Business Review
Risk Management
The prolonged effects of the recent financial market turmoil across all markets has continued to be the headline risk event, impacting property values, borrowing covenants and increasing the risk of failure of occupiers' businesses.
Management actions over the past 12 months including the recent Rights Issue and selected asset sales, have improved the Group's gearing, significantly reducing the risk of breaching borrowing covenant limits and better positioning the Group to take advantage of a market upswing in the future.
Awareness and anticipation of tenants experiencing trading or financial difficulty and reshaping the portfolio where possible, helps to manage the increased risk of tenant default and administration. The Group expects prolonged difficult trading conditions for some retailers and continues to closely monitor and manage this portfolio accordingly.
We maintain relationships with a spread of banks and have a policy to deposit any cash arising across a range of accounts.
The decision to pause development of major projects not already under construction has mitigated construction costs and timing risks, with all other committed developments near completion. Active negotiation of pre-lets to potential new tenants of good covenant reduces residual letting risk on the Group's developments nearing completion.
Management continues to identify, assess and manage the Group's risk profile. The principal risks, which are predominantly external, are detailed in the following table. These and other risks identified within the Group's formal risk management process are subject to prioritisation and analysis based on the likelihood of occurrence and potential impact on the Group. Risks identified as potentially having significant impacts are managed through the design and implementation of mitigation strategies. Assurance on these is the prime focus of the Group's Internal Audit team. The principal risks are considered, reviewed and discussed periodically by the Executive Directors, the Audit Committee and the Board.
| Risk | Impact Areas | Key Mitigants | |
|---|---|---|---|
| Property | Financial market turmoil leads to continued low investor demand and market pricing correction. | Property values. Market liquidity. Debt covenant headroom. |
Prime well located sites. Selective asset sales and Joint Ventures pursued. Use of capital markets. |
| Financial market turmoil leads to continued low occupier demand. | Rents and increased cost of tenant
incentives for new leases. Void costs. Property values. |
Long upward only leases provide income underpinning. Quality developments/prime property. Tenant incentives offered on pre-lets for long leases and good covenants. |
|
| Tenant administration. | Letting income and cash flow. Void costs. Property values. |
Tenant covenants reviewed before new leases signed. Market trends monitored closely. Diversified tenant base. Good relationship and contact with tenants. Selective asset sales to reduce exposure. Prime sites easier to re-let. |
|
| Development contractor solvency and availability. | Cost over-runs. Programme delays. |
Close supply chain relationships. Contractor financial covenant review process before contract agreed. |
|
| Financial | Liquidity/Refinancing risk. | Inability to meet financial obligations
(interest, loan, repayments, expenses,
development, dividends). Cost of renegotiating finance. Inability to capitalise on expected market upswing. |
Significant committed undrawn financing facilities with
a range of lenders. Regular monitoring of covenant headroom and leverage. |
| Counterparty credit risk. | Loss of deposits. Incremental changes in financing rate. Cost of re-arranging deal. Favourable positions forcibly closed. |
Spread of sources and maturity of facilities. Deposits placed across a range of accounts. |
|
| Operational | Poor management of development programme. | Cost over-runs. Un-let buildings after completion. |
Close monitoring of market conditions driving
development strategy. Cost and forecast monitoring. Regular project review meetings. Insurances. |
| Development of unsustainable buildings. | Reputational damage. Penalties and levies. Property values. | New developments built in line with Sustainability Brief. High quality projects. | |
| Fraud and misstatement. | Reputational damage. Financial loss. Operational disruption. |
Access controls, segregation of duties and dual
payment signatories. Conservative policies and transparent procedures. |
|
| Occupational and Construction Health and Safety. | Criminal prosecution of responsible
managers. Reputational damage. Fines and legal costs. |
Specialised advice. Health and Safety policy. Extensive compliance reporting. Audit visits and risk assessments. |