3. RISK MANAGeMENT
The Züblin Group attaches considerable importance to active risk management. The Company has an integrated risk management program which identifies and evaluates the material risks facing the Company and mitigates them through appropriate action. The Board of Directors is charged with overseeing the Companyʼs risk management activities and reviews the status of all risks that have been identified, including the action taken to mitigate them, with Group Management at least quarterly in order to reduce or eliminate these risks.
The Züblin Groupʼs primary business is the acquisition of real estate, mainly in the German-speaking markets, and the creation of value through the active asset management and sale of such properties. To finance new acquisitions of investment properties, new loans are taken out in the currency of the relevant country for up to 60% of the investment. The loans are floating-rate mortgages. The maturities and conditions attaching to these loans depend on the rental situation and the planned timeframe for the sale of the relevant properties.
Business risks are those risks which are inherent to the business strategy or may arise as a consequence of business activities. A clear description of these risks enables shareholders to assess the risk/return profile of the Company and its various investment products. The primary risks for the Züblin Group are comprised of the following:
- Real estate market risk
- Renovation risks
- Selling risks
- Financial risks
- Financial market risks
- Credit risks
- Liquidity risks
- Equity risks/capital management
- Regulatory and tax risks
- Internal organization and human risks
3.2.1 Real estate market risks
Züblin’s management of real estate risk essentially comprises two specific categories: cyclical market risk and rental 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 Group’s investment portfolio. The investment strategy pursued by the Züblin Group is designed to reduce market risks as far as possible by means of geographically diversified investments.
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.
The rental risk relates to the type of use of an investment property, the tenant mix, the creditworthiness of the tenants, the vacancy rate, the potential for rent increases and the recoverability of operating costs. With our local asset management, we monitor the controllable risk factors and proactively decide on measures to best mitigate them. As part of their work, Executive Management and Asset Management review any cluster risks in the tenant structure, any material changes in the creditworthiness of the most significant tenants, as well as current or forecast changes in vacancy rates within all relevant markets. Where necessary, the Board of Directors is informed of material changes within the Züblin Group’s specific risk profile.
3.2.2 Renovation risks
Renovation projects entail a variety of risks. These are related to the building permit, the budgeted costs and their compliance. Furthermore, there are uncertainties with regard to the quality and timely completion of a project, as well as with regard to financing and subsequent letting. To mitigate these uncertainties, the Züblin Group works with selected partners and maintains strict project and cost controls. In addition, projects are only started when financing is secured. The letting of properties is actively taken up by the Züblin Group’s Asset Management at the latest when construction work begins.
In particular, there is a risk of further discounts on the sale of potential non-strategic investment properties.
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. In particular, there is a risk of further discounts on the sale of potential non-strategic investment properties. 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
- currency risks arising from transactions and investments in countries outside Switzerland
- 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
- 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
Currently Züblin Group’s 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 Group’s total equity. As of 31 March 2023 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 Group’s 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 Züblin’s Group 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 kCHF 65 000 (previous year: kCHF 67 000). A change in the 12-month SARON interest rate by 50 basis points would have an impact on the Company’s earnings of kCHF 325 (previous year: kCHF 0).
Züblin aims to finance up to 60% of its investment properties by means of 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 mitigate refinancing risks, Züblin strives to continuously diversify its borrowings.
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.
As of the balance sheet date, as in the previous year, there are no significant default risks - cf. note 5.4 - so that, at the discretion of the Group’s Executive Management, the risk of partners not meeting their contractual demands is very low, but cannot be ruled out. Influences on trade and credit market conditions can result in uncertain and rapid changes in tenant credit ratings as well as lower tenancy stability.
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.
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 Group level and are reviewed on a weekly basis. A detailed liquidity 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 liquidity analysis is reviewed by the Board of Directors on a quarterly basis.
As at 31 March 2023 the Züblin Group had access to unused credit facilities of kCHF 35 000 (previous year: kCHF 33 000). The Group also held cash and cash equivalents of kCHF 3 161 at 31 March 2023 (previous year: kCHF 2 907).
Equity risks/capital management
The Züblin Group’s 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%. Züblin 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 Züblin’s business environment. These risks are closely monitored and managed.
3.2.6 Internal organization and human resources
The risks associated with the outsourcing of tasks and with the filling of roles internally are monitored on an ongoing basis.