Heiwa Real Estate has established a Risk Management Committee to identify and study risks associated with the Heiwa Real Estate Group’s businesses and operations, specify which risks must be managed, and designate which departments are responsible for such management. Furthermore, the Group has put a risk management system in place in order to properly manage and control risks, limit or prevent risks from materializing, and minimize any damage in the event such risks materialize.
These risks have been compiled in the following list, as of March 31, 2023.
1. Building Business
The Heiwa Real Estate Group’s Building Business develops, leases, manages and sells stock exchange buildings, office buildings, commercial facilities, and residential buildings. Among these operations, office building leasing accounts for the majority of the Building Business's operating income.
Accordingly, the Group’s performance could be impacted if revenues from office building leasing decrease as a result of any of the following factors: changes in land prices; decisions by potential tenants to not move in or by existing tenants to end their occupancy due to such factors as worsening economic conditions and supply and demand balance; changes in the building leasing market, including new leasing rate trends; and changes in leasing rates and building occupancy rates.
The Group works to lower the risk of declining revenues from office building leasing by concentrating its building leasing operations in areas in which changes in business conditions have a comparatively minor impact on declining leasing rates, particularly three central wards in Tokyo as well as major cities in other regions of Japan. Nevertheless, if changes in business conditions and worsening supply and demand balance have a greater effect on leasing rates and building occupancy rates than originally anticipated by the Group, its leasing revenues could be seriously impacted.
Business related to the development and sale of real estate may be unable to secure projected earnings as a result of the following factors: lower returns on investment due to economic trends, decreasing demand in the real estate market, and rising material and other construction costs; changes in future interest rates and land prices; competition in the construction industry; less availability of development sites; bankruptcy of business partners; development project delays; or changes in the tax system. Any of these factors could potentially impact the Group’s business performance.
The Group has established risk control guidelines for the sale of real estate as a means to lower risks from changing business conditions or other factors up to the time of sale. In the event of unforeseen circumstances, however, or if such real estate cannot be sold at the expected time, the Group may not be able to secure revenues as expected. Furthermore, although the Group is not carrying out any projects in its condominium sales business at present, if it conducts such projects in the future, the performance of this business may change after large condominium buildings are completed and transferred to their owners. Any of these factors could prevent the Group from securing anticipated revenues and, consequently, impact its business performance.
2. Risks Associated with Real Estate Development Projects
The Heiwa Real Estate Group is involved in real estate development projects, including the redevelopment of Nihonbashi Kabutocho, Kayabacho, and Sapporo. If a building under ownership is demolished in one of its projects, extraordinary losses will be incurred, such as costs related to the eviction of tenants or losses on the disposal of property. Moreover, if a leased building that currently generates leasing revenues is redeveloped, it will not generate such leasing revenues during the development period. The Group devises and executes systematic business plans when carrying out its development projects, however, various factors unforeseen at the time of planning could cause costs to increase above expectations or projects to be delayed or even suspended. These factors include increased land prices, rising material and other construction costs, delays in obtaining development-related permits and authorization, prolonged negotiations with other companies and organizations involved in the project, or delays in attracting tenants due to worsening office building market conditions or defective construction work. Any of these factors could lead to a fall in leasing revenues and, consequently, impact the Group’s business performance.
3. Risks Associated with Interest-Bearing Loans and Investment in Leased Real Estate or Revenue-Generating Real Estate
The Heiwa Real Estate Group acquires, rebuilds and redevelops leased real estate and revenue-generating real estate with the aim of bolstering and stably maintaining its earnings power. It procures interest-bearing loans mainly for the purpose of funding such acquisitions or reconstruction projects. Accordingly, financing conditions and interest rate trends could lead to higher financing costs and consequently, impact the Group’s business performance.
The Group’s policy is to maintain an appropriate level of interest-bearing debt and net debt-to-equity ratio. To minimize the impact of interest rate fluctuations, the Group aims to ensure that the majority of the interest-bearing loans it procures are long-term loans, and the majority of loans have fixed interest rates. Nevertheless, financing conditions, interest rate trends, or other related factors could potentially impact the Group’s business performance if they differ significantly from its original assumptions.
4. Risks Associated with Changes in Real Estate Prices
The appraised values of leased properties owned by the Heiwa Real Estate Group, excluding some small assets, are obtained at the end of each fiscal year, generally from property appraisal companies outside the Group. While the Group closely monitors changes in these property values, the properties it owns could markedly decrease in value due to changes in the real estate market or other factors in the future, which could result in an impairment loss, an appraisal loss on portfolio assets, or some other form of loss. Any of these results could potentially impact the Group’s business performance.
Among the investment securities it holds, the Group maintains cross-shareholdings to strengthening business relationships, as well as to facilitate financial activities and to strengthen business alliances considered to be beneficial for medium- to long-term business development. Every year, the Board of Directors verifies the appropriateness of individual cross-shareholdings in overall consideration of yields and capital costs, as well as whether they are useful for medium- to long-term business development and are in line with Company objectives including strengthening business relationships, facilitating smooth financial activities and enhancing business alliances. If, as a result of this verification, holdings are determined to be inappropriate, they are reduced through disposal by sale after considering for share prices and market trends. However, if there is a significant decline in the value of the Group’s investment securities due to a drop in the market price of shares or other factors, the Group’s business performance and financial results may be impacted.
5. Risks Associated with the Impact of Deferred Tax Assets on Financial Results
The Heiwa Real Estate Group projects the amount of deferred tax assets it can expect to recover based on estimates of future taxable income. Such estimates of future taxable income are based on the Group’s management plans, but they may deviate from those plans due to changes in the economy, real estate market conditions, the financial situation, or other factors. If these estimates are lowered and some or all of the deferred tax assets are deemed unrecoverable, or if tax-related laws are revised or corporate tax rates reduced, deferred tax assets could decrease and tax expenses increase. Any of these outcomes could potentially impact the Group’s business performance and financial results.
6. Risks Associated with Capital Alliance with Mitsubishi Estate
Heiwa Real Estate and Mitsubishi Estate Co., Ltd., concluded an agreement to form a capital and business alliance on February 17, 2011. Based on this agreement, Heiwa Real Estate has been collaborating with Mitsubishi Estate in related businesses, and both companies are currently working together to maximize business synergies, particularly with respect to the redevelopment of the Nihonbashi Kabutocho and Kayabacho district. In the event of changes in the operating environment or unforeseen circumstances in the future, however, there is a possibility that the initial objectives of the alliance may not be achieved, or that the alliance may be terminated in the future due to certain reasons. Any of these results could potentially impact the Group’s business performance.
7. Risks Associated with Natural and Human-caused Disasters
In the event that property held by the Heiwa Real Estate Group is damaged or destroyed by a major earthquake or other natural disaster, or by a human-caused disaster such as an accident or act of terrorism, substantial expenditures would be needed for repair work or reconstruction, and leasing revenue would decrease. Any of these outcomes could potentially impact the Group’s business performance. The Group has been improving the disaster preparedness of properties it owns while stepping up its business continuity planning measures with a view to reduce the impact of natural or human-caused disasters. These measures may be ineffective, however, in the event of a disaster beyond the scope of the Group’s original assumptions.
8. Risks Associated with Real Estate-Related Laws and Regulations
Each of the Heiwa Real Estate Group’s businesses is subject to various laws in Japan, including the Act on Land and Building Leases, the Building Standards Act, and the City Planning Act. If such laws are revised or if new laws are enacted in the future, the Group may be required to take on new obligations and incur higher costs. These factors could potentially impact the Group’s business performance and financial results. Furthermore, the Group makes efforts to promptly acquire information about revisions to such laws, obtain related opinions from lawyers, and communicate effectively with authorities that grant approval and permits. Despite these efforts, however, revisions to laws or the enactment of new laws could differ from the Groups original assumptions.
9. Risks Associated with Employee Misconduct
The Heiwa Real Estate Group has been operating and maintaining internal control systems while striving to comply with all relevant laws and regulations. The Group has implemented thoroughgoing countermeasures aimed at preventing a recurrence of such actions, and took steps to raise awareness of such actions among employees, strengthen its management systems, and bolster its internal reporting system. If, however, an incident of misconduct by employees occurs despite these countermeasures, the consequences could potentially impact the Group’s social credibility, business performance, and financial results.
10. Risks Associated with Sustainability
Given its management plans and other elements, the Group has isolated a number of social issues, considered each issue for their degree of importance to each of the Company and stakeholders, and identified social value for the Company to pursue and materiality. The Group recognizes sustainability management as one of these material issues. Risks that may affect the Group's businesses include, in addition to those listed in (7) Risks Associated with Natural and Human-caused Disasters, reduced development opportunities and increased operating costs due to tighter restrictions calling for real estate development and operation with low environmental burden, and deteriorating reputation due to shifting customer company needs toward office buildings with low environmental burden and the inability to address these needs. The Group has established a Sustainability Committee, chaired by the Representative Executive Officer, President and CEO, to facilitate the smooth implementation of our sustainability initiatives and enable the practice of sustainability management. By monitoring the plan-do-check-act (PDCA) cycle for each sustainability initiative, including those for climate change and other environmental issues, and by reporting important details to the Board of Directors, the committee acts as a main driver in increasing the effectiveness of sustainability management. However, delays in responding to these risks could potentially result in a greater-than-expected impact on the Group's business performance and financial results.
11. Risks Associated with Information Security
The Group handles a large amount of confidential information, including personal information, in each of its businesses. In the event of an information leak to an external party due to cyberattack or the actions or a Group officer or employee, the Group's social credibility may be diminished and the Group may be liable for damages, which may impact the Group's business performance and financial results. The Group strives to take appropriate measures to ensure safety, such as establishing an information security management system, establishing internal regulations based on its basic policies, and continuously providing the education necessary to ensure the security of information assets from the threats of unauthorized access, destruction, information leakage, falsification, loss, and theft. However, cyberattacks are becoming more sophisticated by the day, and there is no guarantee that these measures will be able to prevent all information leaks. If any of these risks were to materialize, they could impact the Group's business performance and financial results. In addition, the Group uses information communication systems in its business operations, and if these systems are affected by a cyberattack or if a system failure were to occur, business operations could be temporarily suspended, which could impact the Group's business performance and financial results.
12. Risks Associated with the Spread of Infectious Diseases
In the event of major outbreaks of infectious diseases such as COVID-19, behavior restrictions and economic slowdown in Japan and overseas may affect the Group’s leased real estate through causing lower hotel occupancy rates, worsening tenant business performance leading to vacancy and leasing rate reductions, and a decline in the sales of owned stores. These factors could potentially impact the Group’s business performance and financial results. While the Group implements risk management practices under its risk management system, if any of these risks materialize, however, they could potentially impact the Group’s business performance and financial results.