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Risk Management

Proactive and effective risk management is a fundamental part of Keppel REITís business strategy.

The Enterprise Risk Management (ERM) framework, which is a component of Keppel REITís System of Management Controls, provides Keppel REIT with a holistic and systematic approach towards risk management. It outlines the reporting structure, monitoring mechanisms, specific risk management processes and tools, as well as Keppel REITís policies and limits in addressing and managing key risks identified.

Robust ERM Framework
The Manager adopts a five-step risk management process comprising risk identification, risk assessment, formulation of risk mitigation measures, communication and implementation, as well as monitoring and review.

Upon identification of key risk factors, they are assessed based on the impact and likelihood of occurrence, and covers the investment, financial, operational and reputational aspects of Keppel REITís business. Tools such as a risk rating matrix, key risk indicators and risk register assist the Manager in its risk management process.

The Board is responsible for ensuring that the Manager maintains a sound risk management system and internal controls to safeguard Unitholdersí interests and Keppel REITís assets. Assisted by the Audit and Risk Committee (ARC), the Board provides advice to management in formulating various risk policies and guidelines.

The Board and management meet on a quarterly basis or more, when necessary, to review Keppel REITís financial performance; assess its current and future operating, financial and investment risks; as well as respond to feedback from the compliance manager and auditors.

The Board, assisted by the ARC, has put in place three Risk Tolerance Guiding Principles for the Manager and Keppel REIT.

These principles, which determine the nature and extent of the significant risks that the Manager is willing to take in achieving its strategic objectives, include:
  1. Risks taken should be carefully evaluated, commensurate with rewards and are in line with Keppel REITís core strengths and strategic objectives.
  2. No risk arising from a single area of operation, investment or undertaking should be so huge as to endanger Keppel REIT.
  3. Keppel REIT does not condone safety breaches or lapses, non-compliance with laws and regulations, as well as acts such as fraud, bribery and corruption.

The risk management assessment framework also determines the adequacy and effectiveness of the risk management system. In 2016, the Board has assessed and deemed Keppel REITís risk management system to be adequate and effective in addressing the key risks identified below:

OPERATIONAL RISK
All operations are aligned with Keppel REITís strategies to provide income sustainability. Measures include proactive lease renewals to reduce rental voids, monitoring of rental payments to minimise arrears and bad debts, as well as controlling property expenses to maximise net property income.

Standard operating procedures are reviewed regularly and good industry practices are incorporated into daily operations.

The Manager actively engages and fosters close relationships with tenants, as well as manages lease expiries to avoid a disproportionate amount of space expiring in any one year.

Business continuity plans are tested regularly to ensure Keppel REIT is able to respond effectively to disruptions while continuing with critical business functions and minimising impact on its people, operations and assets.

The assets in Keppel REITís portfolio are subject to regular external audits to ensure that safety standards and procedures are implemented, and up-to-date.

For assets that are co-owned, the Manager works closely with the property manager and co-owners to optimise asset performance and control property expenses. The Manager and co-owners also jointly assess and approve all new, renewal, forward renewal, review leases, as well as capital expenditures. The Manager attends regular operational meetings to ensure that the assets are managed in accordance with operating plans.

Asset enhancement works are conducted, when necessary, to ensure that Keppel REITís properties remain relevant and competitive.

FINANCING RISK
Liquidity and financing risks are managed in accordance with established guidelines and policies. The Manager proactively monitors its cash flow, debt maturity profile, gearing and liquidity positions including diversifying its funding sources and managing the tenure of borrowings to ensure a wellstaggered debt maturity profile.

The Manager maintains a robust cash flow position and ensures that there are sufficient working capital lines to meet its financial obligations.

EXPOSURE TO FINANCIAL MARKETS RISK
The Manager constantly monitors Keppel REITís exposure to changes in foreign exchange and interest rates. It utilises various financial instruments, where appropriate, to hedge against these risks.

As at 31 December 2016, 75% of total borrowings are on fixed rates, thereby mitigating the risk of adverse interest rate movements.

In 2016, the Manager adhered to its policy and forward-hedged approximately 90% of income from its Australian assets.

CREDIT RISK
Tenantsí financial standing are assessed prior to signing of lease agreements. They are also required to place security deposits upon confirmation of their leases.

Systematic rental collection procedures are implemented to ensure regular collection of rents, thereby preventing potential rental arrears.

INVESTMENT RISK
Comprehensive due diligence procedures to assess and evaluate potential investment risks are conducted prior to any transaction. All investment proposals are evaluated objectively based on the Managerís investment criteria, as well as the target assetís specifications, location, expected returns, yield, growth potential and performance sustainability, while taking into account the prevailing economic cycle and market conditions.

The Board reviews and approves all transactions only after evaluating the merits, sensitivities and risks involved.

To manage concentration risk, the effect of each proposed transaction on the Singaporeoverseas ratio is assessed before any transaction.

COMPLIANCE RISK
The Manager, being a Capital Markets Services Licence holder, complies with applicable laws and regulations, including the Singapore Exchangeís Listing Rules, Code on Collective Investment Schemes, Property Fund Appendix and conditions of the Capital Markets Services Licence for REIT Management issued by the Monetary Authority of Singapore under the Securities and Futures Act, as well as the tax rulings issued by the Inland Revenue Authority of Singapore.

The Manager keeps abreast of changes in legislations and regulations, as well as new developments in its operating environment.

Keppel REIT and the Manager undergo regular internal and external audits to ensure that their practices adhere to relevant policies and processes.