How we manage our risks

Risk is an integral part of any company’s business activities and Helical’s ability to identify, assess, monitor and manage each risk to which it is exposed is fundamental to its financial stability, current and future financial performance and reputation.

Strategic risks

Risk	Impact	Action to mitigate
Reputation	Inability to raise new share capital	Management in regular communication with all shareholders and with major institutional shareholders in face to face meetings.
	Deal flow dries up	Maintain high profile in the market. Continue close contact with all major deal flow sources. Ensure depth of management.
Long term underperformance of real estate sector	Share price falls	Pursue outperformance within sector compared with peers.
Regulatory changes e.g. SDLT, abolition of Empty Property rates relief	Transactional and holding costs increase	Lobby Government and industry representatives to mitigate.
Retention of key senior employees	Inability to access and exploit deal flow	Remuneration packages that retain and motivate.

Operational risks

Risk	Impact	Action to mitigate
People related issues	Low morale	Key management ably assisted by a loyal group of long-standing employees whose remuneration is designed to retain staff with full participation in the Company’s Share Incentive Plan.
Computer software/hardware failure	Loss of transactional history	External IT consultancy used, backed up by technical support from a number of hardware and software suppliers.
Breaches of authorisation levels	Inappropriate use of Company resources	All significant transactions approved at appropriate level.

Market risks

Risk	Impact	Action to mitigate
Inappropriate balance between investment and development and between sectors	Returns lower than market	Selecting the most appropriate level of exposure to each sector is fundamental to the long term success of the company.

Liquidity risks

Risk	Impact	Action to mitigate
Inadequate financial resources	Unable to meet liabilities as they fall due	Company finances its operations from the cash flow generated by its property portfolio, bank borrowings, third party financing and from the capital markets through share issues.
	Unable to undertake investment decisions arising from the Company’s assessment of the market	The guiding principle is to ensure that funding is obtained from diverse providers with a range of maturities backed up by interest rate protection, where appropriate. Financing and interest rate protection is discussed further in note 28 on pages 83 and 84 of the 2011 report and accounts

Credit risks

Risk	Impact	Action to mitigate
Counterparty financial failure	Loss arising from failed tenants, lenders, suppliers, etc.	The financial assessment of tenants, contractors and potential partners is part of the daily routine of the Company.

Risk governance

The responsibility for the governance of the Group’s risk profile lies with the Board of Directors of Helical. The Board is responsible for setting the Group’s risk strategy by assessing risks, determining its willingness to accept those risks and ensuring that the risks are monitored and that the Group is aware of and, if appropriate, reacts to changes in those risks.

The Board is also responsible for allocating responsibility for risk within the Group’s management structure.

Risk register

The Group maintains a risk assessment register which enables the Board to focus on perceived specific key risks, assessing their magnitude and the probability of negative outcomes. This risk register is reviewed regularly and strategies are adopted to minimise and eliminate the risks identified.

Strategic risks

Strategic risks are those risks that may adversely affect the Group’s financial performance by following an inappropriate strategy or by the failure to execute an appropriate strategy.

Strategic risks arise over a long time frame where there are fundamental differences between the business environment in which the Group operates and the environment assumed on the establishment of that strategy.

The Group’s reputation is a key component of its ability to achieve its strategic goals and success in meeting these goals depends not only on the effective management of risks but also on the maintenance of its reputation among stakeholders i.e. employees, investors, regulators, business partners, financial institutions and the public.

Measuring the impact of the Group’s reputation is not a science and, in the view of the Group, may best be measured by the willingness of stakeholders to continue to deal with Helical.

During the year to March 2011 there have been no signs that we are not seeing all the opportunities to deal in property that it would expect and recent transactions suggest that we continue to be a Group that others want to deal with. Internally, risks to the Group’s reputation are mitigated by the application of an internal Code of Conduct and “whistle blowing” procedures which are reviewed annually.

The other main strategic risks identified by the Group include:

• long-term under-performance of the real estate sector compared to alternative forms of investment e.g. equities, gilts;
• regulatory changes which significantly impact on the attractiveness of real estate as an investment compared to alternative forms of investment, or on the attractiveness of investing in real estate through a listed group; and,
• retention of key senior employees.

The principal strategic risks noted above, and the underlying drivers of such risks, are monitored by management and discussed regularly in the Business Plan presented by the Group’s Finance Director to the full Board each year.

In addition the Group receives regular updates on the impact of economic scenarios on the real estate sector as well as subscribing to a number of economic journals in order that senior employees are kept up-to-date.

The Board has a schedule of matters specifically reserved to it for decision. The Board controls the business but delegates day-to-day responsibility to the executive management. However, there are a number of matters which are required to be or, in the interests of the Group, should only be decided by the Board of Directors as a whole.

The Board monitors the financial performance of the Group at regular Board meetings where comparisons against budgets and forecasts are made together with a review of key performance indicators.

The remuneration packages of senior directors and employees are seen as the key to their retention and motivation. These remuneration packages are designed to provide a basic level of salary at or below the median of the Group’s peer group but with cash bonuses and share awards at the top end of the peer group rewarding outperformance compared to that peer group.

The most recent annual review of the strategic risks faced by the Group indicate that the business of Helical is appropriate to the business environment in which it competes.

Operational risks

Operational risks are those that the Group may suffer a loss from inadequate internal processes, systems, resources, incorrect decision-making or through external events.

Losses from operational risk can arise from:

• people-related issues such as inadequate resources, skills or departure of key personnel;
• software or hardware failure, inadequate IT security, failure of back-up facilities;
• incorrect or inappropriate use of valuation models, inappropriate gearing levels, breaches of authorisation levels;
• fraud from internal or external sources;
• external events leading to a loss of a major provider of services e.g. contractor failure.

The Group’s approach is not to eliminate operational risk, but rather to identify the areas in which it might arise and to contain it within acceptable limits through the application of effective controls. Ultimately, the management of operational risk is dependent upon the application of sound management judgement.

The close involvement of the executive directors in the day-to-day running of the business is critical to that judgement.

The Group has not suffered any material losses arising from exposure to operational risks in the year to March 2011.

Market risks

Market risks arise from the possibility that the Group may suffer reduced income or a loss resulting from fluctuations in the values of, or income from, its real estate portfolio.

Market risk is a key component of the Group’s long-term strategy with exposure to the various real estate sectors fluctuating as perceptions of the future performance of each of those sectors change. Net asset value growth, a key performance indicator, is dependent upon an ability to move easily between sectors at the appropriate time.

The Group’s directors constantly analyse fluctuations in market movements using evidence gathered from a variety of public and personal sources, using this analysis to determine the future direction of real estate investment.

Selecting the most appropriate level of exposure to each sector is fundamental to the success of the Group. Measuring that success is undertaken by comparing the Group’s portfolio returns over short-, medium- and long-term periods with those as reported by Investment Property Databank (“IPD”), the source of the main real estate sector indices.

In the year to March 2011, the Group’s real estate portfolio underperformed compared to the majority of property funds in the IPD index. However, over the medium- and long-term, the Group’s performance compares favourably with the rest of the sector as reported by IPD on pages 2 and 32 of the March 2011 report and accounts.

Liquidity risks

Liquidity risks arise from having insufficient financial resources to enable the Group to meet its obligations as they fall due, or can only secure them at an excessive cost. Liquidity risks also arise where the Group has insufficient resources to enable investment decisions, arising from its assessment of market risks, to be executed.

The Group finances its operations from the cash flow generated by its operations, bank borrowings, both secured and unsecured and over short-, medium- and long-term periods, and from the capital markets through share issues.

The management of cash and debt is monitored daily with medium-term cash flows prepared weekly and long-term cash flows discussed regularly in management meetings and presented to the Board at each quarterly Board meeting.

The Group’s overall approach is to provide sufficient liquidity to be able to meet, from cash resources and available facilities, the expected requirements of the business. The guiding principle is to ensure that funding is obtained from diverse providers with a range of maturities, backed up by interest rate protection where appropriate. This is to ensure that a stable flow of financing is available and to provide protection in the event of market disruption.

The Group’s cash resources, bank borrowings, interest rate protection and gearing at March 2011 are noted on pages 78 to 84 of the 2011 report and accounts.

Credit risks

Credit risk is the possibility that the Group may suffer a loss from the failure of its tenants, borrowers, suppliers or other counterparties to meet their financial obligations to the Group, including their failure to meet them in a timely manner. It includes the risks that the Group may suffer a loss as a result of guarantees to third parties. Credit risk in order to earn a return is not a central feature of the Group’s business activities, rather it is a consequence of those activities.

The Group is exposed to credit risk in respect of the financial stability of the tenants and potential tenants in its real estate portfolio. It is also exposed to credit risk where cash flows from the sales of real estate, whether investment or trading properties or funded developments, are deferred. The potential failure of major suppliers such as contractors or sub-contractors also exposes the Group to credit risk. Guarantees to third parties, such as banks, where the Group is in joint venture with partners, expose the Group to risks that those partners are unable to fulfill their obligations.

The financial assessment of tenants, potential tenants, contractors and potential partners are part of the daily routine of the Group. The assessment of these third parties is undertaken by the finance department in discussion with the executive responsible for the real estate decision. In the year to March 2011 bad debts constituted less than 2% of gross rental income.