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Risk Management

Over the past year SEGRO has been reviewing its risk management processes and procedures and we have been assisted in this exercise by KPMG. The continued growth of our business, our expansion into new markets and territories and the increased regulatory pressures that we face create considerable challenges, opportunities and uncertainties for the Group.

SEGRO views effective risk management as integral to day-to-day business decision making and encourages all of its managers to assess risk on a continuous basis. We also carry out regular, formal risk assessments to identify and evaluate risks and furthermore to identify controls and other risk management techniques. These assessments are underpinned by the following key elements:

Identifying significant risks to the achievement of the Group’s strategic objectives
Evaluating the risks in terms of the magnitude of their impact and the likelihood of their occurrence
Developing action plans to manage risks, including the development of internal controls
Reporting to the Audit Committee and the Board on the risk management process, the assessment of key risks and the status of risk management plans

Environmental, Social and Governance risks are separately addressed in our Corporate Responsibility Report.

Key Business Risks

Description of Risk and Potential Impacts		Mitigating factors and risk management strategies

General Property Investment Risks
Economic downturn causing a difficult trading environment for our customers and reduced investor appetite for real estate assets. Loss of customers leading to a reduction in income and profits. Reduction in the value of our investment portfolio or inability to sell properties at acceptable prices.		Broad geographic spread of investments across Europe reduces dependence on any single market location. Active monitoring and review of the portfolio to identify assets at risk of underperforming.

Obsolescence in the portfolio. Our assets fail to comply with new legislation. Leasing becomes increasingly challenging and capital expenditure rises.		Assets are reviewed regularly and customer requirements sought through independent surveys. There is an active programme of re-cycling and refurbishment. Where possible a 'future proof' of the buildings is considered at the design stage.

Development Risks
Inability to source sufficient land and risk of holding too much development land. Dilution of returns due to capital invested in unproductive assets or inability to grow the portfolio and deliver future returns due to lack of growth opportunities.		The operating management and the Group Capital Approvals Committee carefully manage the type, amount and location of development land. See details of development pipeline in the Property Analysis.

Failure to obtain, or delay in obtaining, planning consent on land held for development. Erosion of expected financial returns due to time delays or possible impairment in value of land holdings.		Most sites acquired with outline zoning or planning consent already in place.

Construction costs exceed budgeted levels or there are delays in completing construction projects. Erosion of expected financial returns.		Contingencies built into all development appraisals. Transfer of most risk to construction partners. Use of specialist in-house project managers. Regular project reviews.

Letting risk on speculative development schemes. Erosion of total returns from capital invested in non-income producing developments.		Total exposure to speculative schemes is carefully monitored by the Group Capital Approvals Committee and details reported to the Board. Sensitivity analysis carried out on all potential investments to ensure target returns can be achieved with delay to leasing assumptions. Pace of development programme adapted to market conditions.

Health and safety risks - the risk of injury or illness to the Group's or third parties' construction workers. Failure to achieve the Group's CR objectives and damage to the Group's reputation and possible criminal or civil action.		Group Health & Safety Manager establishes appropriate policies and monitors accident reports - all significant accidents are reported to the Board. Health & Safety training provided to all employees.

Geographic Risks
The political and economic risks associated with investing outside the UK, particularly in some of the emerging economies. Loss of value of investments or failure to achieve adequate risk adjusted returns.		Careful analysis of each market is undertaken before investing in new markets. Local offices set up in all significant markets, staffed by employees who understand their local markets.

Business Continuity
A major disaster or loss of infrastructure. Significant interruption to the business resulting in a loss of revenue and reputation.		Key legal and other important documents are retained by external advisors. Back ups of all electronic files are undertaken regularly. If necessary, colleagues are able to work remotely and we continue to refine our business continuity plans.

Financial Risks
Liquidity risk - a lack of available funds to meet the Group's needs. Inability to fund developments, and requirement to sell properties at wrong point in the cycle.		The Group has a flexible funding strategy with substantial undrawn funds available. Funds availability and financial ratios regularly monitored by the Group Treasurer and reported to the Board quarterly.

Interest rate risk. Increased borrowing costs if interest rates rise.		The majority of borrowings are fixed - see 2007 Annual Report.

Currency risk. Reduction in the sterling value of assets or earnings if foreign currencies depreciate against sterling.		The majority of foreign currency assets are matched by borrowings of equal amount denominated in the same currencies.

Tax risks - REIT compliance. Potential tax penalties or loss of REIT status by failing to comply with the new REIT rules in the UK.		Internal monitoring procedures are in place to track compliance with the appropriate rules.