Invista European Real Estate Trust Full Year -24-

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.