Japan Version Of Subprime Crisis May Be Emerging

TOKYO (Nikkei)--Re-plus Inc., a rent guarantor, has gone bust amid successive real estate-related business failures, prompting worried industry officials to see the bankruptcy as heralding the possible onset of a Japanese version of the U.S. subprime loan crisis.
While the crisis has forced a large number of Americans to lose their homes, the officials warn that a similar consequence may be awaiting Japan.
Re-plus went down with liabilities totaling 32.5 billion yen. Although the sum is considerably smaller than the 255.8 billion yen left behind by Urban Corp. -- the biggest bankruptcy in Japan so far this year -- the rental home market is gravely concerned about the impact of Re-plus' failure due to its business model.

The presence of Re-plus has become noticeable recently in the market for property funds as the manager of Re-plus Residential Investment Inc., a real estate investment trust, or REIT.
Re-plus is thought to have the biggest market share in its core business of guaranteeing rents for homes. According to data released by the company, it had 600,000 guarantee contracts as of the end of June.
A rent guarantor pays rents for clients when they are unable to pay them. Demand for the service has grown sharply among people unable to find co-signers.
Re-plus receives warranty fees equivalent to half of monthly rents from clients in the first year and 10,000 yen a year in the following years.
As long as the payment ability of applicants for the service is accurately examined, the business goes smoothly. However, the screening of applications is "lax" at many guarantors, said an executive at a real estate agent.
Re-plus started running into financial difficulty around June, often failing to make payments to landlords on time. Although the company in August attributed the delay in payments to a computer system glitch, it failed to meet obligations at the end of the month.
On Sept. 24, Re-plus went under as a sharp increase in clients late on rents made it impossible for the firm to make payments to landlords.
A key question is why the delinquency of rents has increased so rapidly.
A large number of condominiums have been put on the market for rental homes because they had been on construction binges until last summer. A glut in the market for rental condos has allowed a large number of people to move in only with rent guarantee contracts requiring no security deposits, according to the president of a real estate fund.
The collapse of Re-plus shows that the market for real estate investment has grown sharply due in part to rent guarantors' lax screening of applications.
Another key question is what will happen to Re-plus' 600,000 clients. While they are unlikely to be forced out of their homes anytime soon due to legal protection, they will need to conclude new contracts with other rent guarantors or find co-signers.
As landlords have become reluctant to accept guarantees from guarantor service companies, they may well increasingly reject new lease contracts.
Because rent guarantee services are often used by people with low creditworthiness, Japan may witness its own version of the U.S. subprime mortgage crisis.
The failure of Re-plus casts a shadow over the future of Japan's residential market.

Translated from an article written by Nikkei staff writer Kazuhiro Kida
(The Nikkei Veritas September 28 edition)