Mortgage Service Japan 7192
日本モーゲージサービス
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2022-05-10
2022-03-15
2022-02-07
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Summary
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.
Thrifts & Mortgage Finance
Key dates
2020-02-26
Coverage initiation
Executive summary
Business overview
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.]）
Earnings trends
In FY03/22, consolidated revenue was JPY7.7bn (+7.9% YoY), operating profit JPY1.7bn (+19.1% YoY), recurring profit JPY1.7bn (+20.0% YoY), and net income JPY1.1bn (-19.5% YoY). Revenue and profit reached record highs. The Housing Finance business, the Housing Latent Defects Insurance business, and the Housing Academeia business all posted a YoY increase in revenue and profit. The earnings growth was driven by the Housing Latent Defects Insurance business in particular.
The company forecasts FY03/23 consolidated revenue of JPY7.5bn (-2.5% YoY), operating profit of JPY1.5bn (-11.6% YoY), recurring profit of JPY1.5bn (-11.7% YoY), and net income of JPY1.0bn (-8.4% 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.
Strengths and weaknesses
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.
Key financial data
The company carried out a 2-for-1 split of its common stock with a record date of August 31, 2020.
Notes: Figures may differ from company materials due to differences in rounding methods.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
Quarterly earnings by segment
Notes: Figures may differ from company materials due to differences in rounding methods.
Full-year FY03/22 results
Summary (consolidated)
Key points
The housing industry saw a YoY recovery in new housing starts driven by various government policies to support home purchases. Revenue and profit for the full year exceeded the company's initial projection and reached record highs. Revenue, operating profit, recurring profit, and net income were 105.3%, 113.1%, 113.3%, and 106.1%, respectively, of the company's full-year earnings forecast.
Revenue increased JPY560mn YoY, broken down to a JPY165mn increase in Housing Finance, a JPY314mn increase in Housing Latent Defects Insurance, and a JPY80mn increase in Housing Academeia. The Housing Latent Defects Insurance business drove the full-year earnings growth.
Operating profit increased JPY272mn YoY. Of the YoY increase, JPY96mn was from Housing Finance, JPY155mn from Housing Latent Defects Insurance, and JPY21mn from Housing Academeia. OPM increased 2.1pp YoY to 22.1%.
By segment
Housing Finance
The number of loans issued in FY03/22 totaled 7,464 (compared with 7,614 in FY03/21), a 2.0% YoY decline. A number of loan products other than the mainstay MSJ Flat 35 also performed well. The company opened 12 new sales locations, reinforcing its sales structure.
Revenue increased 5.1% YoY to JPY3.4bn, and operating profit rose 11.1% YoY to JPY959mn. Segment operating profit reached the full-year target of JPY824mn.
Housing Latent Defects Insurance
The number of insurance policies, warranties, evaluation reports, and conformity certificates issued in FY03/22 increased 10.4% YoY to 124,380. The nationwide recovery in new housing starts, mainly centered on owner-occupied houses, boosted sales.
Revenue was JPY3.7bn (+9.2% YoY) and operating profit was JPY620mn (+33.4% YoY). Segment operating profit was 118.1% of the full-year forecast (JPY525mn).
Cross-selling of cloud and insurance services helped lift revenue. Services related to the Green Housing Point System also contributed to earnings growth.
Housing Academeia
The number of home appliances/equipment extended repair warranties and home maintenance warranties in FY03/22 was 21,130, down 1.9% YoY. There was an increase in home maintenance warranties.
Revenue was JPY573mn (+16.3% YoY) and operating profit was JPY116mn (+22.3% YoY). Segment operating profit was 77.4% of the full-year forecast (JPY150mn).
The company expanded provision of cloud and related housing warranty services. Performance was back to the pre-pandemic levels.
Full-year company forecast
Target figures
For FY03/23, Mortgage Service Japan forecasts consolidated revenue of JPY7.5bn (-2.5% YoY), operating profit of JPY1.5bn (-11.6% YoY), recurring profit of JPY1.5bn (-11.7% YoY), and net income of JPY1.0bn (-8.4% YoY).
For FY03/23 business strategies, we will provide details after interviewing the company.
Medium-term outlook
Medium-Term Business Plan FY03/24
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%).
Problems associated with COVID-19
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.
Company solutions and mission
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.
Growth strategy
Blue ocean strategy in commodity products
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.
Strategic products
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.
Flat 35 loans (warranty type)
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
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.
Business
Business description
Company background
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.
Convinced that housing financing services were a core need of housing companies (response to question [3] 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.
Earnings and business structure
Earnings
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%.
Business structure
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.
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%.
Financial characteristics
GPM in Housing Finance business
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.
OPM at House G-men
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.
Note: Figures for MSJ and House G-men are for FY03/21 (House G-men’s total and net assets are based on FY03/20 results report); figures for other companies are for FY03/20 (as of May 25, 2020).
Business Model
Sales financing model
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.
One-stop shop approach
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).
Unrivaled as one-stop shop for latent defects insurance and mortgages
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.
Measures to eliminate risk
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.
Unique value chain
Major products and services
Loan products: Flat 35
Product description
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.
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.
Insurance products: Latent defects insurance
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.
Warranty products (home appliances/equipment warranties)
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.
Customers
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.
Mortgage seekers
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.
Benefits
Benefits to housing companies
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.
Benefits of Flat 35 loans to mortgage seekers
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.
Note: Simulation parameters: “Fixed-rate during the entire term,” “Minimum interest rate,” “Fixed-rate term: 21–25 years, 26–30 years,” “Property that qualifies for Flat 35 loan,” and “Property that qualifies for Flat 35s loan.”
Sales channels
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.
Earnings structure
Revenue structure
Housing Finance
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.
Housing Academeia
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.
Cost structure
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.
Legal restrictions
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 overview:
Housing Finance (45.4% of revenue, 60.6% of operating profit)
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.
Major loan products
MSJ Flat 35 loans
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 (purchase) scheme
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.
Structure of Flat 35 interest rates
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.
Note: Mortgage rates above are actual examples in December 2019.
MSJ Proper Bridge Loan
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.
Number of loans issued
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).
Estimated total amount of loans originated (annual)
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.
Mortgage sales bases
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.
Source of loan funds
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.
Analysis of breakeven point
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.
(2) Housing Latent Defects Insurance (47.7% of revenue, 32.6% of operating profit)
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
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.
Note: Amounts vary due to discounts and other factors.
Note: Standard price. Insurance premiums are tax-exempt and therefore do not include tax. Inspection fees include tax. Insurance fees are discounted based on the number of housing units insured each year, the rate of incidence of insured events, online applications, and other factors, so actual amounts may differ from those presented above.
Ground warranties
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.
Issuance of conformity and other certificates
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.
Housing performance indication
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).
Number of insurance policies and other certificates issued
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.
(3) Housing Academeia (6.9% of revenue, 6.7% of operating profit)
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.
Consulting services and system development
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.
Market and value chain
Market size
Mortgage market
Market size of JPY2.3tn
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.
Shrinking market of new houses
Sustainable growth in MSJ’s Housing Finance business hinges on continued growth in the issuance of Flat 35 loans, which are used to construct or purchase new houses, purchase pre-owned houses, and refinance mortgages. In this section, we look at market trends centered on funds to construct or purchase new houses.
The number of Flat 35 loans issued closely reflects trends in new housing starts, which in turn are correlated with the number of moving households, the average age of the housing stock, and nominal GPD growth. Nomura Research Institute (TSE1: 4307) expects the number of moving households to fall from 4.2mn in 2019 to 3.9mn in 2030 and 3.4mn in 2040, the average age of the housing stock to increase from 22 years in 2013 to 29 years in 2030 and 33 years in 2040, and nominal GDP growth to fluctuate significantly in the near term due to the COVID-19 pandemic (source: Nomura Research Institute), stagnate in the medium to long-term, and fall to -0.1% in 2035 (based on data compiled by the Japan Center for Economic Research).
Based on the outlook above, new housing starts are projected to decline from 880,000 in FY2019 to 630,000 in 2030, and further to 410,000 in FY2040. The supply of rental housing is expected to increase by about 50,000 driven by increases due to inheritance tax reforms.