annington annual rep 2019-web - Page 24



Strategic report | Principal risks and uncertainties
Principal risks and uncertainties
Area of potential uncertainty
Risk
Strategy
Area of potential uncertainty
Risk
Strategy
The Group has no control over the
quantity, location and timing of
property releases by the MoD.
If the MoD releases a significant number of
properties undesirable in quality or location, or if
properties are released over a short period of time,
the Group may be unable to sell all, or any, such
properties if the market is depressed. The loss of
the rent from the MoD, combined with the poor
sales of the released properties could have an
adverse impact on the Group’s business.
The Board recognises this and
has maintained a policy of
keeping internal resources at
minimum levels. All principal
activities are outsourced to
third parties, which can provide
the necessary skills in the right
mix and location. This enables
the Group to flex outsourcing
to meet its operational needs
according to stock levels and the
prevailing market conditions.
The pursuit of a PRS growth
strategy increases the Group’s
exposure to this market.
The PRS sector in the UK is in its infancy and there
are few external benchmarks against which the
Group can measure its performance. To grow this
business, the Group will have to acquire assets
on acceptable terms, gather quality information
to support decision making and manage the PRS
expansion in the Group.
The Group scrutinizes potential
opportunities and project
plans utilising the 20+ years
of experience gained in the
residential rental market,
meaning it has in-depth
knowledge of local market
dynamics, including rents,
valuations and occupancy rates.
Multiple courses of action are
considered and investment
appraisals are carried out before
new property is purchased to
ensure that there are sufficient
returns or that a strategic
advantage can be gained.
The MoD has already satisfied their obligation
of 13,213 minimum releases as part of the 1996
Acquisition.
In recent years, the MoD has released a relatively
low number of Units, resulting in reduced property
stock being available for sale. However as part of
the Arbitration Agreement, the MoD are committed
to releasing a total of 3,500 units, with a target of
500 units per year measured on a two year rolling
average. Additionally, Annington will provide a
dilapidations waiver of £7,000 on 500 units
per year.
The Group’s operational and
financial performance could be
affected by failures within or by
a key third party supplier, service
provider or stakeholder.
Performance of key entities, for instance, The
Defence Infrastructure Organisation (“DIO”),
Touchstone, LSL, FTI Treasury and the MoD could
have an adverse effect on the Group. Internal
issues may impact its ability to work with the Group
efficiently and knowledgeably and to perform to an
acceptable level.
24 | Annington Limited Annual Report & Accounts 2019
The Group will be exposed to increased market
forces and competitive pressures, which may impact
returns and/or decrease asset values.
The Board is of the view that the
long-term demand for housing in
the UK will continue to outstrip
supply and that demand for
market renting will be stronger
during poor selling periods,
reducing the overall impact on
the Group’s position.
The Board recognises that the
decision regarding the future
rate of property releases rests
entirely with the MoD and, when
reviewing employee resourcing,
the Board recognises the
possibility that activity levels
and market conditions may vary.
However, given the incentive of
dilapidations relief, it is expected
that the MoD will provide a
minimum of 500 units a year.
The business will continue to
examine and benefit from the
best options on a site-by-site
basis and continue to operate
dual sales and rental strategies
where appropriate.
The Group limits its exposure to
market forces by expanding its
portfolio incrementally so that
negative effects are limited.
Property valuation is inherently
subjective and uncertain.
Valuations are inherently subjective due to the
individual nature of each property and are based on
assumptions that may not prove to be accurate.
There is a risk that the valuations of the Group’s
properties will not be reflected in any actual
transaction prices, even where any such transactions
occur shortly after the relevant valuation date.
Failure to achieve successful sales of properties in
the future at commercially acceptable prices could
have an adverse effect on the Group’s business,
results of operations and financial condition.
Unsound valuations could also undermine the
Group’s ability to negotiate favourable rent
increases during the Group’s five-yearly Rent
Reviews with the MoD.
The Group manages this risk by
ensuring that regular valuations
of the Group’s properties
are performed by external,
independent, third party
professional valuers, registered
with the Royal Institute of
Chartered Surveyors.
The Group maintains
interaction with members of
key third parties. Considerable
effort continues to be made
to develop and nurture
relationships to maintain
operational efficiency. The
Group will continue, as it always
has done, to encourage more
co-operation and partnership.
Annington Limited Annual Report & Accounts 2019 | 25

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