Mortgage Service Japan (MSJ) is a mortgage lender that provides Flat 35 long-term, fixed-rate mortgages backed by the government-affiliated Japan Housing Finance Agency (JHF) to mortgage seekers. The company provides Flat 35 loans to mortgage seekers through a network of some 170 alliance partners (housing companies which function as a mortgage broker, and consulting companies) under agency agreements. The market size of Flat 35 loans newly issued was JPY2.3tn at end-March 2020 and MSJ’s market share was 4.8% (Shared Research estimate; versus 28.4% for the industry leader ARUHI [TSE1: 7198]). MSJ’s consolidated revenue has expanded at a CAGR of 10.2% in the last six years, and its consolidated OPM rose to 20.0% in FY03/21 (+15.8pp from FY03/15).
The MSJ group operates in three segments. In the Housing Finance business (45.4% of revenue; 60.6% of operating profit in FY03/21), MSJ provides Flat 35 loans to mortgage seekers through housing companies including builders. In the Housing Latent Defects Insurance business (47.7% of revenue; 32.6% of operating profit), consolidated subsidiary House G-men sells products such as housing latent defects insurance to housing companies. Housing companies such as building contractors are required to ensure financial resources to cover damage compensation under the Act on Assurance of Performance of Specified Housing Defect Warranty. In the Housing Academeia business (6.9% of revenue; 6.7% of operating profit), consolidated subsidiary Jutaku ACADEMEIA Co., Ltd. offers warranty products to housing companies.
The main customers of the MSJ group are housing companies such as house builders. To increase opportunities to receive building orders, housing companies often propose mortgage products (provided through private financial institution partners) to potential clients. In practice, only large housing companies and a handful of small- and medium-sized ones are able to introduce such mortgage products to clients due to the complexity involved. MSJ makes it easier for housing companies to present mortgage products to their clients by providing affiliated loans, specifically Flat 35 loans backed by the government-affiliated JHF. Flat 35 loans are challenging mortgage products for housing companies to deal with because properties must meet many technical requirements in order to qualify for them, and it can be difficult to navigate the administrative procedures and explain the details to mortgage seekers. Thus, by offering clients Flat 35 loans through MSJ, housing companies can rapidly offer financing options to mortgage seekers while being released from the responsibility of explaining complicated loan procedures.
There are a number of companies specializing in private mortgages, Flat 35 loans, latent defects insurance, or warranty products. The MSJ group, however, is the sole one-stop provider of housing financing services for housing companies (ultimately for their mortgage seeker clients), handling Flat 35 loans, latent defects insurance, and warranty products. House G-men is one of five companies designated by the Minister of Land, Infrastructure, Transport and Tourism as housing defect liability insurance corporations. MSJ has developed a business model that allows it to cross-sell Flat 35 loans, latent defects insurance, and housing warranty products, in cooperation with House G-men and Jutaku ACADEMEIA.
Housing Finance segment revenue is generated from loan origination fees accompanying the disbursement of Flat 35 loans (= loan amount x 2.15% [tax included] as of May 2021) and from commissions for principal and interest collection work recommissioned by JHF (estimated at 20bps of the mortgage rate by Shared Research). Housing Latent Defects Insurance segment revenue derives from insurance premiums (mainly latent defects insurance) and evaluation fees (mainly conformity certifications and housing quality evaluations). The Housing Finance business has a cost ratio of 6.6% and a contribution margin of 57.8%. Consequently, growth in the number of loans issued drives profit growth. The agency commissions paid to MSJ alliance partners and other affiliates account for 39.6% of SG&A expenses (FY03/20). Although MSJ issues mortgages, it keeps credit risks off its balance sheet by transferring its loan receivables to JHF. House G-men sells latent defects insurance to housing companies, but it reduces its risk of loss and claims through reinsurance.
While new housing starts are projected to fall due to a contraction in the Japanese population, MSJ sees room to raise its share in the latent defects insurance market. Its growth strategy calls for expansion on three fronts. First, the company aims to expand its share in the latent defects insurance market. Second, it will leverage latent defects insurance to cross-sell products such as warranties covering the house foundation and home appliances/equipment, and aim to expand earnings by increasing sales bases in the Housing Finance business at a pace of 10 per year. Third, the company aims to increase the cross-selling rate by locking in customers with the provision of the platform called Suketto Cloud*, and thereby expands the group’s business results.
(*Suketto Cloud [“Suketto” means talented helper in Japanese] is a platform that allows housing companies to easily contact and share information on designs and construction progress with their clients, and manage properties after completion. The Suketto Cloud is a part of the company’s plan to create a “Main Bank Cloud for Builders.” [See “Segment overview” section for detail.]）
In FY03/21, consolidated revenue was JPY7.1bn (+0.2% YoY), operating profit JPY1.4bn (-3.9% YoY), recurring profit JPY1.4bn (-4.5% YoY), and net income JPY946mn (-6.8% YoY). While consolidated revenue increased YoY due to a good performance in the Housing Finance business, revenue and operating profit in the Housing Latent Defects Insurance and Housing Academeia businesses decreased YoY.
MSJ forecasts FY03/22 consolidated revenue of JPY7.3bn (+2.4% YoY), operating profit of JPY1.5bn (+5.4% YoY), recurring profit of JPY1.5bn (+5.9% YoY), and net income of JPY1.1bn (+12.7% YoY).
The medium-term business plan through FY03/24 targets revenue of JPY9.0bn (CAGR of 8.0% in the four years from FY03/21 through FY03/24) and operating profit of JPY2.0bn (12.0%). The company has deferred the targets for its medium-term plan (through FY03/23) announced in FY03/20 (revenue of JPY9.0bn, operating profit of JPY2.0bn) by one year to FY03/24 in light of the COVID-19 pandemic.
The company’s strengths are (1) high entry barriers in the latent defects insurance market as only five companies have been authorized by the Minister of Land, Infrastructure, Transport and Tourism to sell housing defect liability insurance, (2) a one-stop shop approach that supports multiple streams of revenue (mortgage, insurance, warranty) from a single house, and (3) its ability to eliminate credit risks and insurance risk of loss and claims through securitization and reinsurance, respectively. Its weaknesses are (1) high exit barriers in the latent defects insurance market as the permission of the Minister mentioned above is needed even if the business environment worsens, (2) little prospect of increases in loan origination fees for the core MSJ Flat 35 loans and in premiums for latent defects insurance, and (3) the fact that the company is trailing rivals in the number of Flat 35 loans sales bases, particularly in metropolitan areas.
|Gross profit margin||54.6%||56.3%||57.4%||56.2%||63.9%||69.1%||70.6%|
|Operating profit margin||4.2%||10.5%||13.7%||13.1%||18.5%||20.8%||20.0%||20.5%|
|Recurring profit margin||4.3%||10.5%||13.4%||13.1%||18.4%||20.8%||19.9%||20.5%|
|Per-share data (split-adjusted; JPY)|
|Shares issued (year-end; '000)||8||8||2,379||7,137||7,137||7,137||14,704|
|Treasury shares ('000)||-||-||-||178||133||83||56|
|EPS (fully diluted; JPY)||-||-||-||-||-||-||65.8|
|Dividend per share (JPY)||-||-||6.7||8.0||35.0||35.0||20.0||20.0|
|Book value per share (JPY)||198||255||387||456||564||673||406|
|Balance sheet (cons.)||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|Cash and cash equivalents||2,960||3,420||4,443||4,936||4,973||5,239||4,971|
|Total current assets||14,918||16,084||17,841||21,586||14,089||17,180||18,791|
|Tangible fixed assets||26||23||32||209||210||206||195|
|Investments and other assets||206||211||207||290||385||678||986|
|Total current liabilities||13,499||14,241||14,649||18,081||9,826||12,347||13,118|
|Total fixed liabilities||629||731||847||978||1,085||1,177||1,239|
|Total net assets||1,264||1,559||2,773||3,185||3,963||4,762||5,971|
|Total liabilities and net assets||15,393||16,531||18,269||22,244||14,873||18,286||20,327|
|Total interest-bearing debt||11,376||11,861||11,971||14,965||6,022||7,790||9,240|
|Cash flow statement (JPYmn)|
|Cash flows from operating activities||-2,238||101||431||-2,001||9,545||-984||-1,701|
|Cash flows from investing activities||-56||-20||-74||-244||-129||-130||-222|
|Cash flows from financing activities||2,546||392||735||2,816||-9,001||1,517||1,654|
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||% of Est.||1H Est.||% of Est.||FY Est.|
|Gross profit margin||67.3%||67.5%||68.4%||69.1%||71.1%||70.6%||70.6%||70.6%||71.9%||72.3%|
|Operating profit margin||18.3%||20.9%||22.0%||20.8%||19.1%||20.1%||19.9%||20.0%||21.6%||24.3%||21.1%||20.5%|
|Recurring profit margin||18.3%||20.9%||22.0%||20.8%||19.1%||19.9%||19.7%||19.9%||21.6%||24.3%||21.1%||20.5%|
|Net income attributable to owners of the parent||197||488||792||1,015||216||469||718||946||247||630||117.4%||537||59.1%||1,066|
|Gross profit margin||67.3%||67.7%||70.0%||71.1%||71.1%||70.1%||70.5%||70.7%||71.9%||72.6%|
|Operating profit margin||18.3%||23.1%||24.2%||17.7%||19.1%||21.1%||19.5%||20.2%||21.6%||26.7%|
|Recurring profit margin||18.3%||23.1%||24.2%||17.7%||19.1%||20.7%||19.4%||20.3%||21.6%||26.8%|
|Net income attributable to owners of the parent||197||291||304||223||216||253||249||228||247||384|
|By segment (cumulative)||FY03/20||FY03/21||FY03/22||FY03/22|
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||% of Est.||FY Est.|
|Housing Latent Defects Insurance||828||1,771||2,709||3,744||826||1,668||2,516||3,400||859||1,796||51.2%||3,504|
|Operating profit margin||26.9%||30.3%||31.1%||26.6%||28.6%||30.0%||28.8%||26.7%||28.5%||32.0%|
|Housing Latent Defects Insurance||107||254||422||604||91||199||314||465||138||326||62.0%||525|
|Operating profit margin||12.9%||14.3%||15.6%||16.1%||11.0%||11.9%||12.5%||13.7%||16.1%||18.1%|
|Operating profit margin||12.6%||16.8%||17.7%||22.8%||10.6%||9.8%||11.0%||19.2%||14.3%||15.8%|
|By segment (quarterly)||FY03/20||FY03/21||FY03/22|
|Housing Latent Defects Insurance||828||943||938||1,035||826||842||848||884||859||936|
|Operating profit margin||26.9%||33.1%||32.5%||14.4%||28.6%||31.4%||26.4%||20.4%||28.5%||35.2%|
|Housing Latent Defects Insurance||107||147||168||182||91||108||116||151||138||188|
|Operating profit margin||12.9%||15.6%||18.0%||17.6%||11.0%||12.8%||13.6%||17.0%||16.1%||20.0%|
|Operating profit margin||12.6%||20.9%||19.7%||34.7%||10.6%||9.2%||13.1%||38.2%||14.3%||17.0%|
The number of housing starts was on a recovery trend in the housing industry. The number of new housing starts (owner-occupied houses) in 1H FY2021 (April–September) was 148,745 units (+13.3% YoY). Meanwhile, the number of applications for Flat 35 (purchase-type) loans was for 23,952 units (+0.2% YoY; announced by JHF) in April—June 2021 and 21,210 (-16.0% YoY) in July—September 2021.
In 1H FY03/22, revenue grew 8.1% YoY (+JPY284mn YoY) to JPY3.8bn. Factors contributing to the JPY284mn revenue increase were YoY revenue growth of 6.5% (+JPY104mn) in Housing Finance, 7.7% (+JPY128mn) in Housing Latent Defects Insurance, and 23.7% (+JPY52mn) in Housing Academeia. Operating profit was up 30.5% YoY (+JPY214mn YoY) to JPY916mn. Contributing factors were YoY operating profit increases of 13.6% (+JPY66mn) in Housing Finance, 64.0% (+JPY127mn) in Housing Latent Defects Insurance, and 98.6% (+JPY21mn) in Housing Academeia.
Profit margins increased YoY in all segments: from 30.0% in 1H FY03/21 (28.5% in Q1 FY03/22) to 32.0% in 1H FY03/22 in Housing Finance; from 11.9% to 18.1% in Housing Latent Defects Insurance; and 9.8% to 15.8% in Housing Academia. The growth in profit margins was attributed to an increase in the number of high-margin bridge loans issued and successful cross-selling efforts.
Growth in the number of MSJ Flat 35 loans issued in the Housing Finance business slowed. However, due to an increase in bridge loans issued, the number of loans issued reached a record high. Operating profit also hit a record high, with the OPM increasing to 24.3%. The growth in performance was largely driven by bridge loan products that complemented MSJ Flat 35 loans, capturing loan demand for custom-built houses with high unit prices. The purchase of custom-built houses, unlike built-for-sale houses, is predicated on land purchase, and for these houses, demand for bridge loans is strong. Further, cross-selling of latent defect insurance products and ground warranties contributed to higher revenue. Shared Research thinks the company's business model cultivated through diversifying its product portfolio and expanding into regional markets is working effectively.
In 1H, operating profit was JPY916mn, at around 60% of the full-year target of JPY1.5bn, but the company made no change to the forecast. Due to a timber price hike in spring 2021, more recently wooden boards and other product prices have risen, putting increasing pressure on supply. The company seemed to have left its forecast unchanged out of concern for lingering risks that may dampen demand in 2H, especially in Q4.
Revenue in the Housing Finance business was JPY1.7bn (+6.5% YoY). Amount of each loan issued grew on an increase in the number of high-margin bridge loans issued, such as bridge loan products for Sony Bank mortgage customers (captive finance) in addition to the mainstay MSJ Flat 35 loans. The company’s initiatives of strengthening its product lineup since FY03/21 are bearing fruit. Meanwhile, Flat 35 loans (warranty type), which started in April 2021, do not seem to have made much progress versus the company's initial forecast. Operating profit was up 13.6% YoY to JPY547mn, at 66.4% of the full-year forecast.
In 1H, a total of 3,891 loans were issued, surpassing 3,755 loans issued in 1H FY03/21. The number of loans issued averaged 1,904 per quarter in FY03/21, but rose to 1,862 in Q1 FY03/22 and to 2,029 in Q2 FY03/22, breaking the 2,000 mark.
One of the factors contributing to the continuing trend of the strong number of loans issued is improved sales efficiency. The housing loan offices made contracts with housing companies and introduced mortgages to customers in accordance with the sales of housing companies, but since FY03/21, MSJ has been strengthening the role of the offices as a financial agency where the company’s sales staff can conclude loan agreements. As of end-September 2021, there were 45 housing loan offices. The company opened 10 new offices (net increase of six offices) in 1H FY03/22. The new offices are stationed in Ota Karasuyama, Kyoto, Naha, Akita, Iwate, and Kochi. While MSJ has traditionally opened offices mainly in metropolitan areas, it has increased the number of offices opened in regional cities where the return to detached housing is advancing.
Revenue was JPY1.8bn (+7.7% YoY) and operating profit was JPY326mn (+64.0% YoY). Operating profit reached 62.0% of the full-year forecast (JPY525mn). The number of insurance policies, warranties, evaluation reports, and conformity certificates issued in 1H FY03/22 was 61,412, up 11.7% YoY. Growth in revenue and profit was attributed to a recovery in the nationwide housing starts centered on owner-occupied houses and an increase in the company's market share. OPM rose to 18.1%, up 6.2pp from 11.9% in 1H FY03/21.
Revenue of the Housing Latent Defects Insurance segment comprises revenue from ground warranty and housing performance evaluation services as well as revenue from housing latent defects insurance. GPM of housing performance evaluation services (accounting for roughly half of segment profit) is higher than that of housing latent defects insurance. The company said that 125 companies in Japan (as of April 1, 2021) provide housing performance evaluation services, and its profits from this business were hurt by price wars brought on by its competitors in FY03/21. In FY03/21, both revenue and operating profit fell YoY. However, in 1H FY03/22, due to an increase in orders for products other than Flat 35 loans, revenue and operating profit recovered to the FY03/20 level, prior to the spread of COVID-19 pandemic.
MSJ says that profit margins improved in 1H FY03/22 as its bottleneck problem in terms of competition was solved, as its competitors weakened their sales efforts for housing performance evaluation services as they allocated more personnel to environment-friendly housing system services. In addition to promoting simultaneous cloud and insurance sales, MSJ focused on a smaller housing company (30 units sold / company scale), resulting in monthly acquisitions of 10 companies of new customers for housing latent defects insurance that had fallen to 10 companies a month. In addition, ground warranty and housing performance evaluation services with high gross profit margins exceeded the company's expectations by about 40%. Shared Research understands that the recovery is due to MSJ's business model, which cross-sells ground warranty and housing performance evaluation services in addition to housing latent defects insurance performing well.
Revenue was JPY271mn (+23.7% YoY), and operating profit was JPY43mn (+98.6% YoY). Operating profit was 28.5% of the full-year forecast (JPY150mn). The number of home appliances/equipment extended repair warranties and home maintenance warranties in 1H FY03/22 was 8,057, down 11.3% YoY. As for the breakdown, although the number of home maintenance warranties issued increased due to the company's promotion of cloud and housing guarantee services linked to it, the issuance of warranties did not proceed due to the continued delay in completion and delivery by some housing companies and developers amid the prolonged impact of the COVID-19 pandemic. Higher revenue and profits were due to the company shifting its focus to acquiring new customers, responding to its assumption that major developers' movement of property sales will continue to be sluggish. With regard to the housing industry cloud system, Suketto Cloud, the number of companies using the system free of charge was around 300 in 1H FY03/22.
|(JPYmn)||1H Act.||2H Act.||FY Act.||1H Act.||2H Act.||FY Act.||1H Est.||2H Est.||FY Est.|
|Cost of revenue||1,086||1,111||2,197||1,027||1,069||2,097|
|Gross profit margin||67.5%||70.6%||69.1%||70.6%||70.6%||70.6%|
|Operating profit margin||20.9%||20.8%||20.8%||20.1%||19.9%||20.0%||21.1%||20.0%||20.5%|
|Recurring profit margin||20.9%||20.8%||20.8%||19.9%||19.8%||19.9%||21.1%||20.0%||20.5%|
For FY03/22, Mortgage Service Japan forecasts consolidated revenue of JPY7.3bn (+2.4% YoY), operating profit of JPY1.5bn (+5.3% YoY), recurring profit of JPY1.5bn (+5.9% YoY), and net income of JPY1.1bn (+12.7% YoY).
The company forecasts segment revenue of JPY3.3bn (+0.4% YoY) and operating profit of JPY824mn (-4.6% YoY). The number of housing starts declined in FY2020 for the second year in a row, to 812,164 (-8.1% YoY). The YoY decline was even wider than in FY2019, and the total number of housing starts was the second lowest on record, after 775,277 recorded in FY2009. Owner-occupied houses, rental houses, and condominiums all declined, but the decline was mainly due to the impact of the government’s state-of-emergency declarations in 1H in response to the COVID-19 pandemic. The number of new owner-occupied houses grew for five consecutive months from November 2020 to March 2021. Taking into account lead time, Shared Research believes the company will be able to maintain its main KPI, number of loans issued per quarter, at the 1800 level.
The company forecasts segment revenue of JPY3.5bn (+3.1% YoY) and operating profit of JPY525mn (+12.9% YoY). The profit margin deteriorated in FY03/21 due to a lack of progress in acquiring ground warranty and housing performance evaluation contracts, which have a higher gross profit margin than housing latent defects insurance. In particular, there is intensifying competition in the area of housing performance evaluation services. Nevertheless, April 2021 appears to have displayed strong YoY figures, so the Housing Latent Defects Insurance business is likely to recover.
On the other hand, attention must be given to the global rise in lumber prices, specifically rising iron and aluminum prices. While demand for owner-occupied houses is strong, the possibility of supply constraints is increasing, which may have a moderate impact on the Housing Latent Defects Insurance business, so it is difficult to make a bullish forecast. In fact, the projected YoY increase in revenue for the business in FY03/22 is just 3.1%.
The company forecasts segment revenue of JPY546mn (+10.7% YoY) and operating profit of JPY150mn (+58.1% YoY). Warranty issuance in the Housing Academeia business is dependent on the timeline of recovery in property deliveries by large and medium-sized developers.
The company updates its medium-term plan every year. In light of the prolonged impact of the COVID-19 pandemic, the medium-term plan announced in May 2021 is effectively just the previous “Medium-Term Business Plan FY03/23” pushed back by a year. The plan calls for FY03/24 revenue of JPY9.0bn (CAGR of 8.1% from FY03/21) and operating profit of JPY2.0bn (12.0%).
|By segment||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22||FY03/23||FY03/24||CAGR (vs. FY03/21)|
|% of total price||29.3%||29.3%||32.0%||28.8%||34.6%||40.3%||45.4%||44.5%||43.0%||40.1%|
|Housing Latent Defects Insurance||2,587||2,999||3,099||3,607||3,536||3,744||3,400||3,504||3,914||4,643||10.9%|
|% of total price||65.1%||57.1%||52.8%||57.3%||56.4%||52.6%||47.7%||48.0%||48.9%||51.6%|
|% of total price||5.6%||13.6%||15.1%||13.9%||9.0%||7.1%||6.9%||7.5%||8.0%||8.3%|
|Operating profit margin||4.2%||10.4%||13.7%||13.1%||18.5%||20.8%||20.0%||20.5%||21.3%||22.2%|
|Operating profit margin||18.3%||24.7%||27.8%||22.3%||27.0%||26.6%||26.7%||25.4%||26.1%||26.3%|
|% of operating profit||-||69.3%||64.8%||49.1%||50.5%||51.4%||60.6%||54.9%||52.9%||47.5%|
|Housing Latent Defects Insurance||39||135||226||420||490||604||465||525||590||750||17.3%|
|Operating profit margin||1.5%||4.5%||7.3%||11.6%||13.9%||16.1%||13.7%||15.0%||15.1%||16.2%|
|% of operating profit||-||24.6%||28.0%||51.0%||42.3%||40.8%||32.6%||35.0%||34.7%||37.5%|
|Operating profit margin||-||4.7%||6.5%||-||14.8%||22.8%||19.2%||27.5%||32.7%||40.3%|
|% of operating profit||-||6.0%||7.2%||-0.1%||7.2%||7.8%||6.7%||10.0%||12.4%||15.0%|
COVID-19 is disrupting housing industry supply chains, delaying the handover of homes, and affecting the cash flows of housing companies. The company has said that this has sparked fears of a sudden decline in the newly built market, which was already in a downtrend.
MSJ said two main problems have become apparent during the pandemic: The first stems from the housing industry being slow to adopt digital and cloud technology (ICT). The industry faces a pressing need to facilitate teleworking; remote business operations will be difficult without centralized, cloud-based management. Small and medium builders make up the vast majority of companies in the industry. Massive numbers of parts make production processes extremely complicated. The company said many builders cannot even manage profitability from detached housing on a unit-by-unit basis. The industry is characterized by lack of investment in ICT, stagnant productivity, and difficulty in working remotely.
The second issue is the deterioration in the funding climate for housing industry SMEs with respect to working capital and funds used in procurement. Delays in property handovers have a direct impact on builder finances. A climate of shrinking credit raises concerns that cash flows will be negatively impacted, especially for SMEs.
Furthermore, 2020 saw a sharp rise in lumber prices accompanying lumber shortages. Since it takes time to increase the supply of natural materials such as lumber, the rise in prices could become a prolonged structural factor. If that turns out to be the case, housing prices would likely rise, followed by rising consumer prices. With rising interest rates and inflation, the business environment for housing industry SMEs will become all the more challenging.
The company sees its mission as solving these two problems. It plans to tackle the first (delayed investment in ICT by the housing industry) and differentiate itself from its competition by providing its core housing finance cloud system to customers free of charge. MSJ expects a spike in the need for housing companies to manage all of their operations centrally via the cloud and boost operating efficiency. The company plans to expand the functionality of the Suketto Cloud system it developed and provide it alongside latent defects insurance. This will help housing companies streamline their operations and work remotely. The company also hopes to promote sales of its own products over the cloud.
With regard to deterioration in the funding environment, the company plans to extend its support for cash flows through mechanisms such as sales and settlement financing, as it expects the housing industry to experience a sudden increase in demand for funds. MSJ aims to transform itself from a finance company into a “builders’ bank,” and plans to use bridge loans as a launch pad for developing solutions, such as new sales and settlement financing products, for the housing industry.
Received wisdom in the finance industry states that financial products are commodities. However, MSJ thinks it is possible to establish a high margin business and distinguish itself, even with commonplace products, by combining them skillfully.
The starting point is the latent defects insurance offered by House G-men. This insurance is compulsory for housing companies. The market for latent defects insurance, which is a powerful product for creating new relationships with potential new client housing companies, is an oligopoly of five companies including MSJ.
The company supplies Suketto Cloud free of charge in its Housing Academeia business to lock in customers. Due to COVID-19, operational streamlining is a critical issue for housing companies. The company’s Suketto Cloud enables housing companies to conduct low-cost, cloud-based centralized management, and the company appeals to these companies by offering Suketto Cloud free of charge if they buy its insurance products. Further, the Housing Academeia business can bundle Suketto Cloud with housing warranty services such as extended repair warranties for household equipment and home maintenance warranties.
The MSJ group cross-sells products as a single entity. Every time a house is built, the Housing Finance Business can offer finance, the housing latent defects insurance business can provide insurance, and the Housing Academeia business can provide warranties. The company sees Suketto Cloud becoming an indispensable part of SME housing companies’ operational infrastructures due to its centralized management capabilities.
In FY03/21, MSJ raised a total of approximately JPY2.0bn through its second issuance of stock acquisition rights by third-party allotment (with provisions to revise the exercise price or suspend exercise). It will use the funds raised for the following strategic products.
This product has advantages such as allowing for flexible design of interest rates and other aspects, making it easier to meet the needs of housing companies. In particular, it will contribute to the development of new business and deepening of relationships with medium-sized housing companies and be more attractive to financial agencies. As a result, the company expects it to contribute to growth in the number of mortgages.
Bridge loans are in high demand among small and medium-sized housing companies. They also make a substantial contribution to the company’s profits. Hereafter, MSJ plans to increase the number of bridge loans it provides in connection with its Flat 35 and other loans, as well as for mortgages provided by other financial institutions.
MSJ is a mortgage lender that provides Flat 35 long-term, fixed-rate mortgages backed by the government-affiliated JHF to mortgage seekers through builders and other housing companies. MSJ helps these housing companies receive more building orders by making it easier for the clients of these housing companies to raise funds to purchase or build houses. MSJ was founded in 2005 by current President Yasunori Uzawa.
In 1996, Mr. Uzawa launched Builders System Research Institute Co., Ltd., a consulting firm geared toward housing companies. In January 1995, Japan had been struck by the Great Hanshin Earthquake, and the disaster had triggered public debate over “defective houses” (i.e., houses that are not compliant with current building standards) because many of these had collapsed during the earthquake and exacerbated the damage. During the course of his consulting work, Mr. Uzawa started reflecting on the following central questions.
(1) How can we make sure houses will not collapse?
(2) How can we make the standards and rules for houses more transparent?
(3) What kinds of support are most needed by housing companies?
Mr. Uzawa’s response to question (2) was to establish House G-men, a housing performance evaluation body that assigns ratings to houses based on their performance and quality. Prompted by the public debate over defective houses, the Building Standards Act was revised significantly in 1998. This opened the door for private companies to engage in building inspections, which had previously been the exclusive domain of government bodies. In 2000, the Housing Quality Assurance Act was enacted to realize a housing market in which consumers could purchase houses without fear of collapse. The new act set the mandatory defect warranty liability period for the basic structure of new houses to 10 years, and stipulated the Housing Performance Indication System in order to present information on—and thus facilitate an understanding of—various performance aspects of houses.
In 2005, the Japanese real estate industry was rocked by the “structural calculation forgery problem” scandal, referring to an incident in which structural calculations for new properties were falsified by first-class architect Hidetsugu Aneha. A number of real estate developers caught up in the incident were forced to file for bankruptcy, and consequently were unable to fulfill their defect warranty obligations, forcing affected property owners to foot the bill for the repair expenses. In the wake of the incident, the Building Standards Act and the Act on Architects and Building Engineers were revised in 2006, and the Act on Assurance of Performance of Specified Housing Defect Warranty was enacted in 2007. The latter required builders and other real estate brokers to ensure financial resources (either in the form of insurance or deposits) to cover damage compensation and fulfil their defect warranty obligations. After the law was enacted, House G-men—which provided warranty services at the time—was designated by the Minister of Land, Infrastructure, Transport and Tourism as a housing defect liability insurance corporation in 2008.
Housing performance evaluation body:
Housing performance evaluation bodies are third-party organizations that evaluate housing performance in accordance with the Housing Quality Assurance Act. One to three such bodies are designated per prefecture by the Minister of Land, Infrastructure, Transport and Tourism. At the request of builders or real estate brokers, these bodies conduct paid inspections and evaluations at the design, construction, and completion stages of a housing construction project. They issue performance evaluation reports (design housing performance evaluation report at the design stage and construction housing performance evaluation report at the completion stage) if a property conforms with the relevant standards.
Latent defects insurance:
The Act on Assurance of Performance of Specified Housing Defect Warranty requires new house building contractors and sellers (construction companies or real estate brokers) to ensure financial resources to cover damage compensation and fulfill their defect warranty obligations (either through purchasing insurance policies or through guarantee deposits), starting from October 1, 2008. This requirement applies when delivering newly built properties to ordering parties (owners) or buyers (excluding real estate brokers). In the case of a custom-built house, the building contractor that constructs the house is required to enroll in latent defects insurance.
Act on Assurance of Performance of Specified Housing Defect Warranty:
The Act on Assurance of Performance of Specified Housing Defect Warranty was promulgated on May 30, 2007. It requires suppliers of new housing such as builders and real estate brokers to ensure financial resources, either by setting aside deposits or purchasing insurance policies, to fulfil their defect warranty obligations if a property sold by them is found to have structural defects within a period of 10 years from handover. Under the law, property owners whose properties are affected by structural defects within the specified period are entitled to claim compensation from the deposits or insurance payouts if the builder or real estate broker that sold the property goes bankrupt or is otherwise unable to fund the repairs.
Housing defect liability insurance corporation:
Housing defect liability insurance corporations are designated by the Minister of Land, Infrastructure, Transport and Tourism pursuant to the provision in Article 17-1 of the Act on Assurance of Performance of Specified Housing Defect Warranty. As of end-May 2020, the five companies designated as housing defect liability insurance corporations were Jutaku Anshin Hosho Co., Ltd., Organization for Housing Warranty Ltd., JIO Corporation, House G-men Co., Ltd., and House Plus Corporation.
Convinced that housing financing services were a core need of housing companies (response to question  above), Mr. Uzawa established MSJ as a mortgage lender in 2005. The housing industry was populated with a large number of small and medium-sized companies as oligopolization had made little progress. It had a complex supply chain (consisting of raw wood suppliers, timber companies, construction material distributors, precut part suppliers, housing companies [housing manufacturers and builders]) that produced lengthy payment terms for fund settlements, and small builders in particular struggled with the financing of their projects. The mission of MSJ was therefore to drive innovation in the financing mechanisms of the housing industry.
In FY03/21, consolidated revenue was JPY7.1bn (+0.2% YoY) and operating profit JPY1.4bn (‑3.9% YoY). OPM fell 0.8pp YoY to 20.0%.
MSJ operates in three segments: Housing Finance, Housing Latent Defects Insurance, and Housing Academeia. In the Housing Finance business, the company concludes agency agreements with builders and other housing companies to provide Flat 35 loans to mortgage seekers. In the Housing Latent Defects Insurance business, House G-men offers latent defects insurance and other products to housing companies. In the Housing Academeia business, Jutaku ACADEMEIA sells home appliances/equipment warranties and other products to housing companies.
|% of total price||29.3%||29.3%||32.0%||28.8%||34.6%||40.3%||45.4%|
|Housing Latent Defects Insurance||2,587||2,999||3,099||3,607||3,536||3,744||3,400|
|% of total price||65.1%||57.1%||52.8%||57.3%||56.4%||52.6%||47.7%|
|% of total price||5.6%||13.6%||15.1%||13.9%||9.0%||7.1%||6.9%|
|Operating profit margin||4.2%||10.4%||13.7%||13.1%||18.5%||20.8%||20.0%|
|Operating profit margin||18.3%||24.7%||27.8%||22.3%||27.0%||26.6%||26.7%|
|% of operating profit||-||69.3%||64.8%||49.1%||50.5%||51.4%||60.6%|
|Housing Latent Defects Insurance||39||135||226||420||490||604||465|
|Operating profit margin||1.5%||4.5%||7.3%||11.6%||13.9%||16.1%||13.7%|
|% of operating profit||-||24.6%||28.0%||51.0%||42.3%||40.8%||32.6%|
|Operating profit margin||-||4.7%||6.5%||-||14.8%||22.8%||19.2%|
|% of operating profit||-||6.0%||7.2%||-0.1%||7.2%||7.8%||6.7%|
In FY03/21, the Housing Finance business accounted for 45.4% of revenue and 60.6% of operating profit, the Housing Latent Defects Insurance business for 47.7% and 32.6%, and the Housing Academeia business for 6.9% and 6.7%.
GPM in the Housing Finance business (operated by MSJ) has trended upward since FY03/15, reaching 93.4% in FY03/20. Revenue mainly comprises loan origination fees and principal/interest collection fees (servicing fees) for the Flat 35 loans issued by the company. Cost of revenue reflects items such as cost of funds and loan receivables protection costs. The contribution margin after factoring in total costs is 57.8%, reflecting a pattern through which profit rises when fixed costs are held down and the number of loans issued increases.
|Gross profit margin||84.0%||87.6%||90.7%||91.4%||92.4%||93.4%|
|Operating profit margin||19.7%||24.6%||27.8%||22.3%||27.0%||26.6%|
|Recurring profit margin||20.0%||25.0%||31.3%||30.5%||41.4%||38.4%|
OPM in the Housing Latent Defects Insurance business (operated by House G-men) rose from 1.5% in FY03/15 to 16.1% in FY03/20. OPM is falling in the face of increasing competition in the area of housing performance evaluation services and was just 13.7% in FY03/21 (-2.4pp YoY). The FY03/20 OPM of 16.1% exceeded OPMs for the other four housing defect liability insurance corporations. House G-men sells nearly all of its latent defects insurance policies online, which means it can expand its number of policies without increasing fixed costs.
|FY03/20 Act. (JPYmn)||MSJ||JIO||JHF||Jutaku Anshin Hosho||Houseplus|
|Cost of revenue||2,097||-||7,839||3,620||3,574||3,526|
|Gross profit margin||70.6%||-||32.2%||43.8%||36.8%||29.6%|
|Operating profit margin||20.0%||13.7%||5.1%||8.9%||9.4%||7.5%|
MSJ provides housing financing products to housing companies to support their efforts to win construction orders. Its core business can therefore be described as sales financing (also referred to as captive finance), which typically means the provision of financing services accompanying the sale of products by manufacturers. Car loans issued by automaker subsidiaries are a typical example of this. In a similar way, MSJ provides Flat 35 loans to mortgage seekers, and thus contributes to sales of housing companies by resolving funding issues.
Its sales financing business model essentially aims to build lasting relationships with mortgage seekers, and leverage this to provide a range of financial products. Housing sales are often one-time transactions, but financing services can extend relationships with customers, and thus create a competitive advantage by locking in customers and shutting out rivals. Mortgage seekers apply for a loan because they struggle to independently raise the funds to purchase a home. By issuing loans with a 35-year term, financial institutions can ensure long relationships with customers, during which they can offer them various other financial services.
MSJ helps housing companies to capture customers by providing financing support services. It has built a one-stop shop structure that allows it to leverage numerous revenue opportunities (mortgage, insurance, warranty) from a single house. Its services include (1) providing Flat 35 loans under a mechanism whereby the loan receivables are purchased by JHF, (2) issuing conformity certificates based on construction site inspections to ensure houses conform with the technical housing standards formulated by JHF, (3) selling latent defects insurance (that covers housing latent defects due to faulty construction) to housing companies, and (4) offering housing maintenance warranties to prepare for future maintenance obligations. The MSJ group provides services to mortgage seekers (Flat 35 loans offered by MSJ and conformity certifications offered by House G-men) and housing companies (latent defects insurance offered by House G-men, and maintenance warranties offered by Jutaku ACADEMEIA).
As of May 2021, a total of 317 financial institutions provided Flat 35 loans in Japan (city banks, trust banks, other banks: 9; regional banks: 62; second-tier banks: 34; shinkin banks: 151; credit unions: 21; labor banks: 12; credit federation of agricultural co-operatives: 8; insurance companies and mortgage bankers: 20). Source: Japan Housing Finance Agency website.
Meanwhile, only five companies have been designated by the Minister of Land, Infrastructure, Transport and Tourism as housing defect liability insurance corporations: Jutaku Anshin Hosho Co., Ltd., Organization for Housing Warranty Ltd., JIO Corporation, House G-men Co., Ltd., and House Plus Corporation. The four companies other than House G-men do not provide Flat 35 loans through their respective groups.
The MSJ group is the only group to offer Flat 35 loans, latent defects insurance, housing performance indications, Flat 35 conformity certification inspections, ground warranties, and home appliances/equipment warranties under one umbrella.
While financial institutions that issue floating-rate mortgages are subject to credit risk, MSJ eliminates such risk by transferring its loan receivables to JHF (see Segment overview).
MSJ also enrolls in housing loan insurance provided by JHF’s housing loan insurance business. This further reduces its exposure to credit risk by ensuring that the company can claim insurance payouts if a Flat 35 loan recipient were to default on the mortgage. For latent defects insurance, the company hedges its risk of loss and claims by using non-life insurers as reinsurers.
In sum, the company has adopted a business model that, to the extent possible, eliminates risk accompanying loan receivables and latent defects insurance.
Flat 35 loans are long-term, fixed-rate mortgages issued by financial institutions in partnership with JHF. The MSJ Flat 35 product, while carrying the MSJ name, is essentially the same Flat 35 loan product provided by other financial institutions. The key feature of Flat 35 loans is that they have a fixed interest rate for the entire term of the loan, allowing borrowers to know the total of future principal and interest repayments at the time they obtain the loan.
|Flat 35 loans||Mortgage from private financial institutions|
|Interest rate type||Fixed rate during the entire term||Various types such as variable-rate and fixed-rate period-selection|
|Loan commissions||Vary by financial institution. Flat fee starting from several tens of thousands of yen, or approximately 2% of loan amount, for example|
|Guarantee fees||None||None to approximately 2% of loan amount|
|Enrollment in group credit life insurance||In principle, required (insurance premium included in mortgage rate)||Mandatory (insurance premium included in mortgage rate)|
|Technical standards for property||Yes||None|
|Years of continuous employment||No requirements||Varies by financial institution|
|Prepayment charges||None. (Required prepayment amount: JPY100,000 or more for online application; JPY1mn or more for application at counter)||Varies by financial institution. If charges apply, they will vary based on the prepayment amount or mortgage rate type|
To qualify for a Flat 35 loan, borrowers not only need to meet certain terms and conditions such as age and annual income, but the house must also conform with technical housing standards that cover a large range of items such as the size of the house, the relationship between the site of the house and the front road, the earthquake resistance, the thermal insulation, and the overall durability of the house. Houses need to undergo an inspection to confirm they clear these technical standards. While this limits the number of houses for which a Flat 35 loan can be obtained, it also means that houses that qualify for a Flat 35 loan have met a certain quality threshold.
|Age||Below 70 at time of application|
|Annual income||(1) Below JPY4mn: Total annual repayment = Up to 30% of annual income|
|(2) JPY4mn or above: Total annual repayment = Up to 35% of annual income|
|Loan amount||JPY1mn to JPY80mn|
|Loan term||15 years (10 years, if the applicant or joint obligor is aged 60 or older) or more.|
|Maximum period is the shorter of 35 years or "80 - Age at application (round down months)"|
|Technical standards for property||Property that conforms with technical standards specified by Japan Housing Finance Agency.|
|Area of house||Detached house: 70sqm or more Condominium: 30sqm or more|
Latent defects insurance aims to protect consumers and prevent moral hazard at housing companies. It is governed by the Act on Assurance of Performance of Specified Housing Defect Warranty, which requires construction companies and real estate brokers that deliver new houses to consumers to ensure financial resources to fulfill their defect warranty obligations.
These financial resources may take the form of guarantee deposits or latent defects insurance. If opting for deposits, housing companies deposit a certain amount of compensation (determined based on the number of housing units supplied) to an official deposit office such as a legal affairs bureau. This approach is common among major housing manufacturers that supply a large number of houses.
When opting for latent defects insurance, housing companies enter into an insurance agreement with a housing defect liability insurance corporation for each property they supply, and pay insurance premiums accordingly. Housing defect liability insurance corporations conduct construction site inspections (performed by architects), and underwrite the insurance if properties conform with the required standards. If an insured house is found to have a defect after handover to the homeowner, the expenses necessary for repairs conducted by the housing company are funded through insurance payments. If the housing company is unable to conduct the repairs due to bankruptcy or other reasons, the party who purchased or ordered the house is entitled to claim the insurance payout directly from the housing defect liability insurance corporation.
The latent defects insurance provided by consolidated subsidiary House G-men is type-1 (mandatory) insurance for newly constructed properties with a term of 10 years (equivalent to housing defect warranty liability period) that covers repair fees for “major portions related to structural durability” and “portions that prevent rainwater from entering.” Insurance payouts are capped at JPY20mn, and the insurance premium per house is JPY70,000–80,000.
Home appliances/equipment warranties are products that extend manufacturer warranties, which typically only last one to two years. By purchasing a home appliances/equipment warranty, property owners can extend the warranty period for products such as induction cooktops or water heaters for up to 10 years. In this way, they can continue to qualify for the same repair service as provided under the manufacturer warranty, and prevent being inconvenienced by potential defects. Home appliances/equipment warranty amounts are capped at JPY3mn (incl. tax) per property. They cover not only part replacements but also technical fees and technician travel fees, and are not subject to restrictions on repair frequency.
Appliances and equipment eligible for warranty service include water heaters (energy-efficient electric water heaters and gas water heaters), kitchen appliances/equipment (gas cooktops, dishwashers, etc.), washroom fixtures (washstands with drain plug, wash basin faucets), bathroom fixtures (drying/ventilation systems, low-temperature saunas, bathroom faucets, etc.), living rooms (air conditioners [one unit]), and toilets (multifunctional seats [up to two units], toilet faucets).
Jutaku ACADEMEIA offers a home appliances/equipment warranty program that aims to support the lifestyles of property owners after their property has been handed over, while also reducing after-sales risk for housing companies.
The main customers of the MSJ group are builders and other housing companies. The market for detached housing remains populated with a large number of small and medium-sized companies as oligopolization by major housing companies has made little progress. In terms of financial resources required to fulfil defect warranty obligations, the market is split between companies that accumulate deposits and companies that get latent defects insurance. The MSJ group conducts transactions with roughly 15% of the top 370 companies (builders that each supply over 100 detached houses per year), but its core customers are housing companies that fall outside the top 370 companies.
MSJ provides Flat 35 and other loans to mortgage seekers through housing companies. The attributes of Flat 35 loan recipients are shown in the following table. In FY2019, the average income of households receiving a Flat 35 loan (nationwide basis) was JPY6.0mn. Households with under JPY8mn in annual income accounted for over 80%, and those with annual income between JPY4–6mn represented the lion’s share of this group.
|No. of family members||persons||3.7||3.7||3.7||3.8||3.8||3.7|
|Housing details||Floor space||sqm||128.2||126.8||125.8||127.0||125.3||125.2|
|Financing details||Cash at hand||JPY10,000||651.1||636.5||621.9||769.7||751.8||763.1|
|% of total price||%||19.4||18.7||18.0||21.2||20.4||20.2|
|Loans (purchase; insurance)||JPY10,000||2,633.4||2,677.4||2,743.2||2,782.2||2,848.5||2,912.8|
|% of total price||%||78.4||78.9||79.4||76.6||77.1||77.2|
|% of total price||%||2.2||2.4||2.6||2.2||2.5||2.5|
|Repayment||Planned monthly repayment||JPY'000||89.3||91.5||93.3||96.3||99.6||101.2|
|% of household income||%||19.9||20.3||20.4||20.0||20.6||20.4|
|% of total price||%||100.0||100.0||100.0||24.2||23.5||23.0|
As shown in the diagram below, the application process for a Flat 35 loan is complex. The main difference with loans that are not backed by JHF is the need for property inspections. Properties subject to Flat 35 loans must undergo conformity inspections (at the design and construction stages) to ensure they meet the technical standards specified by JHF. For housing companies, handling the complex administration work related to this process internally would increase costs. Referring mortgage seekers to lenders and institutions that can issue conformity certificates, and providing the necessary explanation is also cumbersome work.
To resolve this problem, housing companies can conclude an agreement with MSJ, and gain access to one-stop services that not only include financing for their customers but also administrative services such as the issuance of necessary certificates. This approach offers significant advantages in the form of reduced transaction costs and the ability to provide a wider lineup of services to attract customers.
Flat 35 loans offer six major benefits to mortgage seekers: (1) long-term fixed interest rate, (2) no change in repayment amount even if interest rates rise, (3) no additional fees for advanced repayment (required for other loans), (4) no restrictions related to employment duration or employer (some lenders require a minimum of three years of consecutive employment as a screening criterion), (5) no guarantee fee (other loans require a guarantee from a separate guarantee company), and (6) relatively easy to obtain for people who are self-employed and freelancers.
|Lender||Product||Loan type||Interest rate [term]||Guarantee fees||Guarantee fee||Administrative fee (incl. tax)||Period of preliminary screening|
|[15–20 years]||[21–35 years]|
|MSJ||MSJ Flat 35||New||1.260||1.360||Not required||No transaction with guarantee companies||2.15％ of principal||One to two business days|
|ARUHI||ARUHI Flat 35 (21–35 years)||New||1.030||1.420||Not required||2.20％ of principal||One to two business days (ARUHI direct)|
|Rakuten Bank||Flat 35s||New||1.030||1.420||Not required||1.10% of principal (with account)||Results on the following day (earliest)|
|SBI Sumishin Net Bank||Flat 35 (purchase type)||New||1.030||1.420||Not required||1.10％ of principal||One to three business days from online registration|
|Mizuho Bank||Flat 35 (fixed/discounted fee plan; purchase type)||New||1.400||1.530||Not required||JPY33,000||Five business days from application of preliminary screening|
MSJ has built a nationwide network of alliance partners that includes consulting firms, loan providers, real estate companies, and builders. This is the main channel through which the company provides loans to mortgage seekers. As of end-March 2021, MSJ had signed up some 170 companies as alliance partners, roughly 30 of which were registered as money lenders.
To sell latent defects insurance, the company similarly leverages a network of agencies (including construction companies, insurance agencies, and housing franchise chains with a nationwide presence) that have cultivated deep business ties with local communities.
House G-men’s web portal contains a dedicated site for housing companies. By registering on this site, these companies can concurrently apply for additional products such as ground warranties. Unregistered parties cannot access the site, but the web portal is intended to promote the use of its one-stop shop for housing services provided by the MSJ group.
MSJ Flat 35 revenue is mainly generated from loan origination fees (= loan amount x 2.15% [tax included]) collected from mortgage seekers and from servicing fees for principal/interest management and collection work (mortgage amount x rate of 20bps) recommissioned by JHF.
Housing Latent Defects Insurance
Housing Latent Defects Insurance revenue mainly derives from insurance premiums revenue (paid as lump sum for a 10-year term) and inspection fees for construction site inspections, both collected from housing contractors. The basic procedure for a conformity certification costs JPY60,000–80,000. Ground warranty revenue mainly originates from ground inspection fees and ground warranty fees collected from housing companies.
Segment revenue is mainly generated from fees for warranty services that leverage internally developed systems and from system platform usage fees. Collection of accounts receivable and payment of accounts happen essentially at the same time. Housing consulting services revenue comes from consulting fees and other services provided such as home appliances/equipment warranties.
The cost ratio in the Housing Finance business (operated by MSJ) was 6.6% in FY03/20, and agency commissions paid out to alliance partners accounted for 40.2% of SG&A expenses. The main cost items in the Housing Latent Defects Insurance business are inspection fees (included under cost of revenue) paid to inspectors and reinsurance premiums paid to non-life insurers. MSJ collects inspection fees and housing latent defects insurance premiums as unearned revenue, and compares these amounts with cost of revenue. The main cost of revenue item in the Housing Academeia business is personnel expenses.
The businesses operated by the MSJ group are governed by a large number of laws and regulated by various supervisory bodies. To provide mortgages in the Housing Finance business, MSJ had to register as money lender and related operations are regulated by the Financial Services Agency (FSA). To operate the Housing Latent Defects Insurance business, House G-men had to register as a housing performance evaluation body under the Housing Quality Assurance Act, and be designated by the Minister of Land, Infrastructure, Transport and Tourism as a housing defect liability insurance corporation.
Unlike the Housing Finance and Housing Latent Defects Insurance businesses, which are regulated businesses, the Housing Academeia business is not subject to strict regulations. The business mainly offers warranty services such as home appliances/equipment and housing maintenance warranties, which can be conducted by regular companies without restrictions.
|Segment||Governing laws/regulations||Required approvals||Number and validity period||Regulator|
|Housing Finance||Money Lending Business Act||Registration as money lender: Registration dates: December 15, 2005 (registration with Governor of Tokyo), March 16, 2006 (registration with Director of Kanto Local Finance Bureau)||Registration number: Director of Kanto Local Finance Bureau (4) No. 01464 Registration validity period (current): Renewed every three years||Financial Services Agency|
|Self-regulated||Approval to join Japan Financial Services Association||Member number: No. 005752||Japan Financial Services Association|
|Approval date: November 13, 2012|
|Banking Act||Approval to provide bank agency services||Approval number: Director of Kanto Finance Local Bureau (Bank Agent) No. 343, Validity period: Not applicable||Financial Services Agency|
|Affiliated bank: Sony Bank Inc.|
|Approval date: October 11, 2018|
|Housing Latent Defects Insurance||Act on Assurance of Performance of Specified Housing Defect Warranty||Designation as housing defect liability insurance corporation||Designation number: Designation No. 5||Ministry of Land, Infrastructure, Transport and Tourism|
|Designation date: October 16, 2008||Validity period: Not applicable|
|Approval for appointment and dismissal of officers|
|Approval related to work provisions|
|Approval of business plan|
|Approval to underwrite insurance for delivered properties|
|Housing Quality Assurance Act||Registration as housing performance evaluation body||Registration number: Minister of Land, Infrastructure, Transport and Tourism 18||Ministry of Land, Infrastructure, Transport and Tourism|
|Registration date: April 2, 2001||Validity period: Renewed every five years|
|Note: Change from designation to registration system on March 1, 2006|
|Agreement on conformity certification operations||Conclusion of agreement for bodies entrusted with conformity certification operations||Validity period: Not applicable||Ministry of Land, Infrastructure, Transport and Tourism, and Ministry of Finance|
|Act on the Improvement of Energy Consumption Performance of Buildings||Registration as body that performs evaluations based on Building-Housing Energy-efficiency Labelling System (BELS)||Registration number: 029 (registration with the Building Performance Evaluation and Indication Association)||Ministry of Land, Infrastructure, Transport and Tourism|
|Registration date: April 1, 2016||Validity period: Renewed every five years|
|Registration as building energy consumption performance determination body||Registration number: Minister of Land, Infrastructure, Transport and Tourism 22 Validity period: Renewed every five years||Ministry of Land, Infrastructure, Transport and Tourism|
|Registration date: March 28, 2017|
|Housing Academeia||Architect Act||Registration as architect office||Registration number: Class-1 registration with Aichi Prefecture Governor (a-29) No. 13425||Aichi Prefecture|
|Registration date: October 24, 2017||Validity period: Renewed every five years|
|Hotel Business Act||(1) Approval as common lodging house||(1) Approval number: Saku Health Center (Nagano Prefecture) Directive 28, Saku HC No. 11-3||(1) Saku Health Center in Nagano Prefecture|
|Approval date: April 21, 2016||Validity period: Not applicable|
|(2) Approval as hotel operator||(2) Toyokawa Health Center (Aichi Prefecture) Directive 29, Toyokawa HC No. 467-1||(2) Toyokawa Health Center in Aichi Prefecture|
|Approval date: April 24, 2017||Validity period: Not applicable|
|(3) Approval as common lodging house||(3) Approval number: Suwa Health Center (Nagano Prefecture) Directive 29, Suwa HC No. 10-9||(3) Suwa Health Center in Nagano Prefecture|
|Approval date: April 21, 2016||Validity period: Not applicable|
In FY03/21, segment revenue was JPY3.2bn (+12.8% YoY) and operating profit was JPY864mn (+13.3% YoY). The business accounted for 45.4% of consolidated revenue.
MSJ provides Flat 35 and other loans in partnership with JHF. Flat 35 loans are long-term, fixed-rate mortgages issued by private financial institutions under a mechanism whereby the loan receivables are purchased by JHF. MSJ has been designated by JHF as a counterparty for loan receivables purchase agreements, and the company provides its Flat 35 loans under the name “MSJ Flat 35” to mortgage seekers.
JHF’s securitization support business aims to support the provision of long-term, fixed-rate mortgages by private financial institutions. It purchases the receivables of Flat 35 loans issued by private financial institutions and securitizes them to pass accompanying interest rate fluctuation risk and prepayment risk to investors. Through this mechanism, long-term, fixed-rate mortgages that used to be only available in the form of direct financing by the former Government Housing Loan Corporation (currently JHF) can now be issued through regular financial institutions.
The interest rates for Flat 35 mortgages, which are backed by JHF, can be broken down into three components: (1) interest paid to investors on mortgage-backed securities (MBS), (2) JHF’s operating expenses, and (3) amount collected by private financial institutions. In other words, the Flat 35 interest rate comprises the coupon rate of the MBS issued by JHF, operating expenses incurred by JHF, and servicing fees set independently by the financial institution that issues the loan. Consequently, interest rates on Flat 35 loans vary by financial institution.
Once the loan receivables are transferred to JHF, JHF recommissions the loan principal/interest collection work to the lender, which records revenue for this work in the form of servicing fees. At MSJ, the servicing fees are recorded under the “other” in the breakdown of its revenue on its parent income statement. Revenue from servicing fees is calculated using the formula: collected interest x servicing fee rate / loan interest rate.
|(1) Interest to be paid to investors (MBS rate)||0.20%||- 10-year JGB + spread (depends on the market conditions)|
|(2) Operational expenses at Japan Housing Finane Agency (JHF)||0.76%||- Cost of MBS issuance, credit enhancement (credit risks of delinquency and default are covered by JHF)|
|(3) Amount received by private financial institutions (servicing fee)||0.21%||- Cost of administration and collection, determined at the discretion of private financial institution (to be added to (a)+(b) to determine mortgate rate; amount received by the institution = interest recollected x servicing fee / ending interest rate|
As ancillary loans to the MSJ Flat 35 loans, the company also provides MSJ Proper Bridge Loans to MSJ Flat 35 applicants who need to pay a portion of their contract fees (to purchase land or make an initial or intermediate payment for construction work) to a housing company. Bridge loan funds are structured as part of MSJ Flat 35 loans, and are therefore ultimately recovered in their entirety once the loan receivables for the MSJ Flat 35 loan are transferred to JHF. However, MSJ remains the creditor until the MSJ Flat 35 loan is disbursed.
|Characteristics||Use of funds||Loan amount||Loan period||Interest rate [term]||Collateral||Principal repayment||Interest repayment||Mortgage origination fee (excl. tax)||Guarantee fees||Prepayment fees|
|MSJ Flat 35||Loan amount is 90% or less of the property price||Funds to construct or purchase new property, purchase pre-owned property, or refinance existing mortgage for property to serve as residence for applicant or his/her family. Funds to construct or purchase second residence or second house to lodge relatives||Up to JPY80mn||Up to 35 years||Long-term, fixed rate||First-lien mortgage on financed property and site registered to Japan Housing Finance Agency as mortgagee||Equal total monthly payments; Equal monthly payments of principal with interest||2.15% of loan amount (incl. tax), minimum of JPY165,000 (incl. tax)||JPY0||JPY0|
|MSJ Flat 35 (MAX)||Loan amount is more than 90% of the property price|
|MSJ Proper Bridge Loan||Can be used to fund four of the five payments (land purchase, conclusion of construction contract, construction start, completion of framework, and construction completion) included in a loan agreement (not all five)||Bridge loan to be repaid from MSJ flat 35 loan amount||JPY1mn to JPY80mn, within the scope of approved MSJ Flat 35 or other loan||Within one year, but no later than the date on which the MSJ Flat 35 or other loan is disbursed||Fixed rate, short-term prime rate plus premium (1.0–3.0pp)||Not required||Lump-sum payment subtracted from MSJ Flat 35 or other loan amounts||Subtracted from MSJ Flat 35 or other loan amounts||Flat fee of JPY110,000 (including tax)||-||-|
MSJ issued 7,614 loans (excluding bank loans provided as an agency and affiliated loan products) in FY03/21, up 8.6% YoY. In FY03/18, the number of loans issued declined 18.7% YoY, reflecting a pullback from a sharp increase in the number of loans issued (including refinancing of existing loans) in FY03/17 following the introduction of negative interest rates by the Bank of Japan (BoJ).
The company has not disclosed data on its total MSJ Flat 35 loans originated. However, a backward calculation from loan origination fee revenue and the loan origination fee rate puts the amount at JPY112.2bn in FY03/20, when the company had a market share of 4.9%. The above estimate of the total amount of loans issued not only covers MSJ Flat 35 loans, but also MSJ Proper Bridge Loans and other loans. It is difficult to provide more precise estimates because (1) MSJ has not released loan breakdowns or data on the total amount of loans originated, and (2) commission rates vary by loan.
|Loan origination fee ||822||1,096||1,441||1,332||1,632||2,196|
|Loan origination fee ||1.955%||1.955%||1.955%||1.955%||1.955%||1.955%|
|Total loans originated ||42,027||56,064||73,697||68,129||83,499||112,339|
|MSJ market share (SR estimate)||2.4%||2.4%||2.3%||2.7%||3.6%||4.8%|
As of end-March 2021, MSJ provided its products through a total of 39 mortgage sales bases across Japan. During FY03/21, it opened eight new bases and closed seven, for a net increase of one. It recorded 195 new loans per base (=7,614 loans / 39 bases), up from 184 per base in FY03/20.
Meanwhile, industry leader ARUHI (TSE1: 7198) had a network of 152 mortgage sales bases as of end-March 2021. In FY03/21, ARUHI issued 24,369 new loans, or 160 per base (=24,369 / 152). The average fell YoY from 164 loans per base in FY03/20.
MSJ raises the loan funds for its MSJ Flat 35 and MSJ Proper Bridge Loan from private financial institutions. The loan rate is the TIBOR (Tokyo Interbank Offered Rate) plus spread. The funds lent by the company are repaid on the day the MSJ Flat 35 loan funds are disbursed, and therefore they are short-term loans receivable. The company mainly raises loan funds through short-term borrowings.
The table below analyzes the breakeven point for MSJ (the Housing Finance business) using the total cost method. Between FY03/15 and FY03/20, the increase in total costs was small relative to revenue growth. In FY03/20, the contribution margin stood at 57.8%. In other words, MSJ has built a structure that allows it to hold down cost increases even amid growth in the number of loans issued.
|Revenue||1,236||1,542||1,878||1,813||2,169||2,868||Change in revenue||285|
|Costs and expenses||989||1,156||1,290||1,260||1,272||1,768||Change in total costs||120|
|Recurring profit||247||386||589||553||897||1,101||Variable cost ratio||42.2%|
|Break-even point ratio||80.0%||75.0%||68.7%||69.5%||58.6%||61.6%|
In FY03/21, segment revenue was JPY3.4bn (‑9.2% YoY) and operating profit was JPY465mn (‑23.1% YoY). OPM fell 2.4pp YoY from 16.1% in FY03/20 to 13.7%. The business accounted for 47.7% of consolidated revenue.
Housing latent defects insurance is one of two measures by which housing companies can meet the requirement of ensuring financial resources to fulfill their defect warranty obligations under the Act on Assurance of Performance of Specified Housing Defect Warranty (the other measure being the accumulation of deposits). Within the MSJ group, latent defects insurance is sold by House G-men.
There are two types of latent defects insurance for new properties. The first (type-1) is mandatory, while the second (type-2) is purchased on a voluntary basis. Insurance premiums for type-1 insurance are made up of a pure premium, a loading premium, and construction site inspection fees. They may be set by housing defect liability insurance corporations but must be approved by the Minister of Land, Infrastructure, Transport and Tourism.
A standard latent defects insurance premium that includes construction site inspection fees costs roughly JPY70,000–80,000 for a detached house (total floor space of about 120 sqm), and ranges from just below JPY1.0mn to about JPY1.1mn for a residential complex (20 housing units, average floor space of 75 sqm each; four floors) (roughly JPY40,000–50,000/unit), as shown below. These amounts cover a 10-year period and are paid as a lump-sum. The premiums vary by housing defect liability insurance corporation based on the total floor space of the insured property and other factors. Housing companies need to apply for the insurance before starting construction because housing defect liability insurance corporations are required to perform on-site inspections during construction.
House G-men sells latent defects insurance to housing companies. House G-men records provision for underwriting reserves on its balance sheet for a portion of its risk of loss and claims, and has non-life insurers underwrite reinsurance to cover excess liabilities. Provision for liability reserve fluctuates depending on the rate of incidence of insured events, but the rate of incidence has been below the expected rate of incidence.
The following table compares the five housing defect liability insurance corporations that sell latent defects insurance, including House G-men. Service fees vary based on discounts and other factors, but the sum of the required company registration fees and insurance fees ranges from JPY64,580 to JPY79,950, with House G-men charging JPY73,560. Any revisions to insurance premiums require approval from the Minister of Land, Infrastructure, Transport and Tourism.
|House G-men||JHF||JIO||Jutaku Anshin Hosho||Houseplus|
|Business size||Registered companies (new construction)||Approx. 14,000||Approx. 63,000||Approx. 40,000||30,476||Approx. 25,000|
|Insurance agent offices||592 offices||631 offices (and nine offices of specified organizations such as the Japan Wood Construction Industry Association, the Japan Housing Industry association, and the Japan Builders Network)||964 offices (of which 59 directly operated)||1,285 offices||1,200 offices|
|Affiliated inspection companies or inspectors||3,271 inspectors||3,700 inspectors||3,600 inspectors||96 companies, 4,048 inspectors||3,000 inspectors|
|Service fees||New company registration fee (housing latent defect liability insurance for new construction) *1||No charges||JPY9,720||JPY4,500||JPY24,000||No charges|
|Insurance fees (incl. insurance premium and inspection fees) [Assumptions: type-1 insurance, for SMEs, standard house, 2-floor wooden structure, total area of 120sqm, two on-site inspections, maximum insurance payout of JPY20mn, no options] *2||JPY73,560 (insurance premium: JPY46,340 + inspection fees: JPY13,610 x 2)||JPY70,230 (insurance premium: JPY46,250 + inspection fees: JPY11,990 x 2)||JPY70,280 (insurance premium: JPY45,400 + inspection fees: JPY27,400)||JPY69,080 (insurance premium: JPY42,820 + inspection fees: JPY26,260)||JPY64,580 (insurance premium: JPY39,740+ inspection fees: JPY24,840)|
House G-men regards ground warranties as important products that can be offered alongside latent defects insurance to housing companies. Ground warranties are provided by Jutaku Gijutsu Kyogikai (a general incorporated association), another member of the MSJ group, with House G-men acting as the intermediary. According to the company, the number of housing companies that concurrently sign up for latent defects insurance and ground warranties has doubled in recent years.
House G-men’s focus on ground warranties has been partially driven by rising demand for such services. This is mainly because housing companies are seeking to avoid large repair costs in the event of a ground-related accident (for example, as a result of differential [i.e., uneven foundation] settlement). House G-men also believes ground warranties sold as special provisions of latent defects insurance agreements are insufficient because such provisions only take effect after a house is handed over to a customer, and therefore do not cover ground-related accidents in the period prior to and during construction.
To prevent such accidents, House G-men urges housing companies to use its housing warranty services or work with a ground investigation company to obtain a proper ground warranty. Housing companies that wish to prevent ground-related accidents can take advantage of the MSJ group’s one-stop services by concurrently applying for latent defects insurance and a ground warranty, which contributes to their operational efficiency.
Jutaku Gijutsu Kyogikai (general incorporated association)
Jutaku Gijutsu Kyogikai engages in (1) the promotion of residential ground investigation, analysis, and warranties, (2) the promotion of technology development for housing repairs and maintenance, (3) research geared toward housing technologies, and (4) education, cultivation, and training activities of housing-related technical personnel. The association operates a ground warranty system that provides warranties against ground-related accidents caused by differential [i.e. uneven foundation] settlement and other causes. Under this system, the association analyzes ground inspection data collected by registered ground inspection companies, verifies their findings and determinations as a third-party body with the expertise to formulate an objective and fair opinion, and subsequently compiles its own findings into a ground determination report. Ground warranties complement latent defects insurance as they can be (1) used to cover damages from accidents deemed not attributable to defects in basic design, or (2) used instead of latent defects insurance claims.
To receive a Flat 35 loan, loan applicants must have their new house inspected to assess conformity with technical standards (such as thermal insulation performance and durability) specified by the JHF, and obtain a conformity certificate from a corresponding body. The inspection to verify conformity with the building standards takes into consideration the balance between the shape of the building and its earthquake resistance, whether the management costs required to occupy the property are fair, and the presence or absence of a long-term repair plan.
The conformity certificate is a requirement of the Flat 35 application process, and must be submitted to the financial institution issuing the loan. Conformity certificates can only be issued by a qualified “conformity certification engineer” affiliated with a third-party conformity certification body. In practice, this is often a construction inspection body or design office.
House G-men’s fee structure differs by usage conditions, but it offers conformity certificates in conjunction with latent defects insurance at JPY37,400 per house, or as a separate product at JPY57,200 per house.
Conformity certification body:
A conformity certification is a process required as part of the application for a long-term, fixed-rate Flat 35 loan issued by a private financial institution in partnership with JHF. It attests the subject house conforms to the technical standards specified by JHF. Houses that fail to obtain a conformity certificate cannot be financed through a Flat 35 loan. The technical standards include provisions in the Building Standards Act and standards separately designated by JHF. For example, wooden houses are checked for conditions that contribute to the longevity of the house such as “a minimum distance of 40cm between the foundations of the house and the ground surface” and “sub-floor waterproofing measures.” For condominiums, the focus is on conditions related to future maintenance and management such as “the compilation of long-term repair plan that spans at least 20 years.” The certification is carried out by a qualified architect affiliated with a third-party conformity certification body. For newly built properties, the certification also confirms whether an inspection certificate has been obtained in accordance with the Building Standards Act. Conformity certification bodies are designated by the Ministry of Land, Infrastructure, Transport and Tourism.
House G-men performs housing performance evaluations, and issues housing performance evaluation reports.
It offers two types of evaluation services: design performance evaluations and construction performance evaluations. The former checks whether the design of a house exhibits the performance described in the original application (in areas such as earthquake resistance, energy efficiency, and accommodations for seniors), and summarizes findings in a design evaluation report. The latter checks whether the construction of the house conforms to the design plans, generally includes at least four construction site inspections, and summarizes findings in a construction evaluation report.
As of April 1, 2021, a total of 125 companies (29 registered with the Ministry of Land, Infrastructure and Transport and 96 registered with the Directors of Regional Development Bureaus operating under the Ministry of Land, Infrastructure and Transport) provide design performance evaluations and construction performance evaluations. In FY2020, House G-men issued Excellent Long-term Housing Technical Review Certificates for 3,162 houses, amounting to 3.1% of the total of 101,675 issued by all bodies. It ranked seventh out of 118 bodies that disclosed data (source: Association of Housing Performance Evaluation and indication).
Design performance evaluations cost JPY46,000 per house (newly built houses, up to 200 sqm). If bundled with construction performance evaluations, the fee increases to JPY146,000 per house (on the same basis).
The number of insurance policies, warranties, evaluation reports, and conformity certificates issued declined 3.1% YoY in FY03/21, partly due to a slowdown in housing starts. The number has expanded at a CAGR of 1.5% in the three years through FY03/21, a slowdown from 9.2% in FY03/20.
The Housing Finance and Housing Latent Defects Insurance businesses are regulated by supervisory bodies. This is not the case for the Housing Academeia business, which is being cultivated into a future growth driver. In the Housing Academeia business, the company provides consulting services to business operators, as well as various systems that support platform infrastructure. In FY03/21, segment revenue was JPY493mn (-2.4% YoY), operating profit was JPY95mn (‑17.8% YoY), and OPM was 19.2%. The business accounted for 6.9% of consolidated revenue.
In the Housing Academeia business, MSJ independently develops and provides the Suketto Cloud housing provider integration system. The company promotes usage of the system among housing companies, and accordingly aims to lock in customers and expand sales of group products.
Suketto Cloud: A professional cloud system for the housing industry that supports services and operations of housing-related business providers.
Housing Provider Architecture (HPA) system: A system that manages all aspects of construction progress from design, cost estimates, confirmation applications, construction start through completion and handover. It allows housing companies to simultaneously share information and construction progress with various parties, and thus helps improve operational efficiency.
Housing Provider Core (HPC) system: A support system that manages operations such as post-construction regular inspections, maintenance, and renovations. It mainly features customer relationship management (CRM) functions, and consolidates various types of data such as housing information (customer data, blueprints), maintenance records, and customer interaction records. The system allows housing providers to lock in customers and make appropriate proposals when selling new houses, conducting post-handover maintenance, renovating properties, and providing property sales support. In this way, it contributes to steady revenue.
At present, the company has integrated its HPA and HPC systems, and it offers the integrated HP system along with strengthened CRM functions applicable to sales under the name “Suketto Cloud.”
Through Suketto Cloud, MSJ packages a range of solutions provided by its group such as latent defects insurance, ground warranties, and home appliances/equipment warranties. This package of services is offered through an electronic platform that helps improve operational efficiency for housing companies, including parties ordering construction.
From FY03/19, the company started offering Suketto Cloud as a free service. It plans to expand its financing-related functions going forward, envisioning it as a “Main Bank Cloud for Builders” that would provide property financing (including mortgage, completion warranties, and bridge loans held in escrow accounts), latent defects insurance and inspections related to housing quality, and home appliances/equipment extended warranty services and fund settlements. The cloud system will not only contain CRM functions, but also centralize the entire process from mortgage applications to fund settlements. The ultimate goal is to allow housing contractors to complete applications for the group’s housing financing, insurance, and warranty products on the cloud by leveraging accumulated housing data, and thus reduce administrative work.
The Housing Academeia business posted an FY03/21 operating profit of JPY95mn ( 17.8% YoY). In FY03/21, orders for products such as home appliances/equipment warranties and housing maintenance warranties decreased 10.9% YoY to 21,534. The main sources of revenue were various support service fees for internally developed systems, warranty fees for warranty services that utilize internally developed systems, and system usage fees for provided system platforms. Commissions and usage fees continued to increase driven by growth in orders.
The Japanese mortgage market (market for new loans), the company’s main target market, was worth roughly JPY22tn at end-March 2020. However, this figure not only includes loans issued by domestic banks, shinkin banks, life insurers, and mortgage companies (so-called “mortgage bankers”), but also loan receivables purchased by JHF. Since MSJ mainly issues Flat 35 loans and transfers the loan receivables to JHF, this segment of the market—valued at about JPY2.3tn—should be regarded as the company’s real target market.
The company has not disclosed details on the amount of new Flat 35 loans originated in FY03/20. However, we can infer the amount for the parent in FY03/20 by dividing loan origination fee revenue by the fee rate of 1.955% (excl. tax), which works out to JPY112.3bn. This in turn puts the company’s current share of the JPY2.3tn market at 4.8%.
The figures for mortgage companies in the table below do not include amounts for new Flat 35 loans originated. According to the Mortgage Bankers Association of Japan, mortgage bankers accounted for roughly 90% of the total amount of new Flat 35 loans originated.
|Institution type (JPYbn)||FY03/10||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20|
|Workers' credit unions||1,678||1,448||1,551||1,374||1,595||1,312||1,305||1,676||1,769||2,014||1,957|
|Life insurance companies||166||185||122||104||133||106||89||85||111||98||101|
|Japan Housing Finance Agency: Purchase||1,013||2,808||2,787||2,184||1,855||1,672||2,344||3,201||2,516||2,273||2,325|
|Japan Housing Finance Agency: Guarantee||18||12||12||5||4||0||0||41||138||242||371|
|Workers' credit unions||8.5%||7.2%||7.6%||6.7%||7.7%||6.8%||6.4%||6.8%||8.2%||9.5%||9.0%|
|Life insurance companies||0.8%||0.9%||0.6%||0.5%||0.6%||0.5%||0.4%||0.3%||0.5%||0.5%||0.5%|
|Japan Housing Finance Agency: Purchase||5.1%||14.0%||13.7%||10.7%||8.9%||8.6%||11.6%||12.9%||11.7%||10.7%||10.7%|
|Japan Housing Finance Agency: Guarantee||0.1%||0.1%||0.1%||0.0%||0.0%||0.0%||0.0%||0.2%||0.6%||1.1%||1.7%|