MITSUBISHI ESTATE Annual Report 2014

Risk Management Risks of Fluctuations in the Real Estate MarketThe real estate market is closely correlated with movement in the economy. Deterioration in the economy has a strong impact on declines in real estate prices and rental fees and the increase in vacancy rates. In view of this correlation, the basic policy of the Group is to conclude relative long-term lease contracts with customers in its office building leasing business. The prospects of stable lease revenues mitigate to a certain degree the risk of sharp movements in the economy. Risks of Changes in Laws and RegulationsAs an expert in large-scale urban development, the Group must comply with various laws and regulations in its Japanese and overseas operations. Should there be any changes in these laws and regulations, such changes could have an impact on the Group’s operations in terms of additional costs arising from adapting to the new systems and of substantial changes to the competitive environment. Therefore, the Group constantly monitors trends in revisions of its related legal systems. Risks of Increases in Interest RatesThe Group acquires funding for its operations by borrowing from financial institutions or issuing corporate bonds.The Bank of Japan (BOJ) has implemented a policy of quantitative and qualitative monetary easing in response to the credit crunch in financial markets and the slowdown in the global economy. Should interest rates rise, however, because of a change in BOJ policy or a deterioration in the demand-supply balance for Japanese government bonds (JGBs) caused by growth in the issuance of JGBs, it may negatively affect the perfor-mance, financial position, or other aspect of the Group’s business.The Group hedges the interest rate risk on a certain portion of its variable interest rate financing by interest rate swaps to convert its interest rate payments into fixed payments. In the future, the Group plans to manage its interest rate risk by procuring funds based on a consideration of its fixed and variable interest rate borrowings and its outstanding corporate bond balances.Risks of Fluctuations in Exchange RatesIn addition to those held in Japan, the Group is developing and holding assets in the United States, Europe, and Asia, for which the book values and income are accounted for in local currencies. Consequently, any fluctuation in exchange rates would affect the yen conversion rate used for foreign currency denominated assets and liabilities and business transactions. The group minimizes these risks of fluctuations in interest rates using such methods as borrowing funds in local currencies when procuring assets overseas. Risks of Natural and Man-Made Disasters, Etc.The occurrence of an earthquake, flood, or other natural disaster or an accident, fire, or other man-made disaster would impact the performance, financial position, or other aspect of the Group’s business. The Group is redeveloping its properties to install advanced disaster management functions and has established disaster response measures through area management. In accordance with the Mitsubishi Estate Group Risk Management Regulations, the Group has formed a risk management system. Based on that organization and system, the Group thoroughly implements a Plan-Do-Check-Act (PDCA) cycle to identify risk exposures and to plan and implement mitigation measures and monitor risks. 42MITSUBISHI ESTATE CO., LTD.