43 MANAGEMENT DISCUSSION AND ANALYSIS KEY RISK FACTORS BUSINESS OVERVIEW The Manager promotes proactive and effective risk management which forms a fundamental part of Al-Salām REIT’s business strategy. A sound and robust risk management framework ensures that the Manager is ready to meet challenges and seize opportunities. The Manager consistently identifies and mitigates anticipated or known risks to which the Fund is exposed that could have material impact on the Fund’s operations, performance, financial condition and liquidity. In 2023, a major risk faced by the Fund is the performance of its retail assets, KOMTAR JBCC and the business performance of its major tenant, QSR Brands (M) Holdings Bhd. As such, in evaluating good potential tenants in optimising the occupancy rate of retails assets, Al-Salām REIT will continue to diligently assess its potential tenants to ascertain tenant’s corporate strength and financial reliability, which include tenant's financial stability, lease length, and type of lease agreement. A summary of the significant risks of Al-Salām REIT is as below: Anticipated and Known Risk Profiles Focus Area Disclosures Sustainable Performance and Competitive Returns to Unitholders Retail assets have become not yield-accretive due to: • Assets are physically unattractive and deteriorating due to wear and tear • Tenants opted for a relocation of business, in favour of lower rentals at other new malls • Lower NPI due to higher operating and maintenance costs The Manager has launched the first phase of a repositioning exercise for KOMTAR JBCC in 2023. Further refurbishment and upgrading works will take place in 2024 to accommodate the change in tenancy mix and layout reconfiguration. Coupled with the ongoing development in the construction of the JB-Singapore RTS, it is expected that an increase of the footfall will jumpstart the demand for retail spaces at KOMTAR JBCC, contributing to the improvement in the demand and rental rates comparable to the market. Competition The prospects for the retail space sector, particularly in Johor Bahru, were challenging and competitive in 2023 due to the significant amount of retail space. While occupancy rates of KOMTAR JBCC and surrounding malls are improving, it is still below pre-pandemic levels. The Manager undertakes active marketing and promotional strategies aimed at maximising occupancy, including a flexible rental package to existing and new prospective tenants of the mall, as well as at Menara KOMTAR Financial The Fund faces challenges in managing higher financing costs due to the increase in OPR, announced in 2023. The Manager closely monitors the Fund's cash flow position and financing profile, to ensure that the investment yield adequately covers its profit rate expenses. Additionally, the Manager manages the Fund's gearing level to limit exposure to profit rate risk. The Manager may also consider other alternatives, such as hedging strategies, in order to mitigate increase in financing costs.
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