The Group has related party transactions with its subsidiaries
(note 34), shareholders and certain Directors.
Directors' fees
The Directors of the Company and its subsidiaries were paid a
total of EUR157,000 (2013: EUR182,000) in Directors' fees during
the year.
The Group also operates an inter-group trading account facility
with its subsidiaries whereby it may receive income on behalf of
its subsidiaries or pay expenses on their behalf. These balances
are non-interest bearing and are settled on demand. These
intragroup transactions are all undertaken on an arm's length
basis.
28. Financial risk management objectives and policies
The Group's financial liabilities, other than derivatives, are
loans and borrowings, warrants and preference shares. The main
purpose of the Group's loans and borrowings is to finance the
acquisition and the development of the Group's property portfolio.
The proceeds from the preference shares were used to repay part of
the bank debt the Group contracted with the Bank of Scotland. The
Group has trade and other receivables, trade and other payables and
cash and short term deposits that arise directly from its
operations.
The Group has exposure to the following risks from its use of
financial instruments:
- market and operational risks,
- currency risk,
- credit risk,
- liquidity risk.
This note presents information about the Group's exposure to
each of the above risks, the Group's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. Further quantitative disclosures are
included throughout these consolidated financial statements.
Risk management framework
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework. A description of the internal controls in place is set
out in the Director's report.
28.1 Market and operational risks
Market risk is the risk that changes in market prices, such as
rental income, interest rates and property value will affect the
Group's income. The objective of market risk management is to
manage and control market risk exposures within acceptable
parameters, while optimising the return.
Interest rate risk
The Group uses derivatives, and also incurs financial
liabilities, in order to manage the market risk attributable to the
interest rate risk. Generally, the Group seeks to apply hedge
accounting in order to manage volatility in profit or loss where
applicable.
The interest rate is based on EURIBOR with interest rate caps. A
decrease in EURIBOR will lead to a decrease of the interest
expense.
Market risk
Rental income and the market value for properties are generally
affected by overall conditions in the local economy, such as
changes in gross domestic product, employment trends, inflation and
changes in interest rates. Changes in gross domestic product may
also impact employment levels, which in turn may impact the demand
for premises. Furthermore, movements in interest rates may also
affect the cost of financing for real estate companies.
Both rental income and property values may also be affected by
other factors specific to the real estate market, such as
competition from other property owners, the perceptions of
prospective tenants of the attractiveness, convenience and safety
of properties, the inability to collect rents because of bankruptcy
or the insolvency of tenants or otherwise, the periodic need to
renovate, repair and re-lease space and the costs thereof, the
costs of maintenance and insurance, and increased operating
costs.
The Investment Manager also analyses portfolio and investment
risks under the following categories:
Criteria Risk control
Rental income Ongoing review of income receipt of rents and
progress on leasing vacancy - at least on a quarterly basis.
Terms of rental agreements Ongoing review at least on a quarterly basis.
Quality of tenants Informal controls performed on an ongoing
basis. Formal analysis on a semi - annual basis by means of the
credit rating performed by IPD M-RIS. Quarterly reviews with the
Board of Directors.
Sector diversification Quarterly, formal comparison of strategy
and review with the Board of Directors.
Geographic diversification Quarterly, formal comparison of
strategy and review with the Board of Directors.
Sizes of individual properties Quarterly monitoring of the
percentage of specific properties in the portfolio in accordance
with London Stock Exchange regulations.
Payments in arrears Ongoing reviews, supported by quarterly
review of property management reports.
By monitoring assets under these categories using the risk
controls outlined and by diversifying the portfolio in different
property sectors, countries, regions and tenant industries the
Group expects to lower the risk profile of the portfolio.
28.2 Currency risk
The Company obtains financing in currencies other than euro
(preference shares in sterling, refer to note 23 ) and is exposed
to the fluctuations of the exchange rate of that currency.
The Company had entered into currency forward contracts to hedge
its exposure to the preference share dividends which are paid in
sterling (see table below). In the year-ending 30 September 2014,
the company had exited from all open position as the payment of
dividends was suspended until further notice under the terms of the
new debt facility. The table below refers to the position at the
end of the prior year-end.
As at 30 September 2013
Maturity date CCY bought Amount bought CCY sold Amount sold Fair value
(EUR'000)
15 December
2014 GBP 1,311,000 EUR 1,598,109 (37)
16 May 2014 GBP 1,311,000 EUR 1,615,398 (50)
02 December
2013 GBP 1,311,000 EUR 1,512,763 (202)
--------------- ------------ -------------- --------- ------------ -----------
As at 30 September 2014, the net exposure of the Group to GBP
was as follows:
30 Sep 14 30 Sep 13
EUR000 EUR000
------------------- ---------- ----------
Cash deposits - 9,549
Preference shares (36,373) (33,912)
Warrants - (176)
------------------- ---------- ----------
Total (36,373) (24,539)
------------------- ---------- ----------
The following table demonstrates the sensitivity to reasonable
changes in the sterling exchange rates, with all others variables
held constant, to the Group's loss before tax:
As at 30 September 2014 Increase/Decrease Effect on profit
or loss before
tax (EUR000)
------------------------- ------------------ -----------------
Sterling +10% 3,637
Sterling -10% (3,637)
------------------------- ------------------ -----------------
As at 30 September 2013 Increase/Decrease Effect on profit
or loss before
tax (EUR000)
------------------------- ------------------ -----------------
Sterling +10% 3,446
Sterling -10% (3,446)
------------------------- ------------------ -----------------
28.3 Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group. Credit risk for the Group arises principally from
rental receivables from tenants.
Trade and other receivables
In the event of default by an occupational tenant, the Group
will suffer a rental income shortfall and may incur additional
costs, including legal expenses, in maintaining, insuring and
re-letting the property. The Investment Manager reviews reports
prepared by Experian, or other sources, to assess the credit
quality of the Group's tenants and aims to ensure there is no
excessive concentration of risk and that the impact of any default
by a tenant is minimised:
- Credit risk for tenants
The Group's income would be adversely affected if a significant
number of tenants were unable to pay rent or its properties could
not be rented on favourable terms. Certain significant expenditure
associated with each equity investment in real estate is generally
not reduced when circumstances cause a reduction in income from
properties;
- Credit risk management for tenants and property managers
Receivables from tenants are the main credit risk for the Group.
A credit evaluation is performed on the financial condition of
prospective new tenants and a deposit is taken depending on the
credit worthiness of the tenant.
The Group establishes a provision for doubtful debt that
represents its estimates of potential losses with respect to trade
and other receivables.
Investment securities
Investments, other than those in property, are held only in
liquid securities and only with counterparties that have a credit
rating above or similar to the Group. Transactions involving
derivatives are with the counterparty Bank of Scotland Treasury.
Credit and counterparty risk on liquid funds and on interest rate
hedges is limited because the counterparty is a bank with a high
credit rating assigned by international credit rating agencies.
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