CapitaLand’s risk management process is not about risk minimisation but rather, risk optimisation or, taking the right amount of risk with the right return.

Even before CapitaLand was incorporated, its predecessors had already established some
risk management methodologies and policies in the mid ’90s. However, a comprehensive risk management framework was only rolled out Groupwide with the formation of CapitaLand in 2000. Supervision is provided by the three-member Risk Committee (RC), which was established in 2002. In 2006, it was chaired by independent board directors, Mr James Koh Cher Siang, Mr Richard Edward Hale, and Mrs Arfat Selvam, together with the Group President and CEO Mr Liew Mun Leong, and members of CapitaLand’s senior management team. This group is assisted by an independent unit called the Risk Assessment Group (RAG).

The Risk Committee, the Group President and CEO, and senior management members meet on a quarterly basis to review the type and level of risks pertaining to the Group’s portfolio of assets and liabilities.

RAG generates a comprehensive portfolio risk report to assist the committee. This quarterly report measures a spectrum of risks, including property market risks, construction risks, interest rate risks, refinancing and currency risks.

One of the reporting tools used is a generic Value-at-Risk (VaR) model that is a comprehensive risk measurement tool adapted from the banking world to measure the potential value deterioration of the Group’s individual exposures based on a historical simulation method.

This is supplemented by stress testing and scenario analysis based on expert judgments on possible future event risks by risk and research experts. In addition, because of CapitaLand’s global footprint, RAG has established a risk-adjusted system of determining country limits to aid management in their capital allocation strategy and manage country-transfer risk. This is based on the sovereign risk ratings by Moody’s and Standard & Poor’s for these countries.

RAG also employs a state-of-the-art comprehensive risk monitoring and measuring system for all contingent obligations undertaken by the Group. A contingent obligation risk registry has been set up where all contingent obligations arising from our treasury activities, commercial business dealings and legal suits against the Group are captured and updated on a regular basis. All these obligations are then objectively evaluated and subsequently priced according to established pricing tools like Monte Carlo Simulation, Binomial Tree Models simulation techniques, and based on independent expert opinions. A summary report is presented to the Risk Committee on a quarterly basis.

At the individual project level, all investment proposals above a stipulated value have to undergo an independent and comprehensive risk evaluation by RAG. Specific value drivers and all the potential risks for each proposal are identified and benchmarked in detail against objective market parameters and historical projects undertaken by the Group. Project improvement structures to mitigate the risks are identified so as to systematically improve the risk-return profile. To ensure that the potential returns commensurate with the risks undertaken, risk-adjusted target returns have been developed for the countries and business areas where the Group is active. This will ensure that every investment undertaken will create value for the shareholders on a risk-adjusted basis. A risk evaluation report is prepared and submitted to the respective business development team and senior management.

As a new initiative in 2006, RAG pioneered the concept of front loading the risk management process to front office operations. Front loading of risk processes and controls aims to instill a risk awareness culture in the business development teams and equip them with the necessary skills and techniques to better manage the investment risks at the inception stage of the deal. This is to ensure that efficiency and optimisation of the overall risk-return relationship is achieved in every investment project.

In addition, a process has been institutionalised to allow RAG to share and pass on experiences learned from previous proposals. This is done through regular workshops where RAG presents to all business units the investment risk analysis, best practices, and lessons learned from past investment proposals.

CapitaLand’s risk management process is not about risk minimisation but rather, risk optimisation or, taking the right amount of risk with the right return. With the help of established statistical risk analytical tools and existing real estate know-how, RAG is able to unbundle, price and package different property-related deal structures and securities so as to achieve a risk-optimal return structure for all transactions.

RAG has also adopted the Group’s new Innovation, Creativity and Entrepreneurship (ICE) culture. This will allow RAG to break new ground in supporting business generation through the application of new financial risk management concepts and methods to the real estate industry.

RAG ensures that all levels of the organisation are clear about the risk-taking processes, are clearly accountable for reviewing the risks proactively and have a structured framework to communicate the risks across the decision-making chain. The result of the entire process is improved risk governance and increased shareholder value.