THE UNITE GROUP PLC Annual Report and Accounts 2024 190 FINANCIAL STATEMENTS 4.5 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risks (primarily interest rate risk), credit risk and liquidity risk. The Group’s Treasury Policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Details on credit risk can be found in note 5.3. 4.5a) Interest rate risk The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings, and by the use of interest rate swap contracts. Hedging activities are evaluated regularly to align with defined risk appetite; ensuring the most cost- effective hedging strategies are applied. The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. The Group holds its debt finance under both floating and fixed rate arrangements. The floating debt is hedged through the use of interest rate swap agreements. The Group’s guideline has been to hedge 75%–95% of the Group’s interest rate exposure for terms of approximately two to ten years. At 31 December 2024, 89% (2023:96% of the Group’s borrowing was held at fixed rates, driven by lower borrowings as a result of the capital raise in July 2024. Excluding the £450 million (2023: £200 million) of swaps the fixed investment borrowing is at an average rate of 4.1% (2023: 3.1%) following the new bond issuance in June 2024 for an average period of 5.8 years (2023: 4.4 years), including all debt with current swaps the average rate is 3.3% (2023: 2.9%). Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates upon the issuance of forecast fixed rate debt held and the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the curves at the reporting date and is disclosed below. The average interest rate is based on the outstanding balances at the end of the financial year. As the critical terms of the hedge contracts and their corresponding hedged items are the same, the Group performs a qualitative assessment of effectiveness and it is expected that the value of the interest rate swap contracts and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying interest rates. The main source of hedge ineffectiveness in these hedge relationships has historically been the effect of the counterparty and the Group’s own credit risk on the fair value of the hedge contracts, which is not reflected in the fair value of the hedged item attributable to the change in interest rates. No other sources of ineffectiveness emerged from these hedging relationships. However, changes in anticipated draw down of debt in 2022 as a result of planned property disposals have meant that the hedged items were no longer expected to occur. As a result the hedge relationships were discontinued from 1 July 2021 and the interest rate swaps are no longer designated as ‘effective’. The fair value of these instruments is assets of £53.4 million (2023: £56.0 million) with £7.4 million maturing in 12 months (2023: £nil). The interest rate swaps settle on a monthly basis. The floating rate on the interest rate swaps is one-month SONIA (2023: one-month SONIA). The Group will settle the difference between the fixed and floating interest rate on a net basis. At the end of the current year and the previous year, the Group had no cash flow hedges in hedge relationships. The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non- derivative instruments as at 31 December 2024. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the reporting date was outstanding for the whole year. A 1% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 1% higher and all other variables were held constant the Group’s profit for the year ended. As the notional value of the interest rate swap contracts is greater than the amount of borrowing at variable rate, the Group is exposed to fluctuations in interest rates. If interest rates had been 1% higher and all other variables were held constant the Group’s profit for the year ended 31 December 2024 would increase by £3.7 million (2023: £1.7 million). There would be with no impact directly recognised in the Statement of Changes in Equity. The Group’s sensitivity to interest rates has remained reasonably consistent year-on-year. NOTES TO THE FINANCIAL STATEMENTS continued