Risks and uncertainties

The operational risks facing the Group for the remaining months of the financial year are consistent with those outlined on pages 19, 22 and 23 of the Annual Report for the year ended 31 March 2008. The risks include property investment risk (primarily lower tenant demand and tenant failure), property development risk (failure to let developments), Trillium risks (failure to let vacated space and performance of service partners), and financial risks (unavailability of funds and exposure to prevailing market rates).

The impact of tenant failures would be to reduce cash inflow in the near-term. Failure to re-let empty units would have an adverse impact on valuation. Although retailers are currently experiencing a difficult trading environment the Group has not suffered any significant tenant failures. In general, the Group has a diversified tenant base, with the largest occupier being the Government (9.6% of income) with the next largest occupier accounting for only 2.7% of our income.

As noted above, the deterioration of markets has restricted the availability of credit and reduced the expectations for growth in the economy. Although credit is not as readily available as previously the Group had at 30 September 2008 unutilised committed facilities of £873.6m. None of these facilities expire in the next eighteen months.

The availability of credit at a reasonable margin to investors in commercial property is important in ensuring a properly functioning investment market, which in turn provides clear evidence of current values and provides liquidity to sellers.

The most significant effect of a failure by a financial counterparty to the Group would be that committed facilities would no longer be available. However, the Group’s largest committed facility which expires in August 2013 is syndicated with 13 financial institutions. The Group has £2.8bn of interest rate hedges with a number of financial institutions. Although the nominal value of the hedges is large, the market value of the hedges is circa £10m.

If property valuations continue to decrease this would have an adverse impact on LTV ratios within the Security Group. As explained above, not until the ratio exceeds 65% do operational restrictions increase significantly. The value of investment properties within the Security Group would have to decline a further 18% for this to apply assuming no changes in debt levels. A liquidity facility or cash reserving facility is progressively required as LTVs move above 55%.