Risks

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Principal risks

Development Securities' business model is defined by the nature and extent of the risks which the Directors consider appropriate to its skills and size. Project specific risk and cumulative portfolio risk are key measures by which the Executive Directors appraise potential new transactions. The Group’s risk profile is maintained under continual review by its Risk Committee, which meets quarterly, and by the Board.

The Directors consider the following to be the principal risks and uncertainties facing the business. They may be grouped as external risks, whose occurrence is beyond the control of the Group, and business risks, which the Directors choose to manage as part of the Group’s operations.

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External risks

Market risk

The real estate market is closely linked with the health of the wider economy, and susceptible to both national and global shocks. Recessionary conditions can undermine the demand for both new developments and existing investment property, and hence significantly reduce their value. Specifically there is a risk to real estate values in the potential for the banks to accelerate their deleveraging in the sector, perhaps forcing a large amount of property on to the market.

Current and prospective market conditions form a principal focus for both executive management and the Board, as described through the following pages.

Scarcity of opportunities

The Group’s business is transactional, and requires a flow of opportunities, which can be sparse either because of lack of market demand for new product or through excess equity liquidity forcing uncompetitive market pricing.

The Group maintains a flexible approach to market opportunity, resisting the temptation to chase activity when prices move too high, and seeking sectors and locations where value can be generated, as described in the Operating Review.

People risk

The Group's success depends on the ability and experience of its Directors and management. The departure of key individuals or the failure to attract and retain new talent can result in the loss of core competencies and industry knowledge and networks.

The Group aims to motivate and reward its team appropriately and competitively, as described in the Remuneration Report, and the Board keeps the strength and depth of the team under continual review.

Counterparty, funding, liquidity and interest rate risks
Counterparty and other financial risks are described in the Financial Review.

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Business risks

Planning risk

Procuring an appropriate and valuable planning consent is a key element of the creation of value through property development. Securing planning permission is a complex and uncertain process, with applications subject to objection from a wide range of potential stakeholders, and hence prone to delay, modification and rejection.

The Directors rely on their experience and local knowledge to maximise the chance of success and reduce the risks and costs of failure to a minimum.

Construction risk

Construction is subject to significant risks of cost overruns, delay and the failure of an appointed contractor.

The Group examines these risks in each case, conducting appropriate due diligence on the capabilities and financial security of its prospective contractors. The Group deploys its own experienced project managers to minimise the likelihood and impact of the above risks.

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Structured selection
and management
of risk

Further reading

• Operating Review