Risk of earnings volatility from economic conditions, real estate market conditions and rising interest rates

「As the normalization of monetary policy progresses, the upward trend in interest rates on real estate investment loans has become more pronounced, and investors have become more selective in their property choices.」

「足元で金利が上昇するも、東京の不動産市場はなお活発。6つの打ち手を実行に移す。」

「Meanwhile, the outlook remained uncertain due to factors including higher borrowing costs associated with the Bank of Japan's policy rate hikes, the impact of persistently elevated construction material prices and labor costs, and fluctuations in resource prices resulting from the unstable international situation.」

「In the real estate industry, the financing environment for property acquisitions has changed due to the gradual rise in mortgage rates. However, in the income-producing real estate market, investors' need to secure stable returns has continued, and investment decisions have increasingly focused on location and property quality.」

「In the real estate industry, although the Bank of Japan lifted its negative interest rate policy and implemented additional rate hikes, the impact on real estate demand was limited and conditions remained firm. Overseas investors with ample investment capital also maintained strong investment sentiment toward investment real estate in Japan. However, the Company will continue to monitor events affecting the real estate market, including rising prices, higher construction costs resulting from the implementation of work-style reform legislation, and fluctuations in financial markets arising from the monetary policies of various countries.」

「During the interim consolidated accounting period (1 March 2024 to 31 August 2024), Japan's economy was on a moderate recovery trend, supported by improvements in employment and income conditions resulting from wage increases and the expansion of inbound demand. Meanwhile, uncertainty about the outlook continued due to factors including soaring energy and raw material prices, rising prices in Japan and concerns about a review of the Bank of Japan's monetary policy.」

「Although concerns remain about monetary easing policy, domestic and overseas investors' investment sentiment toward Japanese real estate has remained firm against a backdrop of expectations that interest rates will not rise sharply and the weaker yen. However, real estate prices remain high, so the situation will need to continue to be monitored.」

「Meanwhile, logistics and construction prices are expected to rise due to the 2024 problem arising from the legislation on work-style reform. In addition, the Bank of Japan's long-standing extraordinary monetary easing has been lifted, and inflation is expected to gradually advance. The Company will continue to closely monitor financial trends.」

「During the third quarter cumulative period (1 March 2023 to 30 November 2023), social activity gradually returned to normal as restrictions on activity related to COVID-19 were eased, and the recovery trend progressed. Meanwhile, uncertainty about the outlook has increased due to factors including soaring energy and raw material prices associated with the prolonged situation in Ukraine, financial instability in Europe and the United States, rising prices in Japan and concerns about the Bank of Japan reducing monetary easing. Economic trends will need to continue to be monitored.」

「During the second quarter cumulative period (1 March 2023 to 31 August 2023), Japan's economy was gradually returning to normal and recovering moderately, partly due to the reclassification of COVID-19 to Category 5. Meanwhile, uncertainty about the outlook has increased due to factors including soaring energy and raw material prices associated with the prolonged situation in Ukraine, financial instability in Europe and the United States, rising prices in Japan and concerns about the Bank of Japan reducing monetary easing. Economic trends will need to continue to be monitored.」

「Meanwhile, uncertainty about the outlook has increased due to soaring energy and raw material prices associated with the prolonged situation in Ukraine, financial instability in Europe and the United States, rising prices in Japan and concerns about the Bank of Japan reducing monetary easing. Economic trends will need to continue to be monitored.」

「Meanwhile, the aforementioned reduction in monetary easing could affect real estate investors' investment sentiment and have a significant impact on the real estate market as a whole. In addition, the economic outlook is expected to remain uncertain due to factors including soaring raw material prices, energy shortages and the situation in Ukraine.」

「In the real estate industry in which the Company operates, demand remained firm as accommodative monetary policy continued and a record decline in the yen temporarily progressed, increasing the perception that Japanese real estate was attractively priced. However, in December 2022, the Bank of Japan decided to raise the upper limit of the fluctuation range for long-term interest rates from 0.25% to 0.50%, and the potential reduction of monetary easing will need to be closely monitored.」

「More recently, the number of infected people has risen sharply, reaching a record high. Meanwhile, uncertainty about the outlook has increased due not only to the renewed spread of infections, but also to the situation in Ukraine, the resulting surge in resource prices and financial instability.」

「During the first quarter cumulative period, Japan's economy was gradually easing social restrictions as vaccination progressed following the worldwide spread of COVID-19, and was showing signs of a partial recovery. Meanwhile, uncertainty about the outlook increased due not only to the renewed spread of infections, but also to the situation in Ukraine, the resulting surge in resource prices and financial instability.」

「Meanwhile, the timing of the end of the COVID-19 pandemic remains impossible to predict, and the economic outlook is expected to remain uncertain due to factors including semiconductor shortages, soaring raw material prices, energy shortages and the situation in Ukraine.」

「In the real estate industry in which the Company operates, the continuation of accommodative monetary policy has resulted in no significant change in financial institutions' lending stance. In addition, residences were viewed as likely to maintain stable occupancy even during the COVID-19 pandemic, causing real estate investors' investment appetite to increase and remain firm. For offices, the upward trend in vacancy rates resulting from consolidation and downsizing is also beginning to level off. However, the social and economic impact of the renewed spread of COVID-19 described above could cause conditions to deteriorate, so the situation will need to continue to be monitored.」

「In the real estate industry in which the Company operates, the continuation of accommodative monetary policy has resulted in no significant change in financial institutions' lending stance. In addition, residences were viewed as likely to maintain stable occupancy even during the COVID-19 pandemic, causing real estate investors' investment appetite to increase and remain firm. However, the social and economic impact of COVID-19 described above could cause this appetite to decline, so the situation will need to continue to be monitored.」

「However, depending on the spread of new variants, real estate transactions could stagnate, and the situation will need to continue to be monitored.」

「The real estate industry in which the Company operates is highly susceptible to the effects of economic trends, land prices, vacancy rates, real estate selling prices, various tax rules and rising interest rates. The Company is similarly susceptible, and changes arising from economic conditions or differences in views regarding the tax system may affect its business performance and other results.」

「More recently, there have been numerous volatile factors affecting the outlook, including the issuance of a state of emergency declaration due to the third wave of COVID-19 infections, making the outlook extremely difficult to assess.」

「The real estate industry in which the Company operates faces an extremely difficult outlook due to factors including voluntary suspension of business activities, restrictions on movement, the continued cautious stance of financial institutions toward real estate lending to individuals since the year before last, and declining rental demand in central urban areas due to the rapid expansion of telework.」

「In the real estate industry in which the Company operates, financial institutions have continued to take a cautious stance toward real estate lending to individuals, a trend that has persisted since the year before last. In addition, the impact of the aforementioned COVID-19 pandemic has prompted many investors to adopt a more cautious stance toward investment.」

「However, as a measure to address the tighter lending stance of financial institutions toward individual investors described above, the Company worked to acquire higher-priced properties and strategically rotate its property holdings. Nevertheless, delays arose in the sales plan, and the real estate sales business fell short of the initial plan.」

「Against this backdrop, the Company has been acquiring higher-priced properties and strategically rotating its property holdings, but its initial sales plan has been delayed by tighter lending by financial institutions to individual investors and other factors. As a result, for the third quarter cumulative period, net sales were ¥3,145.632 million, down 13.2% year on year; operating loss was ¥141.591 million, compared with operating income of ¥66.858 million in the same quarter of the previous year; ordinary loss was ¥171.985 million, compared with ordinary income of ¥30.248 million; and quarterly net loss was ¥136.633 million, compared with quarterly net income of ¥5.542 million.」

「Meanwhile, financial institutions have continued to tighten lending to individual investors as a result of issues including improper lending. According to the Bank of Japan's "Loans and Discounts by Sector," the outstanding balance of loans by domestic banks and credit unions to individuals for rental housing businesses increased 3.8% year on year in June 2017, 2.0% in June 2018 and declined 0.1% in June 2019.」

「Against this backdrop, the Company strategically rotated its property holdings while reviewing the price ranges and holding periods of its properties in response to the severe changes in the external environment described above. As a result, net sales, operating income and ordinary income declined substantially. For the first quarter cumulative period, net sales were ¥1,394.359 million, down 13.1% year on year; operating loss was ¥74.369 million, compared with operating income of ¥76.700 million in the same quarter of the previous year; ordinary loss was ¥88.887 million, compared with ordinary income of ¥61.155 million; and quarterly net loss was ¥89.890 million, compared with quarterly net income of ¥32.358 million.」

「The Company has worked to strengthen its stable earnings base from its real estate leasing and management businesses, centered on its core real estate sales business, and to expand further earnings opportunities. However, the real estate sales business fell short of the initial plan due to the impact of tighter lending stances resulting from issues including inappropriate lending by certain financial institutions that came to light last year. As a result, for the fiscal year, net sales were ¥5,296.866 million, down 16.9% year on year.」

「Because the Company is susceptible to economic trends, land prices, vacancy rates, real estate selling prices, real estate tax policy, consumption-tax increases and rising interest rates, changes in these conditions could affect its results through changes in acquisition prices, selling prices and sales schedules for land and income-producing properties, lower rental income, higher funding costs or insufficient funding, and inventory valuation losses.」