Risk management

The Board regularly reviews the Group’s activities with a view to confirming that all sources of risk are identified. For all risks recognised it has established a programme of management, monitoring and reporting. This includes a formal Risk Committee comprising an executive director and four senior staff, which assesses and reviews risks to the Group, identifies programmes to reduce the risks and reports regularly on this to the Audit Committee. 

Summary of frequently asked risk questions can be downloaded here.

The following commentary addresses some of the principal operational risks affecting the Group’s business:

Through its focus on cash flow, the Group’s day-to-day procedures in the letting and management of its properties control much of the operational risk associated with its business. The commercial risk that the Group carries derives principally from its customer profile. The Group invests in accommodation let generally to smaller businesses which have a weaker covenant. This has traditionally been perceived as a high-risk activity. However, the Group has over 4,000customers and receives in excess of 9,900 enquiries for space per annum. Its exposure, therefore, to any single customer or business sector is low. The letting risk is better assessed against the dynamics of the SME sector in the areas in which the Group operates, rather than in relation to the fortunes of any one or group of customers. The SME sector is resilient, growing and recognised as important by all political parties. The properties held by the Group are generally ideal for long term use by SMEs whose space requirements are generally simple. Our buildings are also less prone than many to obsolescence ,to change in technical and technological requirements and fashion. Day-to-day management of the Group’s operations, including letting and property and financial management, follows simple but carefully constructed processes. The high numbers of customers coupled with a high churn rate generate high volumes of activity. These demand responsive systems and procedures. Through regular routine reporting of key performance indicators, the Group is able to monitor developing patterns in its estates and respond swiftly. The commercial risks of the business are not the traditionally perceived property risks but more akin to those taken by a business-to-business service provider delivering services to the SME sector. Unlike most service providers, however, Workspace Group receives payment for these services in advance. By contracting with its customers for fixed regular payments, made in advance and often further secured by a deposit, the Group’s financial risk is greatly reduced. Customers are subject to post entry and exit interviews. Consultation meetings are held on major issues, together with occasional focus groups. Annual customer surveys are undertaken and customer comments cards provided at all properties. A complaints register is maintained. Workspace Group commissions ongoing research into the SME market to identify emerging needs. The level of occupancy at which the Group breaks even has been in the range 55–60% throughout the last five years. With current overall occupancy of 84.3% and a lowest level of 75% during 1991, the last significant economic downturn, the Group has substantial resilience to changing economic circumstances.

With the focus of its activities in London, the Group's exposure to the fortunes of the city is significant. The Board agrees with the majority of commentators who consider that the long term prospects for London and for its SMEs, remain better than those for the remainder of the UK, and so believes that this risk is greatly outweighed by the opportunities it creates. Its customer base within this region remains broadly distributed with no reliance on any single trading sector.

The key financial risk carried by the Group is its exposure to interest rate variations. These are managed in two ways. Firstly, through its investment in relatively higher yielding properties and its focus on management of the returns from these properties, the Group maintains high levels of interest cover. Notwithstanding a gearing level of 85% (based on adjusted net assets employed) at 31 March 2006,the interest on these borrowings was covered 1.84 times (excluding valuation surplus). The Group further safeguards its position by use of instruments to manage interest rate exposure. At 31 March 2006 54%of the Group’s debt was subject to hedging either through fixed rate borrowings or through the use of interest rate collars.

Workspace recognises the importance of its suppliers in providing a quality service to its customers. All suppliers are subject to an approval process which extends to identification of their environmental and safety policies. At the year end the Group had over400 approved suppliers, of which 69% are based in London. The Group aims to use its customers as suppliers where they are competitive in price and quality. Some 7% of approved suppliers are also customers. The Group aims to settle all accounts within credit terms whenever possible. The Group continuously seeks to find ways of improving the efficiency and performance of its supply chain. This year we have introduced a supplier scoring system, and we are prioritising sectors where more or better suppliers are needed.

The Board has identified and assessed the significant risks to the Group’s short and long term value arising from SEE matters, as well as the opportunities to enhance value that may arise from an appropriate response and these risks are monitored regularly at Board level. The Board receives adequate information to make this assessment and account is taken of SEE matters in the training of directors. The Board has ensured that the Group has in place effective systems for managing significant risks, which, where relevant, incorporate performance management systems and appropriate remuneration incentives. The Group’s commitment to SEE risk management operates on both a short and a long term horizon. Short term SEE risks and opportunities There are two elements to the Workspace Group approach:

Firstly, careful identification of significant environmental and social risks. These frequently relate to the activities of the Group’s customers rather than those within its own direct control. Examples include:

• Land or water contamination on site;
• Health & safety or crime incidents;
• Transport related impacts and congestion charging;
• Environmental taxation such as landfill tax or the climate change levy.

Proposed acquisitions and existing property holdings are investigated carefully including identifying the risk of flooding and the potential extent of contamination from existing or previously undertaken activities on-site. These studies have identified that almost all the Group’s properties are unlikely to suffer from flooding or contamination and that, at those properties where the risk was higher, this was unlikely to give rise to damage and any associated liability. Reports on these matters have been made available to CB Richard Ellis for the purposes of the valuation. Potential contamination by customers is avoided by management of their activities or where the risk is not manageable, exclusion from occupation.

Secondly, the Group’s intensive style of management and the risk management programme undertaken jointly with the Group’s insurers, Norwich Union, seeks to assist current customers in recognising and preventing health & safety, pollution, fire and other risks. In addition, the Group makes significant efforts to work with its customers in order to raise their own awareness and find ways of mitigating their impacts through partnership agreements. Examples of these include:

• The introduction of centralised waste recycling contracts and distribution of educational material on waste management:
• The promotion of cycling initiatives for properties, particularly those located within the congestion charging zones;
• The purchase of electric cars for use by both staff and customers at certain sites.

Workspace is fully committed to supporting sustainability in the operation and development of its portfolio and has adopted clear guidelines in communicating with and instructing its contractors and consultants.

• Standard appointments for design consultants require them to apply principles of whole life costing in order to identify the most environmentally sustainable and financially viable design solutions for the building;
• On all major building contracts over £250,000 it is required that contractors employed are committed to recycling waste materials and providing tangible certified evidence to support this;
• An evaluation of renewable energy, energy saving and sourcing of sustainable and non-hazardous products and materials is made on major building projects to optimise expenditure and value engineer solutions.

Given its focus on the smaller business community and thereby the community at large, the Group is keenly interested in managing its public profile to avoid brand damage. This extends not just to community relations but to the operation of codes and standards of conduct by its staff that would not risk damage to its reputation. The Group’s Code of Conduct for
employees prohibits the receipt or payment of any bribes or facilitation payments, and requires all employees to operate within the law. A Whistle blowing Policy and Helpline exist to enable staff to report perceived breaches of the Code of Conduct.