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To mitigate these risks, the compliance officer consults the
regulatory bodies and works closely with the management and
the Shari’ah Adviser on an on-going basis, to ensure Sabana
Shari’ah Compliant REIT complies with the conditions of the
CMS licence and the requirements under MAS Notices and
Guidelines, the Listing Manual of the SGX-ST and Shari’ah
guidelines, respectively.
Financial Risk
Credit risk
Credit risk is the potential financial loss to Sabana Shari’ah
Compliant REIT resulting from the failure of a tenant or
counterparty to settle its financial and contractual obligations,
as and when they fall due.
The Manager has an established process to evaluate the
creditworthiness of its tenants and prospective tenants to
minimise potential credit risk. Credit evaluations are performed
by the investment, asset and property management teams
before lease agreements are entered into with prospective
tenants. Security in the form of bankers’ guarantees, insurance
bonds or cash security deposits are obtained prior to the
commencement of the lease. On an on-going basis, tenant
credit is closely monitored by the asset management team and
arrears managed by the Property Manager. Cash and fixed
deposits are placed with regulated and reputable financial
institutions.
Liquidity risk
Liquidity risk is the risk that Sabana Shari’ah Compliant REIT
will encounter difficulty in meeting the obligations associated
with its financial liabilities that are settled by delivering cash or
another financial asset. The Manager’s approach to managing
liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring unacceptable
losses or risking damage to the Trust’s reputation.
The Manager monitors and maintains a level of cash and cash
equivalents deemed adequate to finance Sabana Shari’ah
Compliant REIT’s operations and to mitigate the effects of
fluctuations in cash flows. In addition, the Manager also
monitors and observes the CIS Code issued by the MAS
concerning limits on total borrowings.
Market risk
Market risk is the risk that changes in market prices, such as
profit rates, foreign exchange rates and equity prices will affect
Sabana Shari’ah Compliant REIT’s total return or the value of its
holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures
within acceptable parameters, while optimising the return.
Sabana Shari’ah Compliant REIT does not have any exposure
to foreign exchange rates and equity price risks.
Profit rate risk
The Trust’s exposure to fluctuations in profit rates relates
primarily to borrowings. Profit rate risk is managed on an on-
going basis with the primary objective of limiting the extent
to which net profit expense could be affected by adverse
movements in profit rates.
Sabana Shari’ah Compliant REIT hedges its portfolio exposure
to profit rate volatility on its floating rate borrowings by way
of profit rate swaps. As at 31 December 2011, the Trust had
entered into profit rates swaps that effectively fixed 96.7% of
its borrowings.
Capital Management
The Manager reviews the capital management policy of Sabana
Shari’ah Compliant REIT regularly so as to safeguard its ability
to continue as a going concern, maintain an optimal capital
structure, and maximise Unitholder’s value.
The Manager monitors its exposures to various risk elements
and externally imposed requirements by closely adhering to
clearly established management policies and procedures. The
Manager endeavours to employ an appropriate mix of debt
and equity in financing acquisitions and assets enhancements,
and utilise profit rate and currency hedging strategies where
appropriate. The Manager reviews this policy on a continuous
basis.
Sabana Shari’ah Compliant REIT is subject to the aggregate
leverage limit as defined in the Property Funds Appendix. The
Property Funds Appendix stipulates that the total borrowings
and deferred payments (together, the “Aggregate Leverage”)
of a property fund should not exceed 35.0% of its deposited
property except that the Aggregate Leverage of a property
fund may exceed 35.0% of its deposited property (up to a
maximum of 60.0%) if a credit rating of the property fund from
Fitch Inc., Moody’s or Standard and Poor’s is obtained and
disclosed to the public.
The property fund should continue to maintain and disclose
a credit rating so long as its Aggregate Leverage exceeds
35.0% of its deposited property. For this financial period,
Standard and Poor’s has assigned a long-term corporate credit
rating of “BBB-” and ‘axA-‘ ASEAN scale rating with a stable
outlook for Sabana Shari’ah Compliant REIT. Sabana Shari’ah
Compliant REIT has complied with the Aggregate Leverage
limit throughout the financial period.
Risk Management
SABANA SHARI’AH COMPLIANT REIT
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