¹ Other assets includes all amounts shown as trade and other receivables in note 22 except prepayments of £13.2m (2008: £7.1m) for the group and prepayments and sales and social security taxes of £2.7m (2008: £1.0m) for the company. All amounts are non-interest bearing and are receivable within one year.

² Other liabilities for the group includes all amounts shown as trade and other payables in note 24 except deferred income of £34.8m (2008: £33.5m) and sales and social security taxes of £1.9m (2008: £1.0m). For the company, other liabilities represents trade and other payables, excluding £0.8m of sales and social security taxes in 2008. All amounts are non-interest bearing and are due within one year.

All the group’s and company’s financial liabilities designated at fair value through profit and loss are defined as level 2, in accordance with IFRS 7, as they are derived from inputs other than quoted prices which are observable from the liability. There have been no transfers between level 1 and level 2 in 2009 or 2008.

Financial instruments – risk management

The group is exposed through its operations to the following financial risks:

• credit risk;
• fair value or cash flow interest rate risk; and
• liquidity risk.

In common with all other businesses, the group is exposed to risks that arise from its use of financial instruments. The following describes the group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. Further information on risk as required by IFRS 7 is given in the Risk management section and the Risk management and internal control section of the Directors’ report.

There have been no substantive changes in the group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods.

The company has the same risk profile as the group (except tenant credit risk, which does not exist in the company) and therefore no separate discussion has been made of the company.

Principal financial instruments
The principal financial instruments used by the group, from which financial instrument risk arises, are trade receivables, cash at bank, bank overdrafts, trade and other payables, floating rate bank loans, secured bonds, interest rate swaps and interest rate caps.

General objectives, policies and processes
The board has overall responsibility for the determination of the group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to executive management.

The overall objective of the board is to set policies that seek to reduce risk as far as possible without unduly affecting the group’s flexibility and its ability to maximise returns. Further details regarding these policies are set out below:

Credit risk
Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The group is mainly exposed to credit risk from its lease contracts. It is group policy to assess the credit risk of new tenants before entering contracts. The board has established a credit committee which assesses each new tenant before a new lease is signed. The review includes the latest sets of financial statements, external ratings, when available, and in some cases forecast information and bank and trade references. The covenant strength of each tenant is determined based on this review and, if appropriate, a deposit or alternatively a guarantee is obtained.

As the group operates predominantly in central London, it is subject to some geographical risk. However, this is mitigated by the wide range of tenants from a broad spectrum of business sectors.

Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions only independently rated parties with minimum rating of investment grade are accepted. This risk is reduced by the short periods that money is on deposit at any one time. The group does not enter into derivatives to manage credit risk. The quantitative disclosures of the credit risk exposure in relation to trade and other receivables which are neither past due nor impaired are disclosed in note 22.

The carrying amount of financial assets recorded in the financial statements represents the group’s maximum exposure to credit risk without taking account of the value of any collateral obtained.

Market risk
Market risk arises from the group’s use of interest bearing instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk).

Fair value and cash flow interest rate risk
The group is exposed to cash flow interest rate risk from borrowings at variable rates. It is currently group policy that between 40% and 75% of external group borrowings (excluding finance lease payables) are fixed rate borrowings. Where the group wishes to vary the amount of external fixed rate debt it holds (subject to it being at least 40% and no more than 75% of expected group borrowings, as noted above), the group makes use of interest rate derivatives to achieve the desired interest rate profile. Although the board accepts that this policy neither protects the group entirely from the risk of paying rates in excess of current market rates nor eliminates fully cash flow risk associated with variability in interest payments, it considers that it achieves an appropriate balance of exposure to these risks. During both 2009 and 2008, the group’s borrowings at variable rate were denominated in sterling.

The group monitors the interest rate exposure on a regular basis. A sensitivity analysis was performed to ascertain the impact on profit or loss and net assets of a 50 basis point shift in interest rates and this would result in an increase of £0.7m (2008: £1.4m) or a decrease of £0.7m (2008: £1.5m).

The group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps (quantitative disclosures are given in note 26). The group generally raises long-term borrowings at floating rates and swaps them into fixed.

Liquidity risk
Liquidity risk arises from the group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the group will encounter difficulty in meeting its financial obligations as they fall due.

The group’s policy is to ensure that it will always have sufficient headroom in its loan facilities to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain committed facilities to meet the expected requirements. The group also seeks to reduce liquidity risk by fixing interest rates (and hence cash flows) on a portion of its long-term borrowings. This is further explained in the ‘fair value and cash flow interest rate risk’ section above.

The executive management receives rolling three-month cash flow projections on a monthly basis and three-year projections of loan balances on a regular basis as part of the group’s forecasting processes. At the balance sheet date, these projections indicated that the group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

The group’s loan facilities are spread across a range of UK banks so as to minimise any potential concentration of risk. The liquidity risk of the group is managed centrally by the finance department.

Capital disclosures
The group’s capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and minority interest).

The group’s objectives when maintaining capital are:

• to safeguard the entity’s ability to continue as a going concern so that it can continue to provide returns for shareholders; and
• to provide an above average annualised total return to shareholders.

The group sets the amount of capital it requires in proportion to risk. The group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. Consistent with others in its industry, the group monitors capital on the basis of balance sheet gearing and property gearing. During 2009, the group’s strategy, which was unchanged from 2008, was to maintain the balance sheet gearing below 80% in normal circumstances. As was identified in last year’s annual report and accounts, the definition of profit and loss gearing has been changed in order to align it more closely to the group’s most commonly used interest cover ratio covenant. These three gearing ratios are defined in the List of definitions and are derived below: