Enterprise Risk Management
The Board and management of the Company, to ensure a high standard of best practice for the shareholders, identify key risk areas and performance indicators and monitor these factors with due diligence to enable the Company to anticipate and prepare for possible threats to its operation and financial instability.
Risk Management Practices and Policies
The Company is primarily engaged in real estate development. Risk factor includes short-term borrowings which increases the possibility of refinancing risks. This debt mix in favor of short-term borrowings is a strategy which the Company adopted to take advantage of lower cost of money for short-term loans versus long-term loans. Because the Company has the flexibility to convert its short-term loans to a long-term position by drawing down its credit lines with several banks or sell its receivables, refinancing risk is greatly reduced.
The Company manages such refinancing risks by improving and maintaining the acid-test and current ratios of the Company.
This is defined as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The financial instruments which may be the subject of credit risk are the installment contracts receivables and other financial assets of the Company. The corresponding management strategies for the aforementioned risks are as follows:
The credit risk on the installment contracts receivables may arise from buyers who may default on the payment of their amortizations. The Company manages this risk by dealing only with recognized and creditworthy third parties. Moreover, it is the Company's policy to subject customers who buy on financing to credit verification procedures. Receivable balances are monitored continuously which results to the Company's insignificant exposure to bad debts.
The credit risk on the financial assets of the Company such as cash and cash equivalents, cash investments, financial assets at fair value through profit or loss and available for sale investments may arise from default of the counterparty. The Company manages such risks in accordance to its policy wherein the Company shall enter into transactions with a diversity of creditworthy parties to mitigate any significant concentration of credit risks. As such, there are no significant concentrations of credit risks in the Company.
Interest Rate Risk
This is the risk arising from uncertain future interest rates.
The Company's financial instruments are:
The Company's financial assets mainly consist of installment contract receivables, cash and cash equivalents and cash investments. Interest rates on these assets are fixed at their inception and are therefore not subject to fluctuations in interest rates.
For the financial liabilities, the Company only has commercial papers which bear fixed interest rates. Thus, these are not exposed to fluctuations in interest rates.
This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Financial instruments which are measured at fair value are subject to market risk.
The available-for-sale investments are exposed to market risk. There is a risk for a decline in the value due to changes in the market. The exposure, however, is negligible because the amount of the said investment is insignificant as compared to the financial assets of the Company.
This is the current and prospective risk to earnings or capital from a company's inability to meet its obligations when they become due without incurring unacceptable losses. The Company's treasury has a well-monitored funding and settlement management plan. The following is the liquidity risk management framework maintained by the Company:
Asset- Liability Management: Funding sources are substantially from short term borrowings. Funding sources are abundant and provide a competitive cost advantage. The Company also holds financial assets for which there is a liquid market and are, therefore, readily saleable to meet liquidity needs.
Conservative/ Liability Structure: Funding is widely diversified. There is little reliance on wholesale funding services or other credit sensitive fund providers. The Company accesses funding across a diverse range of markets and counterparties.
Excess Liquidity: The Company maintains considerable excess liquidity to meet a broad range of potential cash outflows from business needs including financial obligations.
Funding Flexibility: The Company has an objective to maintain a balance between continuity of funding and flexibility through the use of commercial papers.
The Company is also exposed to risks which are beyond financial:
BUSINESS RISKS AND OPERATIONAL RISKS
The Company's land banking consists of lots held for future development of its condominium projects and lot/s intended for lease. Having enough and diversified land banking is important to support the sustainability of the Company's business. The Company may be exposed to risks because of the possible changes in the value of these lots due to market circumstances which may result in impairment or decline in rental rate levels.
The Company currently has prime lots held for future development which are located in the different areas of Metro Manila. The management also is in continuous study and research on the possible land acquisition which will depend on the needs of the Company and negotiations with prospective sellers. For the land value changes and decline, the Company continues to be cautious in buying new properties by conducting studies of appraisal and conditions of the property within the vicinity.
Property Development and Construction
Construction of a condominium project starts from the planning and securing of permits, to the development or construction of the project and to the delivery or turnover of the units to the buyers. The construction of a project involves an average of three to four years to complete the building. During this period of time, the Company may be exposed to the following risks:
delays or longer than expected time of securing necessary licenses, permits and approvals from different government agencies or neighborhood;
possible increase in the cost of materials and labor which will impact pricing and cost;
labor disputes among and with the contractors and sub-contractors; and
delay in the delivery of the project.
These risks are managed by the Company by having:
well-planned and carefully-phased project development with a reasonable timetable;
concrete sources of financing of the project;
accreditation and careful selection of general contractors and sub-contractors to ensure fulfillment and quality of work; and
continuous and meticulous management of the Company's project development team to ensure that the project is progressing and being accomplished according to plan
The Company's business consists mainly of providing office and housing units in the Philippines and the results of the operations will be influenced by the general conditions of the Philippine economy. Any economic instability or failure to register improved economic performance in the future may adversely affect the Company's operations and eventually its financial performance.
Effect of Climate Change
It cannot be denied that the country is already experiencing the impact of climate change which is considered as a global problem which needs to be addressed by all countries.
Climate change has greatly affected the operations of the businesses, both private and local. Due to climate change, the supply or resources may decline which will lead to increase in cost. Thus, businesses should consider measures to cope with the impact of environmental changes. Aside from considering the impact, businesses should also take its role in ensuring its compliance with the rules and regulations imposed by the environmental authorities.
Cityland Group has invested considerable effort in the development of programming approaches that integrate disaster risk management with long-term programs that have the objective of addressing the underlying causes of vulnerability. This means developing and applying various prevention, mitigation and preparedness policies, strategies and practices to minimize vulnerabilities and disaster risks. The Group firmly believes that emergency preparedness planning is a critical component for all development programming and is a necessary ingredient not only for effective emergency response but also for effective risk prevention, mitigation and preparedness before a disaster occurs. For the Group, emergency preparedness encompasses all aspects of disaster risk management - from addressing underlying causes to responding in times of emergencies. First and foremost, preparedness must focus on prevention and mitigation - taking pre-emptive measures to help communities avoid emergencies and become better equipped so that the impact of disasters are reduced. As one of the criteria set by the Group in acquisition of property, the Group considers whether the location of the prospective property is within the fault line and whether the area is prone to flooding. In this case, the Group minimizes the risk of incurring any additional costs/damages in the future.
Further, the Company has adopted the following controls to ensure its compliance with the environmental laws but not limited to:
Tree planting activities as required by the Board of Investments (BOI) for the Company's BOI-registered projects;
Appointment of Pollution Control Officers in all condominium projects; and
Avoiding hazards and mitigating their potential impacts by reducing vulnerabilities and exposure and enhancing capacities of communities.
The Company's business like all other businesses may be influenced by the political situation in the country. Any political instability in the future could have a material adverse effect in the Company's business.
The industry is characterized by boom-bust cyclical pattern exhibited in the past couple of decades where the industry normally goes through years of robust growth following years of slowdown. The industry is still in the boom stage.
The demand for housing especially in the medium-cost category has moderately stepped up. The situation has attracted both old and new players to develop projects that cater to this rising demand. As a result of the foregoing, competition in the area of medium-cost development is expected to intensify. The Company believes that it is in a better position to cope with the competition because of the affordability of the projects it offers in the market.
Asset Price Bubble
Asset price bubble in real estate occurs when there is an identified rapid increases in valuations of real property until they reach unsustainable levels and then decline. Real estate bubbles had existed in the recent past and is still widely believed to exist in many countries such as in the United States which had resulted in the recent subprime mortgage crisis.
In the Philippines, records of low interest rates have raised concerns over potential asset price bubbles. However, the government, through the Finance Secretary said that this risk is under control (www.cnbc.com). Increased scrutiny and monitoring of this risk in the country comes after Hong Kong and Singapore, which adopted measures to cool property prices (www.bloomberg.com). This asset price bubble risk is intensely monitored by the government agencies, Department of Finance and the Bangko Sentral ng Pilipinas (BSP) which are set to introduce a residential property-price index. This risk will be continuously mitigated by the appropriate actions and policies of regulators as well as the banking sector. Also, since the Philippine economy showed a healthy and sustainable growth, this reduces the risk of asset price bubble.
The Bangko Sentral ng Pilipinas (BSP) has reiterated that there are no macro- prudential risks from the real estate market as growth in the property sector remains demand driven. Mr. Amando Maglalang Tetangco, Jr., the incumbent Governor of BSP, said the BSP closely monitors the lending of banks to the property sector through a quarterly stress test. "For real estate, we do the stress test quarterly because of the special nature of the property sector. Historically that is a source of problem. Not that we have that problem now but what we want is try to avert a potential problem in the property sector," he said. "Right now we believe there is no asset bubble in the property sector. Basically the increase in property prices and the growth in the property sector has essentially been demand driven," Tetangco added. Unlike before, Tetangco said property developers are more conservative in their construction activities. (Source: http://www.msn.com/en-ph/money/topstories/no-asset-bubble-in-real-estate-bsp-reiterates/ar-BBminOS)
Demand for residential properties is mainly driven by the middle class, particularly overseas Filipinos and the young professionals from the BPO sectors. The Company's projects belong to the medium-cost category which cater to the middle income groups. This minimizes the Company's exposure to asset price bubbles risk as compared to the high-end players in the real estate industry.
The Company manages the above risks by conducting assessments of the economic and political situations of the country as well as new developments in the industry. The procedures involve the gathering of information of economic indicators and political events as well as being aware of the new developments in the industry through media, business conferences, economic briefings and other sources.
With this information, the Company is able to assess and manage the risks mentioned above.