Business Risks

There are risks associated with the businesses of the Daiwa House Group that may possibly have a material impact on the consolidated financial positions, operating results and cash flow as indicated below. The future risks described herein are those that had been identified as of March 31, 2022.

1.External factors

(1)Laws, regulations and policies

① Risks associated with legal regulations

Risk details

The enactment of new legislation or the amendment and/or abolition of existing laws or regulations, whether in Japan or in overseas markets, could change the Daiwa House Group’s business situation such that its business performance suffers a negative impact. The Company pursues construction and the real estate business in the Japanese and overseas markets, and its operations are consequently subject to numerous laws and regulations. In Japan they are subject to the application of the Companies Act, the Financial Instruments and Exchange Act, and various laws relating to the construction and real estate sectors as well as protection of the natural environment, and laws specifically regulating particular industries. Overseas, the Group is subject to the application of the laws and regulations of the countries and regions in which it operates. In addition, as the Group companies pursue a wide range of business operations including hotels, logistics, insurance, sports clubs and credit cards, they are subject to the application of laws and regulations specifically regulating respective industries. In this way, there are various laws and regulations that are applicable to the Group’s operations, and in not a few circumstances the amendment and/or abolition of existing laws or regulations or the enactment of new legislation could affect its operations.

In the event of a violation of legal regulations, there is a possibility that the Group may be subject to penalties, punishment or other sanctions or suffer damage to its social credibility or image, which negatively impacts its business performance.

Countermeasures

The Daiwa House Group constantly monitors trends in the amendment and/or abolition of legal regulations or the enactment of new legislation related to Group business, and has developed a system for taking measures in advance to minimize risk in the event that it obtains information about a risk that will impact its business activities or performance.

Furthermore, the Group appoints the Head of the Management Administration Headquarters as the Chief Risk Officer (CRO), putting in place a system for establishing, operating and supervising groupwide risk management systems. Through the development of organizations for preventing the materialization of risk and promoting action to address materialized risks under the CRO's supervision, the Group establishes and operates a system for conducting risk management in each of its businesses. In addition, the Group takes such measures as active provision of information and training to employees with respect to knowledge of the laws and regulations, as well as preparation of various manuals and checklists.

Moreover, the Group takes such measures as active provision of information and training to employees with respect to knowledge of the laws and regulations, as well as preparation of various manuals and checklists.

However, in the event of materialization of a major risk, the Group responds by setting up an emergency task force and seeking to minimize the adverse impact on performance whilst also making sure to prevent a recurrence.

② Risks associated with overseas business operations

Risk details

In its overseas business operations, the Daiwa House Group is subject to risks arising from a variety of possible external causes, including: a sudden upturn in inflation or a sharp change in the exchange rate of the yen; the occurrence of riots, civil insurrection, or war risk resulting from uncertainty arising from political and economic circumstances; delay or suspension in the execution of business, the collection of proceeds, or restrictions on money transfers due to a deterioration in diplomatic relations between Japan and other countries or legal constraints; or the risk of a sharp decline in demand for the purchase of real estate as a result of changes in the legal framework, such as the passage of legislation to restrain transactions in the real estate market. In the event of the materialization of any of these risks, the business performance of the Group may be adversely affected.

Countermeasures

Led by the Overseas Business Division and Management Administration Headquarters in Japan, the Group promotes the development of a regionally based governance system including establishing regional companies (RCs) according to the characteristics of each area overseas and appointing a person responsible for administrative operations at each RC. Furthermore, Group employees in the actual regions are quick to identify and share risk information on matters such as diverse cultures and customs, interpretations of tax affairs and laws, and labor problems and to take countermeasures and preventive measures.

③ Risks associated with changes in government policies and taxation systems relating to housing

Risk details

There is a risk that demand for housing may decline due to changes in or termination of government programs designed to stimulate housing demand, such as preferential interest rates on mortgage loans or subsidy and benefit systems for housing acquisition and renovation. Such a decline would adversely impact the Daiwa House Group’s housing-related businesses.

In addition, increase in the consumption tax rate and changes or abolishment of the tax system, such as preferential interest rates on mortgage loans, leading to a heavier payment burden for potential customers, may cause a decrease in demand for single-family houses, condominiums and other forms of housing, thereby adversely impacting the Group’s business performance.

Countermeasures

The Group constantly monitors information about various subsidies and benefit systems including their amendment or abolition or the termination of benefits, and takes measures in response to system changes.

Furthermore, by planning "lifestyle" proposals and high added value products tailored to customer lifestyles, the Group also works to create demand and reduce the impact of decline in housing demand on performance.

(2)Business environment

④ Risks associated with dependence on specific suppliers, products and technologies

Risk details

The Daiwa House Group consigns part of its operations including the provision of products and services and manufacturing of raw materials used for products to business operators that possess particular technological expertise. However, there is the risk of sudden instability in the supply of products, parts and materials due to rising materials prices, tight supply of materials or delivery delays stemming from global events such as the occurrence of geopolitical risks or pandemics and there is the risk of supply being suspended due to the failure of suppliers. If, in spite of these measures, the risk is materialized, the Group’s business performance may be negatively affected.

Countermeasures

To prevent the materialization of risks such as those described above, the Group makes it a general rule to conclude procurement contracts with more than one company for frequently purchased goods, with the exception of goods with special specifications, performance or functions, striving for diversification in its placement of orders and subcontracting of operations. Moreover, the Group considers factors such as procurement volumes and the difficulty of procuring alternatives and, starting with high priority goods, implements measures such as establishing multiple bases at supply destinations, changing specifications, proposing alternatives, reviewing procurement lead times and ensuring a reasonable level of inventories. The Group has also developed a system for carrying out credit management of suppliers on an ongoing basis and enabling it to decide through discussion with relevant departments whether or not to maintain transactions with suppliers when there are supply instability issues.

⑤ Risks associated with rises in the prices of raw materials, construction materials, labor costs, etc.

Risk details

The Daiwa House Group procures many raw materials and materials and places orders with subcontractors when constructing buildings and supplying services. In the event that the prices of raw materials and materials, labor costs and so on increase and the Group is unable to pass this cost increase onto selling prices, the Group's performance may be adversely impacted. Especially in the event of soaring prices for raw materials, materials and energy under the impact of abnormal weather events worldwide, currency market volatility or geopolitical risks, there is the risk that the the Group is unable to pass this cost increase onto selling prices, leading to higher manufacturing costs and logistics costs. Meanwhile, the ongoing COVID-19 pandemic is also pushing up prices for raw materials and materials and there is the potential risk of an increase in construction costs. The materialization of such risk could adversely impact performance.

Countermeasures

In face of the risk of rising raw materials and materials prices and other costs, the Group works to control cost increases through measures such as (i) reviewing specifications, (ii) maintaining stable supply by purchasing from multiple suppliers, (iii) considering using new materials, (iv) reviewing transport expenses by changing supplying production bases and reviewing transport methods and (v) reducing costs through activities to improve production lines in collaboration with suppliers. In addition, the Group pursues economies of scale through collaboration and order consolidation among Group companies and, by obtaining information on future construction plans early and presenting estimate order quantities to suppliers in advance, the Group works to control cost increases during price negotiations, whilst reducing suppliers' expenses. Meanwhile, at plants, the Group strives to reduce costs by improving the efficiency of production lines and arranging materials and labor early.

In face of the risk of rising labor costs (unit labor cost) and such like, the Group is endeavoring to improve productivity and control cost through digitalization and a review of manufacturing to promote labor savings and energy savings in onsite construction.

⑥ Risks associated with competitive activities

Risk details

The Daiwa House Group engages in business operations in a variety of fields, notably construction and real estate, and is in competition with other companies in all these fields. There is a possibility that the Group may fail to demonstrate an advantage over such competitors in respect of product or service quality, or the effectiveness of its marketing activities, and that its business performance may thereby be negatively impacted.

Countermeasures

The Group leverages its business division-based system to collect and analyze information on the movements of industry competitors and reflects this information in its own business strategies where necessary.

The Group also harnesses its unique strengths such as its information collection and development capabilities with land as the starting point and its ability to solve problems from a customer perspective in an attempt to avoid becoming involved in excessive competition with competitors.

⑦ Risks associated with the decrease in skilled construction workers

Risk details

The construction business, which is the Group's main business, is a business that required many skilled construction workers, but in Japan the number of construction industry employees is gradually decreasing and is also presumed to decrease further moving forward. A further decrease in the number of construction industry employees in the future under the impact of population decline will lead to construction delays and higher labor costs and could adversely affect performance.

Meanwhile, the construction industry's workforce is aging and the transfer of skills to the next generation is a major issue. Failure to secure the next-generation of construction industry employees could also adversely affect business continuity in Japan.

Countermeasures

The Daiwa House Group is implementing work style reforms at sites in line with the basic principles and concrete measures established by the Ministry of Land, Infrastructure, Transport and Tourism to develop and secure construction workers in the medium and long term and is also working to improve the treatment of construction technicians.

In terms of work style reforms at sites, the Group has been implementing 8 holidays in four weeks at all sites since FY2021. In addition, the Group has been providing support for subcontractors' participation in the GREEN-site scheme (*) and using the Construction Career Up System for entry/exit management of site workers to tighten labor management at construction sites.

Further, to improve the treatment of construction technicians, the Group switched to paying subcontractors the full amount of subcontract proceeds in cash from April 2019. In addition, the Group established an engineering excellence certification scheme and pays an allowance to construction firms with construction technicians that have the required skills and also provides construction firms with training support through its technician development funding program and new technician development training, aiming to increase and develop construction technicians.

The Group also promotes DX and BIM for the realization of advanced construction processes. Through BIM, the Group seeks to optimize processes by centralizing data, thereby helping improve productivity, whilst in digital construction projects, the Group works to save labor through the utilization of robotics in construction tasks and to improve productivity by visualizing construction site status.

*Internet service for electronically creating, submitting and managing documentation about labor affairs, safety and health

(3)Real estate market

⑧ Risks associated with declines in the value of assets, including real estate

Risk details

The Daiwa House Group is engaged in the acquisition, development and sale of real estate assets in the Japanese and overseas markets, and consequently, a deterioration in the real estate market, leading to a fall in land prices and lower rent values, could adversely affect the Group’s business performance. Moreover, in such an event, the Group may be forced to write down the book value of its real estate holdings.

In response to market trends, the Group may also be forced to write down the book value of assets other than its real estate holdings, such as inventories other than real estate, property, plant and equipment, goodwill and other forms of intangible assets, and investments and other assets such as investment securities. This could adversely affect the Group’s business performance.

Countermeasures

The Daiwa House Group is engaged in a wide range of business operations and, by selecting businesses suited to the real estate it acquired in the process, the Group seeks to enhance its asset value. In addition, the Group monitors the real estate it owns, including obtaining appraisals on a regular basis, and takes appropriate action if there are indications of a decrease in value. Further, the Group's policy is not to hold risk assets other than real estate, in principle, except where necessary for business and it monitors the price risk of assets held on a regular basis.

⑨ Risks associated with real estate development operations

Risk details

The Daiwa House Group's medium- to long-term strategy is to focus on real estate development for a variety of uses, including residential complexes, condominiums, rental housing, commercial facilities, logistics facilities, and hotels. These projects involve considerable expense and require long time-frames for completion of individual projects. There is, consequently, a risk that, for various reasons, expenses may arise during the course of a project that push total costs beyond the original estimates, resulting in delays to the project or forcing its abandonment. Such an eventuality may have an adverse effect on the Group’s business performance.

Countermeasures

When making important investments, including real estate investments, the Daiwa House Group assesses and deliberates business potential and risks at the Business Investment Committee. In the case of the real estate development business, the Group uses IRR as a key indicator but at the same time it determines whether the business in question is consistent with the Group's management philosophy, management strategies and brand image and carries out a multifaceted risk assessment (16 categories, 26 items) including ESG considerations such as legal risk, soil and groundwater contamination, geotechnical risk, disaster risk (flooding, etc.), environmental issues, and the appropriateness of construction expenses, and even if an investment project satisfies criteria from a financial perspective, in the event that making the investment is at odds with the Group's goals or vision or would have a serious impact on the environment, the Group does not make the investment. In addition, the risk assessment criteria are reviewed on a regular basis. The Group also assesses and deliberates the risk of business investments in the same way it does for real estate development.

(4)Finance

⑩ Risks associated with a rise in interest rates

Risk details

To meet demand for funds mainly for real estate development, the Daiwa House Group procures funds by utilizing interest-bearing debt together with shareholders' equity, whilst taking capital efficiency into consideration.
Therefore, rise in market interest rates or a downgrading of the Daiwa House Group’s credit rating, would lead to higher material procurement costs, which could have an adverse effect on the Group’s business performance.

Moreover, a rise in market interest rates would make it more expensive for prospective buyers to purchase land or buildings by taking out loans, which could lead to a decline in demand and thus have an adverse effect on the Group’s business performance.

Countermeasures

The Group procures operating funds mainly by methods with low borrowing costs such as short-term loans and commercial paper. However, in the case of investments which take time to recover such as real estate development, the Group reduces liquidity risk through long-term financing. Long-term financing consists mainly of financial instruments with maturities of five years to coincide with the time taken to sell real estate. However, the Group also implements ultra-long-term financing with even longer maturities to reduce refinance risk as interest-bearing debt increases. Moreover, the Group borrows at a fixed interest rate, in principle, to avoid being adversely affected by any sudden deterioration in capital market rates and balances this with borrowing at a variable interest rate that allows it to benefit from low interest rates when market interest rates fall. Especially in the current environment when conditions for borrowing are favorable due to monetary easing, the Group procures long-term and ultra-long-term funding at a fixed interest rate.
Meanwhile, the Group strives to build good relationships with financial institutions and raises funds in a stable manner through a combination of direct financing via the corporate bond market and indirect financing. To maintain credit ratings, the Group sets financial discipline goals and conducts management based on an awareness of financial discipline.
The Group also provides total finance support to customers using financing by staying abreast of the latest financing products offered by each financial institution and making financing proposals to meet customer needs and also by collaborating with external experts such as tax accountants and financial planners, and it endeavors to be able to propose the optimal land and building plans.

⑪ Risks associated with retirement allowance expenses

Risk details

The Daiwa House Group has established a corporate pension plan and one-off retirement payment plan as defined benefit plans and a defined contribution pension plan as a defined contribution plan. In the case of the defined benefit plans, volatility in financial markets such as stock markets and currency markets could lead to a large increase or decrease in retirement benefit obligations as a result of fluctuation in the discount rate or other base rate or a large gain or loss on the management of pension assets, and retirement benefit expense could fluctuate significantly. Since the Group fully amortizes actuarial gains and losses for employees' retirement benefits in the fiscal year of occurrence, volatility in the pension asset management environment or fluctuation in the base rate used to calculate retirement benefit obligations could have a significant impact on performance in the fiscal year in which such events occur.

Countermeasures

As a measure to address the risk of fluctuation in pension assets, Daiwa House Industry Pension Fund has established an Asset Management Committee, which is responsible for establishing and reviewing strategic asset composition ratios, and appointing and evaluating the asset management institution, and the basic policy for the management of pension assets is to make diversified investment in multiple investment targets with different risk-return characteristics within the scope of tolerable risk.

However, the balance of the Group's pension assets at the end of the fiscal year was 485.8 billion yen, and significantly bolstered by financial markets such as stock markets and currency markets, in the fiscal year ended March 31, 2022, actuarial gains and losses for employees' retirement benefits of 52 billion yen (decrease in expenses), largely attributable to a gain on the management of pension assets (including a gain on valuation), occurred. The Accounting Standard for Retirement Benefits (Accounting Standards Board of Japan Statement No. 26) stipulates that actuarial gains or losses should be amortized at the pro rata amount computed by the straight-line method over a certain period not longer than the expected average remaining working lives of the employees and easing the impact on performance in the period the actuarial gains or losses occur through "delayed recognition" is permitted. However, since the fiscal year ended March 31, 2003, the Group has fully amortized actuarial gains and losses at the time of occurrence and a change in this amortization method would fall under a "change in accounting policy" but under the current accounting system a change is not permitted because an increase in the balance of pension assets or increased impact on performance does not constitute a valid reason. Operating income for the fiscal period under review of 383.2 billion yen less actuarial gains and losses gives operating income of 332.2 billion yen.

⑫ Risks associated with vacancies in real estate properties for rent, and with declines in rent levels

Risk details

The Daiwa House Group owns and manages a large number of real estate for profit-earning. However, increased competition for the acquisition of tenants could make it impossible to acquire tenants or to set rent levels as planned. Thus, in the event that existing tenants leave, the premises for rent could remain unoccupied for a considerable period of time before new tenants move in, causing a sharp deterioration in the utilization rate of the Daiwa House Group’s real estate assets. Such a situation could oblige the Group to lower its rent levels in order to attract new tenants, and this could have an adverse effect on the Group’s business performance.

Countermeasures

In every business that involves managing rental real estate, the Daiwa House Group endeavors to minimize the risk of vacancies and rent decreases by providing competitive facilities that accurately meet the needs of residents and tenants, taking factors such as area characteristics and social circumstances into consideration.

(5)Hazards and sudden accidents

⑬ Risks associated with information security

Risk details

For creating new value through DX, and smooth and efficient business operations, the Daiwa House Group promotes the utilization of IT systems. However, in the event of a cyberattack resulting in an inability to operate normally the IT systems for a prolonged period, the Group’s business operations may stagnate seriously, which could have an adverse effect on the Group’s business performance. In addition, there is a possibility that personal information or corporate confidential information may be leaked to persons outside the Group. In such an event, the Group would suffer damage to its reputation for trustworthiness among the general public, and may be faced with claims from counterparties for compensation for loss or damage. Such an eventuality could adversely affect the Group’s business performance.

Countermeasures

The Daiwa House Group implements measures to protect information from any access, deploying tools such as firewalls to filter traffic in and out of the network as well as endpoint security, and it responds to the threats to cybersecurity by setting up a CSIRT and an SOC. The Group has also laid down information security regulations (Personal information protection regulations, Information management regulations, etc.) and seeks to thoroughly implement education and training including providing information security e-learning and training on how to counter targeted attack emails to executives and other employees. Further, the Group also shares security awareness topics with Group companies and also implements measures such as gaining an understanding of their actual security levels, encouraging the adoption of security measures and providing them with guidance on solving any issues.

⑭ Risks associated with natural disasters and climate change

Risk details

The Daiwa House Group owns and operates offices, factories, research and development centers and other facilities, both in Japan and overseas. In the event of a large-scale natural disaster such as an earthquake, volcanic eruption, typhoon or water damage, employees and facilities and equipment may be directly affected and indirect damage may also be suffered as a result of the disruption or severing of information systems and telecommunications networks, as well as distribution lines and supply chains. In particular, in the event of an earthquake, typhoon, or water damage, buildings that were built by the Group may be damaged. Such an event would lead to expenses for the repair and reconstruction of damaged buildings and the posting of losses due to the suspension of business activities, as well as expenses involved in inspecting the damage to customers’ properties and effecting emergency repairs, and expenditures on activities in support of the community. Such expenses could negatively impact the Group’s business performance.

Countermeasures

The Daiwa House Group is working on measures to mitigate climate change and has laid down internal regulations and manuals on business continuity management, thereby taking precautions to enable swift and appropriate actions at the time of a natural disaster. The Group also stockpiles foodstuffs, provides storage battery facilities, adopts IP wireless and satellite telephone systems to improve its communication environment, and formulates supply chain business continuity plans and also takes other measures to minimize the negative impact on its business performance that may be caused by the risk.

⑮ Risks associated with epidemics

Risk details

The Daiwa House Group owns and operates facilities where people gather, such as sales offices, factories, construction sites and commercial facilities. In the event of a large-scale epidemic of an infectious disease causing serious health problems, the Company may have to suspend its sales activities and operations of construction sites in order to prevent the spread of infections. A deterioration in the real estate market could also adversely affect the acquisition, development and other operations relating to real estate assets. Especially in the hotel business and the sports club operation business, performance could be adversely affected due to lower occupancy and lower average spend.

Countermeasures

All of these risks above are attributable to external factors and thus it is difficult to reasonably estimate the likelihood of their materialization or how far such an event would adversely affect the business performance. In the event of the materialization of any of these risks, our policy is to give top priority to minimizing the health problems of stakeholders of the Group. In order to prevent the spread of infections, we currently prohibit travels to countries and regions with a high risk of infections, close branch offices, and adopt telework and other programs as countermeasures.

2.Internal factors

⑯ Risks associated with operational strategies and internal reorganizations

Risk details

In pursuit of its business strategies, the Daiwa House Group engages when deemed necessary in the acquisition of other companies or the purchase of specific business operations from other companies, carries out reorganizations of its own internal business structure and sells companies and businesses from a medium- to long-term perspective.

There is, however, the possibility that such acquisitions of companies or business operations, and such internal reorganizations and integration after their implementation may not proceed as projected, and that the synergy between Group companies may not lead to the hoped-for business results or assumptions about the business environment may change drastically. In such an event, the Group may fail to achieve the level of profits envisaged in its business strategy and its business performance may consequently be negatively impacted.

Countermeasures

Since the business environment is constantly changing, it is difficult to estimate the likelihood of materialization of the above risk or the extent of the adverse impact on performance. However, to address this risk, the Group has put in place a system for considering acquisitions which involves clarifying the purpose of the acquisition, properly assessing the corporate value of the target company and the feasibility of the business plan by carrying out due diligence and an evaluation of the share price with the help of various experts and judging the pros and cons of acquisition prior to acquisition. Further, after implementation of the acquisition, the Group establishes a certain PMI period and a specialist department implements PMI with the aim of achieving the intended purpose and maximizing synergy. Moreover, after the end of the PMI period, control of the acquired company or business operation is transferred and Group management under the business division-based system, and the relevant business division takes the lead in pursuing synergy and working to realize the enhancement of corporate value and medium-to-long-term growth of the Group as a whole.

⑰ Risks associated with product quality guarantees, etc

Risk details

In its residential businesses, the Daiwa House Group is committed to offering a long-term guarantee system to ensure a higher level of customer satisfaction, and to maintaining effective quality management. During a long period of support, however, an unforeseeable major issue relating to quality may arise, adversely impacting the business performance of the Group.

Countermeasures

In the design phase, the Group monitors compliance with legal regulations and, during construction, a department that is not involved in the construction implements quality inspections. Further, the Group has established a system for carrying out inspection/diagnosis on a regular basis after handover and for monitoring buildings throughout a long support period including diagnosing deterioration, thereby sharing information about significant quality issues with engineering departments and minimizing the possibility of them adversely impacting performance.

⑱ Risks associated with workplace safety and environmental protection

Risk details

The Daiwa House Group places a high priority on both safety and consideration for the natural in its manufacturing plants, as well as at construction sites, and therefore takes appropriate measures to realize workplace safety and environmental protection. In spite of these measures, however, there is a possibility that accidents at construction sites and/or incidents of pollution may occur. Such accidents or incidents could have an adverse effect on the business performance of the Group, as a result of harm to personnel and/or material damage, such as in the form of pollution of the environment.

Countermeasures

To mitigate safety risks, the Group carries out regular and special patrols of construction sites and provides guidance and education to its own employees and employees of construction companies through the Safety and Health Council.

Moreover, to mitigate environmental risks, the Group implements initiatives to substitute and reduce hazardous chemicals, provides education and training, and establishes a specialist department to deal with soil contamination, which is a major problem in the construction industry.

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