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Business Opportunity & Business Risk
Management
The key to high returns is flexibility, both in terms of business organisation
and financing to take advantage of shifts in the property market.
These opportunities can also represent risks. Demand for property and
the ability of tenants to pay rent can be affected by general economic
conditions at both a macro and local level. Excessive levels of supply
of property can also lead to falling rents. Rising interest rates may
impact the security of the tenant base, lower development margins significantly
and reduce investment appetite. Property values are also affected by changes
in planning, taxes, technology and lease structures. Interest rates, bond
yields and the relative attractions of other asset classes also impact
property values. These risks in the UK property sector can be amplified
by development exposure and gearing. Internal Control
In compliance with the provisions of the Combined Code, the Board continuously
reviews the effectiveness of the Group's system of internal control. The
key risks that the group faces and features of the internal control system
that operated throughout the period covered by the accounts are described
below: Identification and evaluation
of commercial risks and related control objectives
The Board and the operational boards consider the risk implications of
business decisions. These include matters such as new treasury products
and major transactions. The control environment is supported by the various
committees of the Board and the operational boards, including the Audit
Committee, the Environment and Society Committee and the Derivatives Committee.
The way each risk is managed within the Group is considered by the Board
and the Audit Committee. The Group re-assesses these risks on a regular
basis to ensure that any risks arising from changes in the Group's operations
or the external environment are identified and appropriately managed.
The detailed individual risks have been categorised into the following
areas:
In order to provide relevant and timely information to the executives
with responsibility for managing risks the Group has the following key
information systems which generate reports as follows:
The nature of the specific risk areas and related controls are as follows:
Principal risks Property values may decline and returns not be optimised; uneconomic investments may be made or under-performing properties retained; significant tenant defaults may reduce income and property values; and property insurance may be inadequate. Principal controls These include regular reviews of current and future market sentiment; reviews of each individual property at least two times a year including internal and external assessments, considering current and future values and yield prospects as the basis of sell or hold decisions; benchmarking portfolio performance against peer groups using IPD statistics; consideration of tenant mix covenant strength across the portfolio; and reviewing insurance cover. Property development risk Principal risks Letting risk for speculative developments; construction cost and time overruns; adverse changes in planning and/or planning policy which may cause delay and affect profitability. Principal controls These include limiting the amount of speculative development; assessing letting potential and prospective profitability of developments prior to commencement of construction; on-going assessment of development expenditure by quantity surveyors with regular comparisons of costs against budget; and ensuring executives are kept up to date with planning policies. Taxation risk Principal risks The group is exposed to financial risks from increases in tax rates and changes to the basis of taxation including corporation tax, VAT and stamp duty. Principal controls These include regular monitoring of legislative proposals and participation in discussions with Government directly and through trade bodies to understand and, if possible, mitigate the impact of changes. Management risk Principal risks The Group is reliant on its small, high calibre team of executives. Principal controls These include the assurance that knowledge of all processes and projects is shared by at least two employees; that the group recruits and develops high calibre employees; and that the Board considers succession planning issues. Financing risk Financing policy and risk management are dealt with in the next section. Monitoring The Audit Committee meets regularly throughout the year and has reviewed the Group's internal controls and the possibility of a need for an internal audit function. During the year the Group established an internal audit function. The Audit Committee has agreed a schedule of internal audit reviews of various of the Group's processes and controls to be undertaken. The Head of Internal Audit reports directly to the Audit Committee.
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