Business Review
Risk management
British Land generates returns to shareholders through long-term investment decisions requiring the Company to evaluate opportunities arising in the following core areas:
- demand for space from occupiers against available supply;
- differential pricing for premium locations and buildings;
- alternative use for buildings;
- demand for returns from investors in property, compared to other asset classes;
- economic cycles, including their impact on tenant covenant quality, interest rates, inflation and property values;
- price differentials for capital to finance the business;
- legislative changes, including planning consents and taxation; and
- construction pricing and programming.
These opportunities also represent risks, the most significant being changes to the value of the property portfolio. This risk has high visibility to senior executives and is considered and managed on a continuous basis. Executives use their knowledge and experience to knowingly accept a measured degree of market risk.
The principal business risks, which are predominantly external, are summarised in the following table.
These and other risks are identified within British Land’s formal risk management process, which defines risk areas and includes a risk scoring methodology based on the assessed impact of the risk event and the likelihood of its occurrence. The principal risks identified are considered and reviewed at various stages in the process, culminating in consideration of and discussion by the Executive Directors, the Audit Committee and the Board. Internal procedures to mitigate risks are the focus of assurance work performed by the Group’s Internal Audit function.
| Risk: | Principal Mitigations: |
|---|---|
| Property Market | |
| Market pricing and other changes such as those caused by the current ‘credit crunch’ affecting property value, including: | Regular investment appraisals assess prospects and identify properties for disposal where justified |
| • Change in investor and occupier demand | Upward only long leases on good quality well-located buildings |
| • Letting risk on speculative development | Occupier led development strategies with a phased pipeline of projects |
| • Environmentally unsustainable buildings | New developments built in line with a formal Sustainability Brief |
| • Tenant default | Spread of tenants with strong financial covenants and regular covenant review process |
| Debt and Financing | |
| Reduced availability or increased cost of finance Gearing covenants/constraints Counterparty credit risk Adverse interest rate movements |
Sufficient lines maintained for spending commitments Leverage regularly reviewed Covenant headroom maintained Spread of sources and maturities of facilities Active interest rate management policy with high level of hedging |
| Currency exchange movement | Foreign currency assets financed by matching currency borrowings |
| Development | |
| Poor control of design and construction programme Construction cost inflation Contractor failure leading to cost overruns and programme delays |
Contractor performance closely monitored within project management process Regular monitoring against budget and forecasting of project costs Early procurement strategy Contractor financial covenant reviewed Overall development exposure regularly reviewed |
| Reputation | |
| Health and safety | Health and Safety Policy and defined responsibilities and reporting throughout the Group |
| Non-compliance with regulation | Independent compliance auditing programme |
| People | |
| Retention of key staff | Career development and succession planning for key executive positions Key man insurance Remuneration structure reviewed and benchmarked |
| Financial Administration | |
| Loss of REIT status due to non-compliance with requirements | Quarterly re-forecast and review of ‘balance of business’ tests |
| Overseas fiscal compliance and execution risk | Central review and oversight Professional local advice and administration obtained Compliance reporting |
| Monetary fraud or accounting irregularity | Access controls and dual payment signatories Extensive review of accounting procedures |
