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

  

INTERNAL FACTORS

Refinancing Risk

 

The Group is primarily engaged in real estate development. Risk factor includes minimal risk debt level of the Group’s borrowings. The short-term nature of these borrowings increases the possibility of refinancing risks. This debt mix in favor of short-term borrowings is a strategy which the Group adopted to take advantage of lower cost of money for short-term loans versus long-term loans. Because the Group 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 Group manages such refinancing risks by improving and maintaining the current and acid-test ratio of the Group.

Credit Risk

 

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, contract assets and other financial assets of the Group. The corresponding management strategies for the aforementioned risks are as follows:

 

1. The credit risk on the installment contracts receivables and contract assets may arise from the buyers who may default on the payment of their amortizations. The Group manages this risk by dealing only with recognized and credit worthy third parties. Moreover, it is the Group’s policy to subject customers who buy on financing to credit verification procedures. Also, receivable balances are monitored on an on-going basis which resulted to an insignificant exposure to bad debts. The risk is further mitigated because the Group holds the title to the real estate properties with outstanding installment contracts receivable balance and the Group can repossesses such property upon default of payment by the customer. The Group policy is to enter into transactions with a diversity of credit-worthy parties to mitigate any significant concentration of credit risk. There are no significant concentrations of credit risk within the Group.

2. The credit risk on the financial assets of the Group such as cash and cash equivalents, short-term investments, financial assets at fair value through other comprehensive income (FVOCI), refundable deposits and other receivables may arise from default of the counterparty. The Group manages such risks in accordance to its policy wherein the Group 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 Group.

Interest Rate Risk

This is the risk arising from uncertain future interest rates.

 

1. The Group’s financial assets mainly consist of installment contracts receivable, contract assets, notes receivable, cash and cash equivalents and short-term and long-term investments and other receivables. Interest rates on these assets are fixed at their inception and are therefore not subject to fluctuations in interest rates.

2. For the financial liabilities, the Group only has commercial papers which bear fixed interest rates. Thus, these are not exposed to fluctuations in interest rates.

 

Market Risk

 

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 financial assets at FVOCI 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 Group.

 

Liquidity Risk

 

This is the current and prospective risk to earnings or capital from the Group’s inability to meet its obligations when they become due without incurring unacceptable losses. The Group’s treasury has a wellmonitored funding and settlement management plan. The following is the liquidity risk management framework maintained by the Group:

 

1. Asset-Liability Management: Funding sources pertain to short-term borrowings. Funding sources are abundant and provide a competitive cost advantage. The Group also holds financial assets for which there is a liquid market and are, therefore, readily saleable to meet liquidity needs.

2. Conservative/Liability Structure: Funding is widely diversified. There is little reliance on wholesale funding services or other credit sensitive fund providers. The Group accesses funding across a diverse range of markets and counter parties.

3. Excess Liquidity: The Group maintains considerable excess liquidity to meet a broad range of potential cash outflows from business needs including financial obligations.

4. Funding Flexibility: The Group has an objective to maintain a balance between continuity of funding and flexibility through the use of commercial papers.

 

As such, the Group addresses risk on liquidity by maintaining committed borrowing facilities in the form of bank lines and established record in accessing these markets.

 

Overall, the Group adopts to the changing environment by being flexible and open to new opportunities to improve its financial status.

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The Group is also exposed to risks which are beyond financial as follows:

 

GROUP’S BUSINESS RISKS AND OPERATIONAL RISKS

Land Banking

 

The Group’s land banking consists of parcels of land wherein some lots are being leased while awaiting the development of the Group’s condominium projects. Having enough and diversified land banking is important to support the sustainability of the Group’s business. The Group 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 Group currently has prime lots for future development and/or investment properties which are located in the different areas of Metro Manila and Cavite. The management also is in continuous study and research on the possible land acquisition which will depend on the need of the Group and negotiations with prospective sellers. For the land value changes and decline, the Group continues to be cautious in buying new properties by conducting studies on 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 to completion of a project averages three to four years. During this period of time, the Group 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 costing;

• labor disputes among and with the contractors and subcontractors; and

• delay in the delivery of the project.

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These risks are managed by the Group by having:

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• well-planned and carefully-phased project development with a reasonable timetable;

• concrete sources financing for 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 Group’s project development team to ensure that the project is progressing and being accomplished according to plan.

 

EXTERNAL FACTORS

Economic

 

The Group’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 Group’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. In addition, businesses should ensure compliance to 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 impacts 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 Group has adopted the following controls in relation to the compliance with environmental laws but not limited to:

 

• Adherence to the standards/requirements set by the regulatory agencies governing the real estate industry;

• Appointment of Pollution Control Officers in all condominium projects;

• Continuous study on how to improve the project from planning to construction until its completion;

• Active participation with the government’s requirements to real estate developers (e.g. socialized housing, tree planting, etc.); and

• Avoiding hazards and mitigating their potential impacts by reducing vulnerabilities and exposure and enhancing capacities of communities.

 

 

Effect of COVID-19 pandemic

The Philippine real estate industry showed resurgence in 2022 despite the challenges brought about by COVID-19 pandemic. Throughout the year, the real estate sector proved to be resilient, providing significant contributions to the country’s economic growth. One of the key factors that drove the industry’s success was the demand for housing.

 

The Philippine real estate industry has shown significant growth and is expected to continue in the subsequent years. The Group will continue to monitor the demand in housing projects and implement strategies to cope with the changes in the environment and increase in demand.

Political

 

The Group’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 Group’s business.

The ongoing Russia-Ukraine conflict sets several uncertainties with the potential to disrupt businesses and institutions and poses threat to world trade and economies, in general. The continuing effect of the situation on business and institutions could result in business continuity interference, trade disruptions, rising prices of basic commodities including oil and power, among others.

As of December 31, 2022, the Group believes that the current political situation of Russia and Ukraine will not have an adverse effect in the Group’s business operations. Further, the Group has no significant sales transactions to the Philippine government that would result to a significant effect to the Group’s revenue/income. Further, the Group has no exposure to investments in Ukraine or Russia. Supplies and materials need for the construction of the project undergo a detailed negotiation process to achieve the best products with a reasonable cost.

 

Industry

 

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. In 2021, the Group is slowly recovering from the effect of COVID-19 pandemic. While in 2022, business activities are already going back to normal and that the Philippine economy is seen to recover. This is due to the united effort of the government, businesses, and the people.

 

The Group has adopted business continuity plans and strategies tomitigate the risks and effect of the pandemic.

 

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Competition

 

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 the increase in demand. As a result of the foregoing, competition in the area of medium-cost development is expected to intensify. The Group 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.

Cityland Group’s major competitors include SM Development Corporation, Vista Land Corporation, Empire East, Avida Land Corporation, New San Jose Builders, Torre Lorenzo Development Corporation and DMCI.

 

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Asset Price Bubble

Asset price bubble in real estate occurs when there is a seeming increase in the demand for housing units which leads the developers to build more and when there is already a significant gap between the demand and the supply, this will lead to a sudden decline in the value of the properties.

The Residential Real Estate Price Index (RREPI) is an indicator of change in the prices of residential properties in the Philippines over a period of time. The growth rate of the index measures the house price inflation. The RREPI is computed for the National Capital Region (NCR) and areas outside National Capital Region (AONCR) as well as for different types of housing units such as single detached houses, townhouses, and condominium units to be able to measure real estate price changes across different areas and types of housing units. The RREPI is computed for new housing units only.

(Source: https://www.bsp.gov.ph/Statistics/Prices/TechnicalNotes_RREPI.pdf)

In the latest RREPI that the BSP complied, covering the third quarter of 2022, the regulator had seen signs of increased consumer pessimism toward the yearend. The index showed that prices of new housing units across the country had risen by 6.5% in the third quarter while housing loans fell by 4.2%. RREPI data are based on information related to actual mortgage loans granted to acquire new housing units only, which are submitted by universal, commercial and thrift banks in the country. On a year-on-year basis, residential property prices surged by 17.5% in the National Capital Region and by 2.3% in areas outside the National Capital Region. The BSP said this was primarily driven by the increase in the prices of condominium units and single detached/attached houses, which outweighed the decrease in the prices of townhouses. Further, the number of residential real estate loans granted for all types of new housing units in the Philippines decreased by 4.2%. Of the loans granted, 48% was used to fund purchases of single-detached or attached houses; 39% for condominium units and 13% for townhouses.

(Source:https://business.inquirer.net/383717/bsp-buys-time-to-finetune-asset-bubble-trackingindices)

 

As the demand for residential units increases, the Group ensures that proper and strategic planning is implemented to cope with the demand. Further, as the Philippine economy is seen to recover and that the demand for warehouses and commercial offices increases, the Group considers this as an opportunity to minimize exposure to asset price bubble by focusing on the in-demand real estate commercial projects with good office location and reasonable price.

 

Generally, the risks are mitigated by conducting assessments of the economic and political situations of the country as well as new developments in the real estate 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, the Group is able to assess and manage the risks mentioned above.