Risk management

The Group views effective risk management as integral to the delivering of superior returns to shareholders. Principal risks and uncertainties facing the business and the processes through which the Company aims to manage those risks are:

Risk Mitigation Commentary

Market risk

   

Concentration of assets in central London.

Property markets are cyclical. Performance depends on general economic conditions, a combination of supply and demand for floor space as well as overall return aspirations of investors.

Constrained credit markets have served to put downward pressure on property valuations and slowed occupational demand with the potential for increased void levels and tenant defaults.

Research into the economy and the investment and occupational markets is evaluated as part of the Group’s annual strategy process covering the key areas of investment, development and asset management and updated regularly throughout the year.

Prior to committing to a development the Group conducts a detailed Financial and Operational appraisal process which evaluates the expected returns from a development in light of likely risks. During the course of a development, the estimated returns are regularly monitored to allow prompt decisions on leasing and ownership to be determined.

The Group’s rents remain low by comparison to the market.

Tenants are proactively managed to ensure changing needs are met with a focus on retaining income, where appropriate, and maintaining a diverse tenant mix by industry sector and size. Formal covenant procedures are completed on all new tenants to ensure rent deposits or guarantees are secured where appropriate.

The impact of changes in legislation particularly in respect of environmental legislation and planning regulations.

Through the use of experienced advisers and direct contact, senior Group representatives spend considerable time ensuring that buildings are maintained and refurbished or redeveloped in line with current regulations and changing tenant demands including, for example, changing environmental legislation requirements, in the most cost-effective manner.

Development

   
Failure to obtain or delays in gaining planning consents. Planning applications are proactively managed. The Company monitors changes in planning legislation and has strong relationships with planning authorities and consultants.
Letting risk.

Market analysis including a good understanding of tenants’ requirements which influence building design and sensitivities are included within the development appraisals.

The Company has resource dedicated to the letting of the developments supported by a strong network of specialist leasing agents.

Investment

   
Difficulty in sourcing investment opportunities at attractive prices. The Company has dedicated resources whose remit is to constantly research each of the sub-markets within central London seeking the right balance of investment and development opportunities suitable for current and anticipated market conditions.
Portfolio returns impaired by inappropriate recycling of capital. Business plans are produced on an individual asset basis to ensure the appropriate churn of those buildings with relative limited potential performance.
Inability to recycle out of ex-growth assets at the latest valuation due to credit market difficulties resulting in a limited pool of potential buyers. The Company has dedicated resource to identify potential buyers even in thin markets.

Attracting and retaining the right people

   
Achieving the Company’s aims requires people of the highest calibre. The Company has a remuneration system that is strongly linked to performance and a formal appraisal system to provide regular assessment of individual performance and the identification of training needs.

Reputation

   
Health & Safety and Environment (“HSE”). The Company has dedicated HSE personnel to oversee the Company’s HSE Management Systems including regular risk assessments and annual audits to proactively address key HSE areas including energy usage and employee, contractor and tenant safety.

Financial risks

   
Liquidity risk.

Cash flow and funding needs are regularly monitored to ensure sufficient undrawn facilities are in place.

Funding maturities are managed across the short-, medium- and long-term. The Group’s funding measures are diversified across a range of bank and market bonds. Strict counterparty limits are operated on deposits.

Adverse interest rate movements. Formal policy to manage interest rate exposure by having a high proportion of debt with fixed or capped interest rates through derivatives.
Breach of borrowing covenants.

Financial ratios are monitored and regularly reported to the Board.

Non-compliance with REIT regulations. The Group’s accounts and forecast financial measures are regularly compared to REIT limits and reported to the Board.