3.2.1 Real estate market risks

The management of real estate market risks is one of the core competencies of the Züblin Group. Essentially, these risks are comprised of two specific categories – the cyclical risks of the real estate market and rental market risk.

Cyclical real estate market risks are related to fluctuations inherent to the overall commercial real estate market and the related impact on the valuations of the Züblin Groupʼs investment portfolio. These risks can be partially mitigated by the Züblin Groupʼs strategy of geographical diversification.

Risks in connection with a change in discount rates as well as changes in market rents are risks that affect the entire property market. The sensitivity analyses in note 5.1 show these impacts on the property valuations.

Rental market risks relate to the use of the property, the tenant mix, the creditworthiness of the tenants, the vacancy rate, the ability to increase rents, and the recoverability of running costs. Through its local asset management activities, the Company is constantly managing controllable risk factors, and is focused on proactively mitigating these risks where possible. In its regular meetings Group and Asset Management evaluate the overall concentration risk of its tenant structure, reviews any material changes to the credit standing of its significant tenants, as well as current or pending changes to the vacancy rates in all markets. Where necessary, the Board of Directors is alerted to material changes in the Züblin Groupʼs specific risk profile.

3.2.2 Renovation risks

Renovation projects entail a variety of risks. These include obtaining the relevant building permits, the budgeting of costs and adherence to the budget. Moreover, there is also uncertainty as to whether renovation work will be completed on time and with the required quality, and about the financing and subsequent letting of the property. In order to minimize these uncertainties the Züblin Group works with carefully selected partners and maintains strict cost control over the projects. In addition projects are only started once the financing has been secured. Züblin Groupʼs asset management actively begins to market the properties for letting at the latest when the construction work begins.

3.2.3 Selling risks

The sale of investment properties is subject to the market environment prevailing at the proposed date of the sale and the risks associated with this. In order to mitigate these risks Züblin obtains internal and external market analyses before taking any divestment decision. Moreover, unpredictable economic developments and local circumstances can cause delays in planned selling transactions.

3.2.4 Financial risks

Financial risk management within the Züblin Group is performed in accordance with the principles established by the Board of Directors. In particular, these principles govern the management of liquidity and the procurement of short-term and long-term loans.

Financial market risks

The main financial risks encountered by the Züblin Group are market risks. These risks may include

1. currency risks arising from transactions and investments in countries outside Switzerland
2. interest rate-related fair value risks, where fluctuations in market interest rates can result in a change in the fair value of a financial instrument
3. interest rate-related cash flow risks, where changes in market interest rates can result in a change in the future cash flows of a financial instrument

Currency risks

Currently Züblin Groupʼs investment property portfolio lies to 100% in Switzerland. Therefore no currency risks arise from the portfolio. 

The Company would also face currency risks relating to the equity invested in the euro zone which is not hedged. Thus, Group Management, together with the Board of Directors, actively monitors the impact of changes in the Swiss Franc – Euro exchange rate on the Züblin Groupʼs total equity. As of 31 March 2022 no major equity is invested in the euro zone anymore. Therefore, as in the previous year, a change in the Swiss Franc – Euro exchange rate would have no impact on the Züblin Groupʼs total equity. 

Interest rate risks

Interest rate risks arise from fluctuations in interest rates and movements in the yield curve. These risks are only incurred insofar as is necessary for optimal funding of the investment property portfolio. Interest rate risks are minimized by selecting suitable interest rate and maturity structures. The Züblin Group does not enter into speculative financial transactions of any kind.

Changes in interest rates have an effect on the Züblin Groupʼs balance sheet and earnings situation. In terms of interest expense, they primarily result in changes in the expense relating to mortgage loans. The Züblin Group has currently unhedged financial liabilities of TCHF 67,000 (previous year TCHF 67,000). As in the previous year, a change in the 12-month SARON interest rate by 50 basis points would have no impact on the Companyʼs earnings due to the prevailing negative interest.

Refinancing risks

Züblin intends to finance its investment properties up to 60% with mortgages. The Group depends on the ability and willingness of financial institutions to extend or offer loans to the Group on reasonable term, including term regarding collateral requirements. The general conditions for real estate financing are subject to constant change. Any negative development of general economic, regulatory and business conditions may adversely impact the groups ability to borrow from banks or may significantly increase the cost of such borrowings. In order to minimize refinancing risks Züblin seeks to continuously diversify its borrowing.

Credit risks

The Company is primarily exposed to credit risk through its rental activities. This risk is monitored at a local level and is dispersed among a large number of tenants. If there is a higher risk with an individual tenant, asset management remains in regular contact and proactively monitors its financial position. As of the current year-end, there were no tenant accounts significantly in arrears. Within the Züblin Group, default risks mainly relate to rental receivables. In respect of rental receivables, the Züblin Group performs regular, extensive analyses of the collectability of outstanding receivables on a local basis, and where necessary, positions are impaired. Impaired receivables are written off if, in the opinion of group and asset management, there is a high probability that part or all of the receivable will not be collected, or if debt collection action taken against the debtor is unsuccessful.

Credit risk arising from the investment of liquidity is limited by the fact that the Züblin Group works exclusively with banking partners with excellent credit standing. The Züblin Group itself receives no collateral for its credit risk, therefore the theoretical risk of default equals the positive book values of the financial instruments.

No significant default risk existed at the current or previous financial year-end (see note 5.4) so that, in the opinion of Executive Management, the risk that partners fail to meet their contractual obligations is very low, although it cannot be entirely ruled out. Influences on trade and credit market conditions, such as the COVID-19 pandemic, may result in uncertain and rapid changes in tenant credit ratings and lower lease tenure.

In the case of financial assets/liquidity that are neither overdue nor impaired there were, as in the previous year, no indications that the debtors will fail to meet their payment obligations.

Liquidity risks

The Züblin Group aims to ensure a balance between maintaining ongoing coverage of its cash requirements and ensuring sufficient financial flexibility through the use of overdraft facilities and short-term loans. Cash balances are monitored on a local as well as a Group basis, and are reviewed at the Group level on a weekly basis. A detailed cash management plan which takes into account future investments, debt service and other operational cash needs, as well as anticipated cash receipts, is prepared monthly and action is taken where necessary to ensure that cash reserves are sufficient to cover operational needs. Furthermore, this monthly liquidity analysis is reviewed by the Board of Directors on a quarterly basis. As at 31 March 2022 the Züblin Group had access to unused credit facilities of kCHF 33,000 (previous year: kCHF 51,000). The Group also held cash and cash equivalents of kCHF 2,907 (previous year kCHF 2,239) at 31 March 2022. 

Equity risks/capital management

The Züblin Groupʼs primary aim when managing its capital is to secure a level of equity appropriate for an internationally active real estate management company. The primary tool the Züblin Group uses to monitor its equity is its consolidated equity to total assets ratio. The Züblin Group has set its target at a minimum equity to total assets ratio of 40%. The Züblin Group believes that this level of equity ensures a high credit rating while allowing sufficient leverage to grow the business and maximize shareholder value. In order to adjust the equity ratio and to maintain the requisite capital structure, the following measures can be utilized by the Züblin Group: the adjustment of dividends resp. capital repayments or the issuance of new shares.

3.2.5 Regulatory and tax risks

Changes in legislation, regulations, standards, interpretations and the like can have a financial impact on Züblinʼs business environment. These risks are closely monitored and managed.

3.2.6 Internal organization and human resources

The risks associated with the outsourcing of certain tasks and with the filling of roles internally are also monitored on an ongoing basis.