Risk Factors

The following are risk factors of potential significance to investors. These are based on information available as of December 31, 2016. The information concerning the future below is not intended to be an exhaustive list of all risks associated with the business activities of the MUGEN ESTATE Group (hereinafter “Group”).

1.Changes in economic conditions, interest rates, and others

The real estate industry in which the MUGEN ESTATE Group operates is easily affected by factors such as business trends, economic conditions, interest rates, and land prices. A decline in purchasers' demand due to the effect of these factors may affect the business performance and financial condition of the Group.

2.Consumption tax hikes

Demand in the real estate industry in which the .Group operates tends to be affected significantly by the trends in consumption tax rates. A hike in the consumption tax rate is a factor that reduces real household income, which induces lower personal spending. If a rebound from a last-minute surge in demand amplifies changes in personal spending, personal spending may fall sharply immediately after a consumption tax hike, which may affect the business performance and financial condition of the Group.

3.Reliance on interest-bearing debts

The Group acquires the funds for purchasing used real estate in its Real Estate Trading Business primarily through borrowings from financial institutions. As a result, the ratio of interest-bearing debt to total assets at the end of the consolidated fiscal year under review is 65.9%. Before borrowing funds, the Group analyzes the appropriateness of the sales plan in each individual project, and makes it a point not to rely on any specific financial institutions. However, the interest rates may fluctuate and borrowing may become difficult due to changes in financial conditions, which may affect the performance and financial condition of the Group.

4.Valuation loss on real estate for sale

The Group applies the Accounting Standards for Measurement of Inventories (ASBJ Statement No. 9 announced July 5, 2006) to the real estate for sale that the Group owns. For the investment-type properties among the real estate for sale held at the end of the fiscal year, the book value after depreciation and net selling price are compared, and if the net selling price is lower than the book value, a valuation loss on goods is recorded. For residential-type properties among the real estate for sale, such as owned condominium units and detached houses, the purchase price and net selling price are compared, and if the net selling price is lower than the purchase price, a valuation loss on goods is recorded. If future sales fall short of initial targets due to a decline in the economic or real estate market conditions, real estate for sale may be retained as inventory. The prolonged retention of this real estate may result in a net selling price that is lower than the book value or purchase price, causing a valuation loss on goods, which may affect the performance and financial condition of the Group.

5.Impairment of non-current assets

The Group calculates future cash flow, etc. for each fiscal year in accordance with the accounting standards, etc. for the impairment of non-current assets to understand and measure impairment losses. An impairment loss on non-current assets may be caused by future land price or economic trends, which may affect the performance and financial condition of the Group.

6.Competitive risk

The Group operates the Real Estate Trading Business, its core business, primarily in Tokyo area (Tokyo and three neighboring prefectures of Kanagawa, Saitama, and Chiba), in which the entry barriers to the purchase and resale of residential-type properties in particular are low and competition is exceptionally intense. Changes in the business environment, such as deregulation and the entry of companies from different business fields, may weaken the competitiveness of the Group, which in turn may affect its performance and financial condition.

7.Legal regulations, etc.

The real estate industry in which the Group operates is regulated by laws such as the Building Lots and Buildings Transaction Business Act, Building Standards Act, City Planning Act, National Land Use Planning Act, Act against Unjustifiable Premiums and Misleading Representations, the Fair Competition Codes Concerning Indication of Real Estate, etc. The revision or abolition of these laws or the enforcement of new laws and regulations in the future may affect the performance and financial condition of the Group.
The Group ensures that it complies with laws and regulations, and that no violations of the law have been committed at the present time. If, however, a law is violated for some reason in the future and the Group’s operation is suspended or its licenses are revoked by the competent authorities, its business activities will be interrupted and the performance and financial condition of the Group may be affected. The following table lists the effective periods and other expiration dates of laws and regulations specified by laws, contracts, etc.

(Status of permits and licenses)

MUGEN ESTATE Co., Ltd.

Permit, license, etc. Permit, license, or registration number Effective period Corresponding law Reason for revoking or refusing to renew permit or license
Licensed for building lots and building transaction business Minister of MLIT license (2) No. 7987 From May 14, 2015 to May 13, 2020 Building Lots and Buildings Transaction Business Act Articles 5 and 66 of said Act
Registered for first-class architect office Tokyo Governor Registration No. 51257 From July 20, 2015 to July 19, 2020 Act on Architects and Building Engineers Article 26 of said Act

FUJI HOME Co., Ltd (Group company)

Permit, license, etc. Permit, license, or registration number Effective period Corresponding law Reason for revoking or refusing to renew permit or license
Licensed for building lots and building transaction business Tokyo Governor License (4) No. 75654 From October 4, 2012 to October 3, 2017 Building Lots and Buildings Transaction Business Act Articles 5 and 66 of said Act
Registered for first-class architect office Tokyo Governor Registration No. 56843 From February 5, 2016 to February 4, 2021 Act on Architects and Building Engineers Article 26 of said Act
Licensed for ordinary construction business Tokyo Governor License (28) No. 145260 From June 16, 2016 to June 15, 2021 Construction Business Act Articles 29 and 29(2) of said Act

8.Defeat liability

If a traded real estate unit has a hidden defect (a defect that cannot be discovered with normal care), the seller is held liable to the buyer for the defect under the Civil Code and Building Lots and Buildings Transaction Business Act. If a real estate unit sold by the Group has a hidden defect, the Group may be held liable for the defect as the seller. As a result, the buyer may cancel the agreement or claim compensation for damage, and the Group may also have to pay the cost of restoration, which may affect the performance and financial condition of the Group.

9.Natural and man-made disasters

The used real estate traded by the Group is located primarily in Tokyo and the three neighboring prefectures. If a natural disaster such as an earthquake, fire, and flood or a man-made disaster such as a large accident and terrorist attack strikes the Tokyo area, the used real estate owned by the Group may be lost, damaged, or degraded, and its resale value or rental revenue may be significantly reduced.
Even if a natural or man-made disaster strikes a region other than the Tokyo area, a decline in consumer confidence may affect the performance and financial condition of the Group.

10.Securing human resources

The Group understands that one of the most important tasks is to continuously hire and develop superior human resources to overcome various business challenges. Thus, the Group will continue to recruit skilled mid-career people and new graduates, and enhance its education and training programs to develop employees who understand the Group's management philosophy and take responsibility for their duties. However, a setback in the recruitment and development of human resources sought by the Group may affect its performance and financial condition.
The Group has built a personnel system that defines the human resources needed for additional growth, and works to support the personal growth of each employee (a personnel organization based on jobs, appraisal system that encourages growth, and rewarding wage system). However, if the functioning of the Group's personnel system is hindered by poor evaluator skills and communication with subordinates, the employees’ motivation may decline or human resources may flow out.

11.Risk of information leakage

The Group holds the confidential information of its customers and business partners, personal information, and other important information in the running of the Real Estate Trading Business and Real Estate Leasing and Other Business. The Group is strengthening its information management system and ensures information security, such as by continuously improving its database access environment and security systems in order to prevent the improper outflow and leakage of this information. Any contingency causing confidential or personal information held by the Group to flow out or leak to an external party may result in risks such as liabilities for damage and damage to the Group’s credit, which may affect the performance and financial condition of the Group.

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