Daiwa House Industry, Japan’s leading home builder, announced on April 12th that 2,000 of its single-family homes and multi-family buildings located throughout Japan are likely in violation of the Building Standards Law. Construction defects in the affected structures range from insufficient fireproofing to code violations relating to columns and building foundations in homes that were delivered to customers between 2000 and 2013.
One glaring aspect of Daiwa House’s admission is that the construction defects were reported by one or more employees to management in 2016, but it took over a year and a half for the company to launch a full-scale investigation. The company reported the construction defects to the Ministry of Land on April 12th, the same day it released the information to the public at a press conference.
Following on the heels of the LeoPalace21 construction defect scandal, the announcement by Daiwa House is expected to further shake consumer confidence in the industry’s leading companies.
Daiwa House said that the main cause of the construction defects was that the person in charge of design had an insufficient understanding of the requirements set forth by the Building Standards Law. An executive at the news conference stated that the company carries out construction based on the principle of safety first and not with the aim of reducing costs or shortening the time required for completing a project.
A whistleblower reported the building code violation to management in December 2016. The report reached the president of Daiwa House in February 2017, but a full-fledged investigation, consisting of a committee of design and quality-control specialists, was not launched until July 2018. Executives at the press conference explained that because over 220,000 properties would have had to be inspected, the president was not able to immediately authorize an investigation. By the time Daiwa House started auditing properties, the employee who initially reported the problem had already left the company.
The bigger picture
Japan’s residential real estate market faces strong headwinds in the form of a declining birth rate and the greying of the population, and some domestic home builders are facing declining sales.
However, Daiwa House, Japan’s leading builder of prefabricated homes, has been able to grow sales thanks to its diversification into new channels like internet sales and overseas markets. The company is expected to report record-breaking numbers with respect to consolidated sales and profit in the the fiscal year which ended in March 2019.
Daiwa House has also found itself at the center of high-profile scandals in recent years. In 2014 to 2015, the company was found to be in violation of building codes established by the Ministry of Land relating to fire-resistant shutters and doors in some of its single-family houses. In March this year, the company said that Dalian Daiwa Zhongseng Real Estate, a local affiliate of Daiwa House Industry, had identified a significant discrepancy between the company’s bank deposits and the amount indicated in its official accounts. The alleged embezzlement amounted to about 1.42 billion yuan (US$212 million).
These scandals have led some industry leaders to call for improved corporate governance and quality control throughout the industry in order to restore consumer trust in an industry that must battle against not just shorter-term consumer confidence but larger macroeconomic and demographic trends.
Lead image: Daiwa house logo via Wikimedia
Source: Mainichi Shinbun, April 12, 2019; Daiwa House press release (in Japanese); South China Morning Post, March 15, 2019