
                        CKT manages its exposure to currency risk by maintaining a natural foreign exchange hedge between Japanese Yen denominated
                        assets and borrowings.

                        Income hedges
                        The Trust is exposed to foreign exchange risk on Japanese Yen denominated earnings which are fully hedged against movements
                        in the Japanese Yen exchange rate (Refer Note 3 policies). Any gains or losses arising from changes in fair value are reflected in the
                        Income Statement. The effect on the Trust’s profit and loss for the year ended 30 June 2008 was a gain of $1.46 million (30 June
                        2007: gain of $10.94 million).
                                                                                                                                                            58




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 21 – Financial instruments (continued)
                  Income hedges (continued)
For personal use only

                  The notional and fair values of income hedges for 2008 and 2007 are presented in the table below:
                  Description                                                  Consolidated         Consolidated                 Trust               Trust
                                                                               30 June 2008         30 June 2007        30 June 2008         30 June 2007
                  Foreign currency income hedges                                      $’000                $’000               $’000                $’000

                  Notional contract value                                           166,663              117,683             166,663              117,683
                  Fair value movements                                                1,459               10,939               1,459               10,939
                  Fair value (assets)                                                12,398               10,939              12,398               10,939

                  The details of the outstanding income hedge contracts are as follows:
                                                                                   Trust sells          Average             Trust sells          Average
                                                                                   Japanese        exchange rate            Japanese        exchange rate
                                                                                       ¥’000                                    ¥’000
                  Buy Australian Dollars                                                2008                2008                 2007                 2007

                  Maturity
                  Less than one year                                             1,810,081                 86.12             777,411                88.52
                  One to two years                                               1,859,257                 81.73           1,289,761                84.55
                  Two to three years                                             1,839,752                 77.58           1,287,595                80.37
                  Three to four years                                            1,834,682                 73.94           1,285,729                76.58
                  Four to five years                                              1,835,364                 70.93           1,285,623                73.19
                  Greater than five years                                         3,284,566                 67.73           2,951,674                68.22

                  Capital hedges
                  The Trust is exposed to foreign exchange risk on Japanese Yen denominated assets and liabilities which are partly hedged against
                  movements in the Japanese Yen exchange rate. Any gains or losses arising from changes in fair value are reflected in the Income
                  Statement. The effect on the Trust’s profit and loss for the year ended 30 June 2008 was a loss of $4.07 million (30 June 2007: gain
                  of $9.47 million).
                  The notional and fair values of capital hedges for 2008 and 2007 are presented in the table below:
                                                                               Consolidated         Consolidated                 Trust               Trust
                                                                               30 June 2008         30 June 2007        30 June 2008         30 June 2007
                  Cross currency swaps                                                $’000                $’000               $’000                $’000

                  Notional contract value                                           114,801               81,000             114,801               81,000
                  Fair value movements                                                (4,071)              9,465               (4,071)              9,465
                  Fair value (assets)                                                  5,394               9,465                5,394               9,465

                  The details of the outstanding capital hedge contracts are as follows:

                  Gross-settled capital hedges
                                                                                   Trust sells          Average            Australian            Japanese
                                                                                   Japanese        exchange rate             interest             interest
                  Buy Australian Dollars                                               ¥’000                                     rate                 rate

                  Maturity – 2008
                  Less than one year                                                      –                    –                  –                    –
                  One to two years                                                        –                    –                   –                    –
                  Two to three years                                                      –                    –                   –                    –
                  Three to four years                                            2,840,030                  92.6              6.49%                1.20%
                  Four to five years                                               3,121,189                 92.5              6.49%                1.28%
                  Greater than five years                                         2,989,192                  93.5              6.46%                1.46%
                  Maturity – 2007
                  Four to five years                                              2,502,900                   92.7             6.41%                1.23%
                  Greater than five years                                         5,005,800                   92.7             6.34%                1.39%

                  Gross-settled capital hedges comprise two components. CKT delivers Japanese Yen to the counterparty and in return, receives
                  Australian Dollars from the same counterparty. Likewise, coupon interest is paid in Japanese Yen and is received in Australian Dollars.
                                                                                                                               Challenger Kenedix Japan Trust Annual Report 2008          59




                        Net-settled capital hedges
                                                                                                    Trust sells              Average              Australian               Japanese
For personal use only
                                                                                                    Japanese                exchange                interest                interest
                        Buy Australian Dollars                                                          ¥’000                    rate                   rate1                   rate1

                        Maturity – 2008
                        Less than one year                                                                –                          –                    –                          –
                        One to two years                                                                  –                          –                     –                         –
                        Two to three years                                                      863,361,602                       93.6                6.31%                          –
                        Three to four years                                                     582,203,183                       94.9                6.14%                          –
                        Four to five years                                                       301,044,764                       98.6                6.00%                          –
                        Greater than five years                                                            –                          –                     –                         –
                        Maturity – 2007
                        Not applicable 1                                                                      –                       –                      –                       –

                        1
                            Net-settled capital hedges were entered into during the year ended 30 June 2008. These hedges receive only interest denominated in Australian Dollars after
                            deducting Japanese Yen interest.

                        Sensitivity analysis
                        The analysis below shows a summary of the impact on profit after tax and equity of a movement in foreign currency exchange rates
                        against the Australian Dollar on the Japanese Yen exposure at the balance date:
                                                                        Movement in                        P&L                  Equity                    P&L                  Equity
                                                                      variable against                    2008                    2008                   2007                    rate
                        Currency                                               A$ (%)                    $’000                   $’000                  $’000                   $’000

                        Consolidated
                        Yen                                                      +10%                  19,391                 (25,334)                14,037                 (18,279)
                                                                                 –10%                  (23,701)               30,885                  (17,157)                22,340

                        Trust
                        Yen                                                      +10%                  19,391                         –               14,037                         –
                                                                                 –10%                  (23,701)                       –               (17,157)                       –

                        The analysis below shows the impact on profit after income tax and equity of a movement in foreign currency exchange rates against
                        the Australian Follar on the Japanese Yen exposure for the foreign currency translation reserve (FCTR) at the balance date:
                                                                        Movement in                        P&L                  Equity                    P&L                  Equity
                                                                      variable against                    2008                    2008                   2007                    rate
                        FCTR                                                   A$ (%)                    $’000                   $’000                  $’000                   $’000

                        Consolidated
                        Yen                                                      +10%                         –               (25,334)                       –               (18,279)
                                                                                 –10%                         –               30,885                         –                22,340

                        The analysis below shows the impact on profit after income tax and equity of a movement in foreign currency exchange rates
                        against the Australian Dollar on the Japanese Yen exposure for the fair value of currency hedges at the balance date:
                                                                        Movement in                        P&L                  Equity                    P&L                  Equity
                        Fair value of                                 variable against                    2008                    2008                   2007                    rate
                        currency hedges                                        A$ (%)                    $’000                   $’000                  $’000                   $’000

                        Consolidated
                        Yen                                                      +10%                   20,117                        –                14,147                        –
                                                                                 –10%                 (24,588)                        –               (17,291)                       –

                        Trust
                        Yen                                                      +10%                   20,117                        –                14,147                        –
                                                                                 –10%                 (24,588)                        –               (17,291)                       –
                                                                                                                                                         60




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 21 – Financial instruments (continued)
                  Income hedges (continued)
For personal use only

                  Sensitivity analysis (continued)
                  The analysis below shows the impact on profit after income tax and equity of a movement in foreign currency exchange rates
                  against the Australian Dollar on the Japanese Yen exposure for the foreign currency denominated accounts at the balance date:
                  CKT Trust                                Movement in                      P&L           Equity                  P&L              Equity
                  foreign currency                       variable against                  2008             2008                 2007                rate
                  denominated accounts                            A$ (%)                  $’000            $’000                $’000               $’000

                  Consolidated
                  Yen                                               +10%                  (726)                   –              (110)                   –
                                                                    –10%                   887                    –              134                     –

                  Trust
                  Yen                                               +10%                  (726)                   –              (110)                   –
                                                                    –10%                   887                    –              134                     –

                  Interest rate risk
                  Interest rate swaps

                  Consolidated
                  The notional and fair values for 2008 and 2007 are presented in the table below:
                                                                              Weighted
                                  Notional                         Net fair    average
                                  contract       Fair value          value     interest             <1      1-2         2-3      3-4        4-5        >5
                  Year               value      movements           assets         rate            year   years       years    years      years      years

                  2008             326,302          (3,266)         (1,144)          1.97%           –        –          – 229,377       96,925          –
                  2007             198,371           2,122           2,122           2.02%           –        –          –         – 198,371             –

                  The effective interest rate on floating facilities (which are 96% hedged) is 1.98%. The effective interest rate on fixed interest facilities
                  is 1.86%.

                  Sensitivity analysis
                  The analysis below shows the impact on profit after tax and equity of a movement in five-year Japanese swap rates at the balance
                  date:
                                                              Movement in                   P&L           Equity                  P&L              Equity
                                                                  variable                 2008             2008                 2007                rate
                                                                       (%)                $’000            $’000                $’000               $’000

                  Consolidated
                  Interest rate movement –
                  financial assets/liabilities                        +1%                  6,921                   –           10,375                     –
                                                                     –1%              (9,600)                     –           (6,640)                    –

                  Trust
                  Interest rate movement –
                  financial assets/liabilities                        +1%                   115                    –              (175)                   –
                                                                     +1%                   (135)                  –              167                     –
                                                                                                               Challenger Kenedix Japan Trust Annual Report 2008   61




                         The analysis below shows the impact on profit after income tax and equity of a movement in interest rates for interest bearing
                        liabilities at the balance date:
For personal use only

                                                                Movement in                   P&L               Equity                 P&L               Equity
                                                                    variable                 2008                 2008                2007                 rate
                                                                         (%)                $’000                $’000               $’000                $’000

                        Consolidated
                        Interest rate movement –
                        interest bearing liabilities                    +1%                  (156)                   –                (187)                   –
                                                                         –1%                  156                    –                 187                    –

                        The analysis below shows the impact on profit after income tax and equity of a movement in interest rates for derivative financial
                        instruments at the balance date:
                                                                Movement in                   P&L               Equity                 P&L               Equity
                                                                    variable                 2008                 2008                2007                 rate
                                                                         (%)                $’000                $’000               $’000                $’000

                        Consolidated
                        Interest rate movement –
                        derivative financial instruments                 +1%                 7,077                    –              10,562                    –
                                                                         –1%               (9,756)                   –              (6,827)                   –

                        Trust
                        Interest rate movement –
                        derivative financial instruments                 +1%                   115                    –                (175)                   –
                                                                         –1%                 (135)                   –                 167                    –

                        Credit risk
                        Consolidated
                        The credit risk in respect of derivative transactions is spread among three counterparties within specified limits, each with an S&P
                        rating of A or higher.

                        Tenants are credit risk assessed with reference to both external and internal ratings. The concentration of tenant credit risk for
                        approximately 80% of the portfolio have a BB rating or higher. As at 30 June 2008, the largest tenant comprises 15% of the
                        property portfolio. As at 30 June 2008, there are no impairments for CKT group (2007: Nil).

                        Trust
                        The credit risk in respect of derivative transactions is spread among two counterparties within specified limits, each with an S&P
                        rating of A or higher.

                        As at 30 June 2008, there are no impairments for the Trust (2007: Nil).
                                                                                                                                                                                      62




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 21 – Financial instruments (continued)
For personal use only
                  Liquidity risk
                  The following table summarises the maturity profile of CKT’s financial assets and liabilities.
                                                              Carrying
                                                               amount
                  Consolidated                                     per
                                                               Balance      Contractual
                  Year ended                                     Sheet         amount          <1 year       1-2 years      2-3 years       3-4 years      4-5 years        >5 years
                  30 June 2008                    Notes          $’000            $’000         $’000           $’000          $’000           $’000          $’000           $’000

                  Financial assets
                  Non-derivative
                  financial assets
                  Cash and
                  cash equivalents                     8        29,796           29,796        29,796                 –              –               –              –                 –
                  Trade and
                  other receivables                    9         2,440             2,440        2,440                 –              –               –              –                 –
                  Other financial assets               11             29                29             –               –              –               –              –             29
                  Derivative
                  financial assets
                  Interest rate swaps                 21            463              463              –               –             27           436                –                 –
                  Foreign exchange
                  contracts                           21        28,632           28,632          9,813         12,313           6,506                –              –                 –
                  Total financial assets                         61,360           61,360        42,049          12,313           6,533            436                –             29

                  Financial liabilities
                  Non-derivative
                  financial liabilities
                  Trade and
                  other payables2                     13         9,059             9,059        9,059                 –              –               –              –                 –
                  Unsecured bank facility             16               –                –             –               –              –               –              –                 –
                  Interest bearing
                  liabilities 1                       16      339,083           368,051         6,656           6,656           6,656       250,822           97,261                  –
                  Derivative
                  financial liabilities
                  Interest rate swaps                 21         1,607             1,607         1,229            378                –               –              –                 –
                  Foreign exchange
                  contracts                           21         8,773             8,773              –               –              –         1,052           4,637          3,084
                  Total financial
                  liabilities                                 358,522           387,490        16,944           7,034           6,656       251,874        101,898            3,084
                  Net financial
                  assets (liabilities)                       (297,162)         (326,130)       25,105           5,279            (123)     (251,438)      (101,898)          (3,055)

                  1
                      The contractual amount of interest bearing liabilities at the year end represents the undiscounted future principal and interest payments until expiry of the
                      facility terms. Interest payments are calculated using the weighted average cost of debt at the year end.
                  2
                      Future Trade and other payables are calculated using the balance date spot rate as disclosed in Note 2.
                                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008   63




                                                                    Carrying
                                                                     amount
For personal use only
                        Trust                                            per
                                                                     Balance     Contractual
                        Year ended                                     Sheet        amount          <1 year       1-2 years      2-3 years    3-4 years   4-5 years     >5 years
                        30 June 2008                    Notes          $’000           $’000         $’000           $’000          $’000        $’000       $’000        $’000

                        Financial assets
                        Non-derivative
                        financial assets
                        Cash and
                        cash equivalents                     8         3,249            3,249         3,249                –              –          –            –            –
                        Trade and
                        other receivables                    9         6,719            6,719         6,719                –              –          –            –            –
                        Other financial assets               11      279,881          279,881               –               –              –          –            –    279,881
                        Derivative
                        financial assets
                        Foreign exchange
                        contracts                          21        28,632            28,632         9,813         12,313            6,506          –            –            –
                        Total financial assets                       318,481          318,481        19,781          12,313            6,506          –            –    279,881

                        Financial liabilities
                        Non-derivative
                        financial liabilities
                        Trade and
                        other payables1                    13          1,648            1,648         1,648                –              –          –            –            –
                        Derivative
                        financial liabilities
                        Foreign exchange
                        contracts                          21          8,773            8,773              –               –              –      1,052       4,637        3,084
                        Total financial
                        liabilities                                  10,421            10,421        1,648                 –              –      1,052       4,637        3,084
                        Net financial
                        assets (liabilities)                       308,060           308,060        18,133          12,313            6,506     (1,052)     (4,637)    276,797

                        1
                            Future Trade and other payables are calculated using the balance date spot rate as disclosed in Note 2.
                                                                                                                                                                                      64




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 21 – Financial instruments (continued)
For personal use only
                  Liquidity risk (continued)
                                                              Carrying
                                                               amount
                  Consolidated                                     per
                                                               Balance      Contractual
                  Year ended                                     Sheet         amount          <1 year       1-2 years      2-3 years       3-4 years      4-5 years        >5 years
                  30 June 2007                    Notes          $’000            $’000         $’000           $’000          $’000           $’000          $’000           $’000

                  Financial assets
                  Non-derivative
                  financial assets
                  Cash and
                  cash equivalents                     8        12,093           12,093        12,093                 –              –               –              –                 –
                  Trade and
                  other receivables                    9          7,459            7,459         7,459                –              –               –              –                 –
                  Other financial assets               11             29                29             –               –              –               –              –             29
                  Derivative
                  financial assets
                  Interest rate swaps                 21         3,063             3,063              –               –           542          1,065           1,456                  –
                  Foreign exchange
                  contracts                           21        23,366           23,366         5,966           5,584           5,167          4,805           1,844                  –
                  Total financial assets                         46,010           46,010        25,518           5,584           5,709          5,870          3,300               29

                  Financial liabilities
                  Non-derivative
                  financial liabilities
                  Trade and
                  other payables2                     13         8,451             8,451         8,451                –              –               –              –                 –
                  Interest bearing
                  liabilities 1                       16      215,263           234,245         3,560           3,560           3,560          3,560       220,005                    –
                  Derivative
                  financial liabilities
                  Interest rate swaps                 21            941              941           864              77               –               –              –                 –
                  Foreign exchange
                  contracts                           21          1,813            1,813              –               –              –               –              –          1,813
                  Total financial
                  liabilities                                 226,468          245,450         12,875           3,637           3,560          3,560       220,005            1,813
                  Net financial
                  assets (liabilities)                       (180,458)        (199,440)        12,643           1,947           2,149          2,310       (216,705)         (1,784)

                  1
                      The contractual amount of interest bearing liabilities at the year end represents the undiscounted future principal and interest payments until expiry of the
                      facility terms. Interest payments are calculated using the weighted average cost of debt at year end.
                  2
                      Future Trade and other payables are calculated using the balance date spot rate as disclosed in Note 2.
                                                                                                                                 Challenger Kenedix Japan Trust Annual Report 2008      65




                                                                    Carrying
                                                                     amount
For personal use only
                        Trust                                            per
                                                                     Balance     Contractual
                        Year ended                                     Sheet        amount          <1 year        1-2 years     2-3 years       3-4 years      4-5 years    >5 years
                        30 June 2007                    Notes          $’000           $’000         $’000            $’000         $’000           $’000          $’000       $’000

                        Financial assets
                        Non-derivative
                        financial assets
                        Cash and
                        cash equivalents                     8         3,167            3,167         3,167                –                 –          –                –         –
                        Trade and
                        other receivables                    9         1,287            1,287         1,287                –                 –          –                –         –
                        Other financial assets               11      208,814          208,814               –               –                 –          –                –   208,814
                        Derivative
                        financial assets
                        Foreign exchange
                        contracts                          21        23,366           23,366          5,966          5,584            5,167        4,805             1,844         –
                        Total financial assets                      236,634           236,634        10,420           5,584            5,167        4,805             1,844   208,814

                        Financial liabilities
                        Non-derivative
                        financial liabilities
                        Trade and
                        other payables1                    13          2,913            2,913         2,913                –                 –          –                –         –
                        Derivative
                        financial liabilities
                        Foreign exchange
                        contracts                          21          1,813            1,813              –               –                 –          –                –     1,813
                        Total financial
                        liabilities                                    4,726            4,726         2,913                –                 –          –                –     1,813
                        Net financial
                        assets (liabilities)                        231,908          231,908          7,507          5,584            5,167        4,805             1,844   207,001

                        1
                            Future Trade and other payables are calculated using the balance date spot rate as disclosed in Note 2.

                        Fair values
                        All assets and liabilities recognised in the Balance Sheet, whether they are carried at cost or at fair value, are recognised at amounts
                        that represent a reasonable approximation of fair value unless otherwise stated in the applicable notes.


                        Note 22 – Net asset backing
                                                                                                  Consolidated            Consolidated                       Trust              Trust
                                                                                                  30 June 2008            30 June 2007            30 June 2008           30 June 2007

                        Basic net asset backing ($)                                                         1.97                      1.48                   1.98               1.53
                        Basic net asset backing attributable to
                        CKT unitholders (excluding minority interest) ($)                                   1.91                      1.44                   1.98               1.53

                        Basic net asset backing is calculated by dividing the equity attributable to CKT by the number of partly paid ordinary units on issue.
                        The number of units used in the calculation of net asset backing is 150,097,328.

                        Further details can be found in Note 2 (iii) Basis of Consolidation.
                                                                                                                                                        66




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 23 – Related party disclosures
                  (a) Responsible Entity
For personal use only

                  The responsible entity of CKT is CLIL, a wholly owned subsidiary of Challenger Life Holdings Pty Limited.

                  (b) Consolidated entities
                                                                                                                        % economic          % economic
                                                                                                     Country of             interest            interest
                                                                                                  incorporation                2008                  2007

                  Tokumei Kumiais (TKs) established under
                  the Tokumei Kumiai Agreements with:
                  Godo Kaisha Kenedix Master TK                                                           Japan                97%                   97%
                  Godo Kaisha Sub TK One                                                                  Japan                97%                   97%
                  Godo Kaisha Sub TK Two                                                                  Japan                97%                     –

                  Under the contractual relationship with Godo Kaisha Kenedix Master TK (Master Tokumei Kumiai Agreement), CKT is entitled
                  to 97% of the profits and losses of the Master TK business. The Master TK Operator has invested in the business of two Sub TK
                  Operators, Godo Kaisha Sub TK One and Godo Kaisha Sub TK Two under other TK Agreements (Sub TK Agreements). The Master
                  TK Business is entitled to 99.9% of the profits and losses of the Sub TK business.

                  The ultimate parent of CKT Group is Challenger Kenedix Japan Trust.

                  (c) Details of Key Management Personnel
                  (i) Directors
                  The Directors of CLIL, the Responsible Entity of CKT, are considered to be Key Management Personnel.

                  • Brenda Shanahan – Chair (appointed 5 December 2007)

                  • Peter Brook (resigned 12 March 2008)

                  • Stephen Gerlach (resigned 5 December 2007)

                  • Russell Hooper

                  • Ian Martens

                  • Geoff McWilliam

                  • Ian Moore

                  • Brendan O’Connor (appointed 12 March 2008)

                  • Robert Woods

                  During the year ended 30 June 2008, Directors were paid $694,733 (2007: $639,150) in respect of their directorship of the
                  Responsible Entity. This amount includes all fees paid to the Directors of CLIL in respect of their Responsible Entity Board and
                  Committee duties for all trusts, including CKT and three other ASX listed funds (ASX: CDI, CWT and CIF).

                  (ii) Other Key Management Personnel
                  In addition to the Directors noted above, the following were considered Key Management Personnel during the period with the
                  authority for the strategic direction and management of CKT:

                  • Trent Alston (Head of Real Estate)

                  • Brett McCarthy (Fund Manager, CKT)

                  • CLIL (Responsible Entity, CKT)

                  (iii) Compensation of the Key Management Personnel of CKT
                  No amounts are paid by CKT directly to the Key Management Personnel individuals of the Trust.

                  CLIL, as the Responsible Entity of CKT, is deemed to be the Key Management Personnel of CKT. Compensation paid directly to CLIL
                  in the form of fees is disclosed in Note 23(d).
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   67




                         (d) CLIL fees
                        CLIL provides strategic and compliance management to CKT and outsources management, custodial and administrative functions
For personal use only
                        to associated entities that are wholly owned by Challenger Financial Services Group Limited (CFSGL). It is entitled to a fee under the
                        CKT Trust Constitution.

                        Challenger Management Services Limited (CMSL) provides custodial and management services to CKT in accordance with the CMSL
                        Management Services Agreement (‘Management Agreement’).

                        (i) Management fees policy
                        The total base management fee payable is calculated as 0.25% per annum of the gross asset value of CKT’s direct and indirect
                        proportionate interest in the assets held in the Master TK business and other assets of CKT. The fee is calculated and accrued
                        monthly and paid half-yearly within two months of the end of each half-year. Further details on base management fees can be
                        found in the Product Disclosure Statement issued 19 March 2007.

                        (ii) Performance fees policy
                        CLIL may also be entitled to a Performance Fee, with an element related to asset level performance and an element related to the
                        relative equity level performance of CKT. The amount payable to the Responsible Entity will be from the assets of CKT. This fee is
                        payable two months after the end of each financial year. Further details on performance fees can be found in the Product Disclosure
                        Statement issued 19 March 2007.

                        (iii) Reimbursement policy
                        All costs associated with custodial and management services are paid for by CMSL. CMSL is entitled to recover all out of pocket
                        expenses included in the Management Agreement. CLIL is entitled to recover costs from CKT under the Constitution.

                        Transactions between CLIL, CMSL and CKT result from normal arm’s length dealings with that company as the Responsible Entity.
                        CLIL is an Australian Financial Services Licence holder.

                        Challenger Treasury is a wholly owned subsidiary of CFSG and is an associate of CLIL.

                        The attached table discloses all fees paid by CKT to CLIL and CMSL under the Trust Constitution and to CMSL under the
                        Management Agreement with CLIL.

                                                                                    Consolidated        Consolidated                Trust                Trust
                                                                                    30 June 2008        30 June 2007        30 June 2008         30 June 2007
                                                                                           $’000               $’000               $’000                $’000

                        (a) Base Responsible Entity fees paid or                              73                    8                  73                   8
                            payable to CLIL, equating to 5% of the
                            base management fee.
                        (b) Management fees paid or payable to                             1,391                 157                1,391                 157
                            CMSL, equating to 95% of the base
                            management fees plus all other fees
                            payable.
                        (c) Performance fees payable to CLIL,                                 98                    –                  98                   –
                            equating to 50% of the asset
                            performance fee.
                        Total Fees as per the Income Statement                             1,562                 165               1,562                  165

                        (d) Acquisition service fees and due diligence                     1,118                    –               1,118                   –
                            fees in relation to further acquisition
                            of properties and debt placement fees
                            for arranging the borrowings, paid or
                            payable to CLIL (Balance sheet).
                        Total fees paid or payable at balance date                         2,680                 165               2,680                  165

                        Total expenses paid by CKT to reimburse CMSL for the year ended 30 June 2008 in respect of costs paid on behalf of CKT were
                        $348,986 (2007: $2,233,020).

                        All transactions were at arm’s length.
                                                                                                                                                    68




                  Notes to the financial statements (continued)
                  For the year ended 30 June 2008



                  Note 23 – Related party disclosures (continued)
                  (e) Transactions with related parties
For personal use only

                  The following transactions occurred with related parties:
                                                                              Consolidated     Consolidated               Trust              Trust
                                                                              30 June 2008     30 June 2007       30 June 2008        30 June 2007
                                                                                     $’000            $’000              $’000               $’000



                  Asset management fees – paid/payable to
                  Japan Asset Manager                                               1,323              146                   –                      –
                  TK minority interest – paid/payable by
                  Master TK Operator                                                  457                27                  –                      –
                  Distributions receivable from Master TK Business                      –                    –           6,676               1,210
                  Performance fees payable to Japan Asset Manager,
                  equating to 50% of the asset performance fee                        102                    –               –                      –

                  (i) Asset management fees policy
                  The asset management fee is a fee for the management and operation of the Sub TK Business. An annual fee of 0.25% of the gross
                  value of assets held in the Sub TK Business less the Japan Investment Management Fee is payable to the Japan Asset Manager from
                  the assets of the TK Business. The fee is paid semi-annually within two months of the end of each half year.

                  (ii) Performance fees policy – Japan Asset Manager
                  The Japan Asset Manager may also be entitled to a performance fee, with an element related to asset level performance and an
                  element related to the relative equity level performance of CKT. The amount payable to the Japan Asset Manager will be from the
                  assets of the Sub TK Business. This fee is payable two months after the end of each financial year.

                  (f) Units in CKT held by Key Management Personnel
                  The interests of Key Management Personnel in units of CKT at year end are set out below:
                                                                                                  Balance –             Change          Balance at
                                                                                                 beginning               during             end of
                  Name                                                                              of year            the year               year

                  R Hooper                                                                          80,000                   –             80,000
                  G McWilliam                                                                      200,000                   –            200,000
                  I Moore                                                                                    –        400,000            400,000
                  T Alston                                                                         225,000                   –            225,000
                  B McCarthy                                                                        25,000            202,500             227,500

                  Challenger Life No.2 Limited owns 5.00% of CKT (7,504,961 units).
                                                                                                              Challenger Kenedix Japan Trust Annual Report 2008   69




                        Note 24 – Auditor’s remuneration
For personal use only
                                                                                  Consolidated        Consolidated                  Trust               Trust
                                                                                  30 June 2008        30 June 2007          30 June 2008        30 June 2007
                                                                                         $’000               $’000                 $’000               $’000

                        Amounts received or due and receivable
                        by Ernst & Young for:
                        – An audit or review of the financial report
                          of the entity and any other entity in the
                          consolidated entity                                               212                  114                 152                  85
                        – Compliance plan audit                                               3                   25                   3                    –
                        No amounts were received or due and
                        receivable by auditors other than Ernst & Young.



                        Note 25 – Commitments and contingencies
                        (a) Leasing commitments
                        Operating lease commitments – Group as lessor
                                                                                  Consolidated        Consolidated                  Trust               Trust
                                                                                  30 June 2008        30 June 2007          30 June 2008        30 June 2007
                                                                                         $’000               $’000                 $’000               $’000

                        Future minimum rental revenues under
                        non-cancellable operating leases at
                        30 June are as follows:
                        – Not later than one year                                       35,029                 27,274                   –                   –
                        – Later than one year and
                          not later than five years                                     139,013                107,764                   –                   –
                        – Later than five years                                         396,995                300,611                   –                   –
                        Total lease commitments                                        571,037            435,649                       –                   –

                        (b) Commitments relating to investment property
                        There was no capital expenditure contracted, but not provided for, at balance date.


                        Note 26 – Events subsequent to balance date
                        There has been no matter or circumstance that has arisen subsequent to 30 June 2008 that has significantly affected, or may affect,
                        CKT’s operations in future financial years, the results of those operations or CKT’s state of affairs in future financial years.
                                                                                                                                                        70




                  Statement by the Directors of the
                  Responsible Entity of CKT
                  On the financial report of the Challenger Kenedix Japan Trust
                  In accordance with a resolution of the Directors of Challenger Listed Investments Limited (the Responsible Entity of the Challenger
For personal use only
                  Kenedix Japan Trust (herein known by its ASX code ‘CKT’)), I state that:

                  1. In the opinion of the Directors:

                        (a) The financial statements and notes of CKT are in accordance with the Trust Constitution and the Corporations Act 2001,
                            including:

                           (i) giving a true and fair view of CKT as at 30 June 2008 and of its performance for the period ended on that date; and

                           (ii) complying with Accounting Standards and Corporations Regulations 2001; and

                        (b) There are reasonable grounds to believe that CKT will be able to pay its debts as and when they become due and payable.

                  2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section
                     295A of the Corporations Act 2001 for the financial period ended 30 June 2008.

                  On behalf of the Board




                  Brenda Shanahan
                  Chair

                  Sydney
                  21 August 2008
                                                    Challenger Kenedix Japan Trust Annual Report 2008   71




                        Independent audit report to members
                        of CKT
For personal use only
                                                        72




                  Independent audit report to members
                  of CKT (continued)
For personal use only
                                                                                                                  Challenger Kenedix Japan Trust Annual Report 2008   73




                        Unitholder information

                        ASX listing                                    Distributions                                   If you are not happy with how the
                        Challenger Kenedix Japan Trust (CKT)           CKT pays distributions six-monthly for the      complaint has been handled, you may
For personal use only
                        is listed on the Australian Securities         periods ending 30 June and 31 December.         contact the Financial Ombudsman Service
                        Exchange (ASX). The Trust’s units trade        Distribution payments can be paid by:           (FOS), of which the Responsible Entity is a
                        under the code ‘CKT’. Unit prices are                                                          member. This is an independent body and
                                                                       •   direct credit to a nominated Australian
                        published daily in major Australian                                                            is approved by ASIC to consider complaints.
                                                                           financial institution account; or
                        metropolitan newspapers, and are also                                                          The contact details for FOS are:
                        accessible from the CKT website.               •   a cheque mailed to your registered
                                                                                                                       Financial Ombudsman Service
                                                                           unitholding address.
                        The CKT website                                                                                GPO Box 3
                        The CKT website                                Annual Taxation Statements                      Melbourne VIC 3001
                        www.challenger.com.au/ckt                      The taxable income shown on your                Tel: 1300 780 808
                        contains important information                 Annual Taxation Statement is taxable in         www.fos.org.au
                        about the Trust, including unit prices,        the year of entitlement rather than the
                        announcements, annual reports and              year of receipt. This means that taxable
                        an overview of each asset in the               income included in distributions paid
                        CKT portfolio.                                 in February 2008 and August 2008 is
                                                                       assessable in the taxation year ended
                        Unitholder enquiries
                                                                       30 June 2008.
                        If you have queries relating to your
                        unitholding or wish to provide a change of     An Annual Taxation Statement is sent
                        address, Tax File Number, instructions for     to unitholders in August each year. This
                        payment of distributions or annual report      statement includes important taxation
                        elections, please contact the Registry, Link   information and should be retained by
                        Market Services Limited, using the contact     unitholders to assist in the completion of
                        details below.                                 their taxation return.

                        Challenger Kenedix Japan Trust                 Unitholder complaints
                        C/– Link Market Services Limited               If you are dissatisfied with a service or
                        Locked Bag A14                                 process relating to your investment, please
                        Sydney South NSW 1235                          let us know. There is no charge to make a
                        Telephone: 1800 754 866                        complaint. Complaints can be made either
                        Telephone (outside Australia):                 verbally or in writing by contacting:
                                   +61 2 8280 7489
                                                                       Complaints Manager
                        Facsimile: +61 2 9287 0303
                                                                       Challenger Kenedix Japan Trust
                        Alternatively, visit the Link                  C/– Link Market Services Limited
                        Investor Service Centre at                     Locked Bag A14
                        www.linkmarketservices.com.au, where           Sydney South NSW 1235
                        you can access information about your          Telephone: 1800 754 866
                        unitholding and update your holding            Telephone (outside Australia):
                        details online.                                           +61 2 8280 7489
                                                                       Facsimile: +61 2 9287 0303
                        If you have any questions relating to the
                        management of CKT, please contact              The Responsible Entity has a documented
                        Challenger on +61 2 9994 7000, or send         internal dispute and resolution policy
                        an email to ckt@challenger.com.au.             in line with the Australian Standard for
                                                                       Complaint Handling ISO 10002_2006.
                                                                                                                                                  74




                  Unitholder information (continued)

                  Substantial unitholdings as at 18 August 2008
                                                                                             Effective             Number                 % issued
For personal use only
                                                                                                 date              of units                capital

                  Challenger Financial Services Group Limited                            24-4-2007               7,504,961                    5.00
                  Commonwealth Bank of Australia                                            27-4-2007           17,153,520                   11.43
                  APN Funds Management                                                  23-10-2007             21,508, 752                   14.33



                  Top 20 unitholders as at 18 August 2008
                  Number       Name                                                                        Number of units         % issued capital

                  1            UBS Wealth Management Australia Nominees Pty Ltd                                22,800,713                  15.19%
                  2            RBC Dexia Investor Services Australia Nominees Pty Limited                       19,582,712                13.05%
                  3            HSBC Custody Nominees (Australia) Limited                                       11,566,506                   7.71%
                  4            Citicorp Nominees Pty Limited                                                   11,564,989                   7.70%
                  5            National Nominees Limited                                                         8,295,524                  5.53%
                  6            Citicorp Nominees Pty Limited                                                     8,124,954                  5.41%
                  7            Challenger Property Noms P/L                                                      7,504,961                 5.00%
                  8            Netwealth Investments Limited                                                     6,431,052                 4.28%
                  9            Feta Nominees Pty Limited                                                         6,081,345                  4.05%
                  10           ANZ Nominees Limited                                                              4,686,911                  3.12%
                  11           HSBC Custody Nominees (Australia) Limited – A/C 2                                 3,914,731                  2.61%
                  12           J P Morgan Nominees Australia Limited                                             2,375,928                  1.58%
                  13           Sandhurst Trustees Ltd                                                            2,177,000                  1.45%
                  14           M F Custodians Ltd                                                               1,548,800                   1.03%
                  15           Trust Company Limited                                                            1,426,000                   0.95%
                  16           Citicorp Nominees Pty Limited                                                     1,338,156                 0.89%
                  17           Suncorp Custodian Services Pty Limited                                            1,323,136                 0.88%
                  18           Citicorp Nominees Pty Limited                                                     1,230,659                 0.82%
                  19           L J K Nominees Pty Ltd                                                           1,050,000                   0.70%
                  20           Cherryoak Investments Pty Ltd                                                      980,000                   0.65%
                               Total                                                                          124,004,077                 82.62%


                  At 18 August 2008 there were two unitholders each holding less than a marketable parcel of 555 ordinary units.

                  Voting rights
                  On a show on hands, each member of CKT, being a holder of units (Member) has one vote. On a poll, each Member has one vote
                  for each dollar of the value of the total units in CKT held by that Member.
                                                                                   Challenger Kenedix Japan Trust Annual Report 2008   75




                        Spread of unitholders as at 18 August 2008
                                                                      Number of                Number of
For personal use only
                        Holding                                      unitholders           units fully paid                     %

                        1 to 1,000                                           13                    10,802                    0.01
                        1,001 to 5,000                                       67                   241,770                     0.16
                        5,001 to 10,000                                     129                 1,100,918                    0.73
                        10,001 to 50,000                                    353                 8,397,451                    5.59
                        50,001 to 100,000                                    42                2,960,768                     1.97
                        100,001 and over                                     71              137,385,619                    91.53
                        Total                                               675              150,097,328                  100.00
                                                               76




                  Additional information

                  Use of proceeds of initial
                  public offering
For personal use only
                  In accordance with ASX Listing Rule
                  4.10.19, the Responsible Entity confirms
                  that cash or assets readily convertible to
                  cash held at the time of admission of CKT
                  to the official list of the ASX have been
                  used in line with the business objectives
                  set out in the PDS dated 19 March 2007.
                        Directory

                        Challenger Kenedix Japan Trust          Company Secretary                    Registry
                        ARSN 124 068 971                        Christopher Robson                   Link Market Services Limited
For personal use only

                                                                Suzie Koeppenkastrop                 Locked Bag A14
                        Australian Securities Exchange                                               Sydney South NSW 1235
                        (ASX) code                              Manager                              Telephone: 1800 754 866
                        CKT                                     Challenger Management                Telephone (outside Australia):
                                                                Services Limited                                +61 2 8280 7489
                        Responsible Entity                      ABN 29 092 382 842                   Facsimile: +61 2 9287 0303
                        Challenger Listed Investments Limited   Level 15
                        ABN 94 055 293 644                      255 Pitt Street
                        AFSL 236887                             Sydney NSW 2000
                                                                Telephone: +61 2 9994 7000
                        Directors of the                        Facsimile: +61 2 9994 7777
                        Responsible Entity                      Email: ckt@challenger.com.au
                                                                Website: www.challenger.com.au/ckt
                        Brenda Shanahan (Chair)
                        Russell Hooper
                                                                Japan Asset Manager
                        Ian Martens
                        Geoff McWilliam                         Kenedix, Inc.
                        Ian Moore                               KDX Shimbashi Building
                        Brendan O’Connor                        2-2-9 Shimbashi, Minato-ku,
                        Robert Woods                            Tokyo 105-0004
For personal use only




                Level 15
                255 Pitt Street
                Sydney NSW 2000
                telephone 02 9994 7000
                facsimile 02 9994 7777
                                         7255/CG570/0708




                www.challenger.com.au

				
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