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MNP Tackles Your Risk

12/02/2016


​As anxiety grows in real estate and construction, companies must refocus on risk management

The confidence and optimism that have characterized Canada’s real estate markets in recent years have started to waver, and anxiety is rising among Canada’s real estate and construction companies. Business challenges are growing, and companies face a broad range of competitive, operational, financial, fraud and other risks—some immediate and easily spotted, others much less so. And any one of them could catch a company by surprise and potentially cause a significant crisis.​

Companies can avoid such potential crises by being proactive today. As clear skies and calm waters give way to stormier conditions, Canada’s real estate and construction firms should invest in understanding the full range of risks affecting their entire enterprise. Equipped with this knowledge, management teams can then focus on identifying, evaluating, mitigating and monitoring those risks to steer around threats and ride out oncoming headwinds.

It’s time to refocus on risk

Canada’s generally positive real estate environment in recent years has made it easy to forget—or overlook—the fact that real estate and construction entail significant risk. In truth, a wide array of factors pose potentially serious risks to any organization:

  • Financial risks are created by a range of macroeconomic and internal factors. Commodity price fluctuations, interest rate volatility and changes in government spending or taxation can play havoc with a company’s forecasts and balance sheet. Internally, ineffective due diligence, a flawed or misaligned business model, financial performance issues or an inexperienced or distracted management team can slowly but steadily move a company towards a crisis point.
  • Fraud risks remain a perennial challenge for real estate and construction firms. Building site thefts are only one aspect of this challenge. From property valuations to bidding processes and contracts themselves, fraud can occur wherever there’s opportunity and motive. And each instance is a direct hit to a company’s bottom line.
  • Emerging risks arise as markets change and business conditions shift in real estate, construction and other industries. Overcapacity worries are rising over Ontario condo and resort properties and the abundance of office space coming on-stream in Calgary and some other markets. Land syndicates nervously watch for signs of an exodus of anxious investors. And retailers’ own woes could continue to create significant challenges for landlords and property owners across the country.

However, the greatest risk facing real estate and construction firms may be the “tunnel vision” with which they look at and manage risk every day. All too often, firms manage risk at an operational level, focusing on the issues and risks affecting individual organizational silos. This makes it very hard for management teams to recognize how risks connect to and influence other risks elsewhere in the business—or how risk and strategy intersect. Worse, this kind of tunnel vision can cause companies to miss critical risks and leave themselves exposed to sudden, potentially severe shocks. >As risks rise, action is required

Myriad risks face Canada’s real estate and construction companies. Left unmanaged, these risks can quickly escalate into serious business challenges or even spark a crisis. Taking action now can help firms manage their risks and prevent a truly unfortunate event. Firms can start by focusing on:

  • Understanding the full enterprise risk picture:To succeed in an increasingly turbulent market, companies must be able to see all the risks they face. An Enterprise Risk Management (ERM) framework can deliver this perspective, by providing a structured, disciplined process that forces management to consider risk from every angle. It’s an approach that encourages communication and knowledge sharing and provides management with a more complete understanding of the company’s risks.
  • Improving the balance sheet: Companies should take steps now to improve their ability to ride out challenges arising from financial risks. Improving liquidity is key: Management should look for ways to bring spending under control, boost cash flow and de-leverage the company wherever possible.
  • Checking fraud controls:Companies should look at the internal controls in place to prevent and detect fraud and determining their effectiveness. Reviewing typical client expectations and prior incidents of fraud can be a source of insights that can be used to re-evaluate existing anti-fraud controls and identify any gaps that need to be closed.

Best practices for successful risk management

Managing risk across the enterprise requires companies to make a significant investment of time and energy. Adopting these and other best practices can ensure that investment is truly effective:

  • Lead from the top:Enterprise-wide risk management is a strategic program requiring all parts of the organization to communicate and collaborate.It must be led by a member of the executive team.
  • Include risk in every strategy discussion:Risk and strategy are inseparable, yet many companies only discuss them separately. Firms need to ensure they talk  about risk in all strategy meetings—not only in terms of challenges, but opportunities too.
  • Tailor the risk program to the business: A company’s risk management program needs to reflect the nature, size, complexity and culture of its organization, and be designed to embed itself into existing processes.
  • Capitalize on the experience of external advisors: Outside advisors can bring experience, specialized expertise, proven implementation techniques and a range of best practices to bear on a risk management project. Working with an external advisor can help companies ensure their risk management solution meets their specific, unique needs.

Does your company understand the risks it faces today—and tomorrow?

Canada’s real estate and construction companies face a more turbulent future, as confidence and optimism become clouded by a host of factors—some beyond firms’ control, others simply unknown. Firms that don’t make a concerted effort to understand the many risks they face could suddenly find themselves in a crisis situation. Companies need to be proactive: They must invest the time and energy needed to identify the risks facing their entire enterprise, and develop strategies to evaluate, manage and monitor those risks. Taking action today can help firms avoid major surprises and big mistakes—not to mention missed opportunities—tomorrow.

This is the first in a series of MNP perspectives on risk management aimed at Canada’s real estate and construction companies. Subsequent publications will explore enterprise risk management, fraud risk, and restructuring and insolvency risk.

For more information, contact Lee Thiessen, MBA, National Leader, Real Estate and Construction, at 403.263.3385 or [email protected], or your local MNP Real Estate and Construction Advisor.