4  Notes to the consolidated balance sheet

4.1  Investment real estate

Within the commercial real estate portfolio, the value-enhancing investments relate to the Toni site, Zurich (CHF 12.1 million), Grüngasse 27–31 / Badenerstrasse 119–133, Zurich (CHF 2.2 million) and eight other properties (CHF 3.4 million).

With the sale of four yield-producing properties, the market value of those properties amounting to CHF 93.2 million (CHF 95.0 million in acquisition costs and CHF –1.8 million in revaluation) as at 31 December 2015 was eliminated from assets.

The reclassification from investment real estate under construction to yield-producing properties relates to the commercial property Schiffbau­strasse 7, Zurich, completed as at 1 June 2016, recognised at CHF 27.0 million (CHF 22.6 million in acquisition costs and CHF 4.4 million in revaluation). The Fangletenstrasse project in Bülach (recognised at CHF 7.8 million) was ­reclassified from development real estate to investment real estate under construction as a result of the start of building.

In terms of individual regions and property types, the breakdown of acquisition costs and market values as at 31 December was as follows:

Costs incurred in connection with the acquisition (purchase price, notary’s fees, property transaction costs, commission payments) are recognised under acquisition costs, as are the actual production costs of the additions from construction activity and value-enhancing investments and total renewals.

The revaluation of the investment real estate is based on the valuation conducted on 31 December by the external real estate valuer using the discounted cash flow method (see pages 132 to 138 of the Annual Report).

This involves the yield potential of a property being determined on the basis of future revenue and expenditure. The resulting payment flows correspond to current and forecast net cash flows. The annual payment flows are discounted to the valuation date. The discount rate used for this purpose is based on the interest paid on long-term, risk-free investments plus a specific risk premium. The latter takes account of market risks and the associated illiquidity of a property. The discounting interest rates vary according to macro- and micro-locational considerations and depending on real estate segment.

This valuation process involves the real estate valuer inspecting each property at least once every three years, as well as after additional acquisitions or on completion of major alterations. The real estate valuer calculates the payment flows on the basis of the rent rolls provided by Allreal (cut-off date
1 January of the following year), all major commercial leases, detailed budgets and medium-term planning per property, as well as planned and executed investment projects. From these parameters, the real estate valuer infers his view of the contractual market rents achievable on a sustainable basis and the future real estate expenses. The results of the valuation are discussed with Group Management, which assesses their plausibility.

As in the previous year, Jones Lang LaSalle AG acts as the real estate valuer on a contract basis. There are no further business connections or investments between Allreal and the real estate valuer.

The valuation of the yield-producing properties as at 31 December 2016 was based on the following rent bandwidths for the various regions and types of properties:

A 5% increase or reduction in the market rents (serving as a basis of the valuations) of all investment properties would result in an increase or reduction in value of CHF 161 million (2015: CHF 149.0 million).

When determining the highest and best use, the external real estate valuer identified the Escher-Wyss site, Zurich, as a yield-producing property that satisfies the requirements of IFRS 13. The decision not to exploit the potential value of these properties is connected with existing and not immediately terminable rental contracts, some of which run over several years.

On the basis of a sensitivity analysis of investment real estate with a market value of CHF 3574.5 million on the balance sheet cut-off date (31.12.2015: CHF 3525.2 million), an isolated change in discount and capitalisation rates by 50 basis points would lead to an increase or decrease in value of CHF 530.0 million or CHF –408.2 million, respectively (31.12.2015: CHF 468.2 million/CHF –364.3 million). The bandwidths for the discount and capitalisation rates used in the sensitivity analysis range between 2.50 and 3.70% (residential properties) and between 3.20 and 5.40% (commercial properties) for lower interest rates and between 3.50 and 4.70% (residential properties) and between 4.20 and 6.40% (commercial properties) for higher interest rates.

4.2  Development real estate

4.3  Other property, plant and equipment

Other property, plant and equipment comprises capitalised fit-out costs and installations for commercial and sales premises at the Zurich site (CHF 0.1 million), IT equipment (CHF 0.1 million) and works of art (CHF 0.9 million).

4.4  Financial assets

In the Real Estate division, Allreal provided tenants with prefinancing of costs for interior fit-outs of business and commercial premises which will be repaid by the tenants over the term of their leases on an annuity basis. Final maturities for repayment of the prefinanced tenant fit-outs run until 2034, with interest rates at 1.00 to 5.55% p.a., depending on the individual contractual arrangements. Totalling CHF 123.9 million (31.12.2015: CHF 128.9 million), the largest individual positions for tenant fit-outs on the Toni site, Zurich, and on Zürcherstrasse, Winterthur, are with the canton of Zurich as counterparty. Interest received in the year under review amounted to CHF 1.8 million (2015: CHF 1.8 million) and was credited to financial income.

As at the balance sheet cut-off date, the prefinanced tenant fit-outs break down as follows:

4.5  Purchase of companies

On 28 July 2016, Allreal Generalunternehmung AG acquired 100% of the share capital of Bülachguss AG, Bülach, at a purchase price of CHF 39.3 million paid in cash. No transaction costs were incurred. Under the acquisition, one employee was taken on at unchanged terms.

Between the acquisition date and 31 December 2016, Bülachguss AG generated income of CHF 0.0 million and a contribution to net profit of CHF –1.5 million. This includes CHF –1.5 million (after deferred taxes) in revaluations of part of the development real estate which, subsequent to acquisition, was reclassified as investment real estate (Fangletenstrasse Bülach project).

If the acquisition of Bülachguss AG had taken place on 1 January 2016, the consolidated operating income would have been CHF 0.6 million higher at CHF 826.0 million and net profit would have increased to CHF 173.8 million.

The following identifiable net assets were taken over as a result of the acquisition:

4.6  Intangible assets

4.7  Trade receivables

The CHF 8.8 million in receivables due to the Real Estate division include balances (not yet due) owed by property management companies.

The actual losses on receivables in the Projects & Development division amounted to CHF 0.0 million (2015: CHF 0.1 million). For income losses in the Real Estate division see 3.1.

The maturities structure for the non-value-adjusted receivables of the Projects & Development division was as follows as at 31 December:

The stated values conform to the valuation principles described under 2.14 after deduction of prepayments made for each project which as at 31 December is under construction for third parties and has not yet been billed and paid.

4.8  Other receivables

4.9  Cash

Of the cash amounting to CHF 21.4 million (31.12.2015: CHF 23.4 million), CHF 16.7 million is freely disposable in the form of current account balances and CHF 4.7 million can only be used for certain third-party construction projects of the Projects & Development division. As at the balance sheet cut-off date, all funds are invested at standard market conditions with Swiss banks with at minimum a BBB+ rating (if rated).

4.10  Share capital

As at the balance sheet cut-off date, the share capital of Allreal Holding AG comprises 15 942 821 registered shares with a par value of CHF 50 each (fully paid up). Each share carries one vote and confers entitlement to attend the general meeting if entered in the share register.

Shareholdings developed as follows:

On 31 December 2016, Allreal held 12 000 treasury shares (31.12.2015: 33 220 shares). The average purchase price per share stands at CHF 139.97 (31.12.2015: CHF 134.38). The total purchase price is deducted from consolidated equity.

The Board of Directors is authorised by the annual general meeting to increase the share capital – excluding the subscription rights of shareholders as applicable – until 15 April 2018 to acquire businesses, business units, participating interests or real estate through an exchange of shares, for financing or refinancing the acquisition of businesses, business units, participating interests or investment projects, or for the purpose of an international placement of shares worth up to CHF 50.0 million by issuing up to 1 000 000 registered shares each with a par value of CHF 50 (authorised capital).

For the purpose of issuing convertible bonds, warrant bonds or other financial instruments, the annual general meeting of 31 March 2006 created – excluding the subscription rights of shareholders – conditional capital of up to CHF 125.0 million through the issue of up to 2 500 000 registered shares with a par value of CHF 50 each. Bearers of the convertible and/or warrant bonds are entitled to subscribe to the new shares. This conditional capital decreased by CHF 0.2 million to CHF 124.8 million (as at 31 December 2016) following the conversion of convertible bonds into shares in previous years.

Further, Allreal Holding AG has conditional capital of CHF 10.0 million (200 000 registered shares at a par value of CHF 50 each) at its disposal for the purposes of issuing options to the members of the Board of Directors and management. This conditional capital has not been drawn on.

The Board of Directors will propose to the Allreal Holding AG annual general meeting of 21 April 2017 a distribution of CHF 5.75 per share, corresponding to a total amount of CHF 91.7 million, in the form of a repayment of reserves from contribution of capital. In 2016, CHF 91.6 million in reserves from contribution of capital were distributed to shareholders, corresponding to CHF 5.75 per share. Treasury shares are not entitled to a dividend.

4.11  Borrowings

Maturity of liabilities at nominal values

The financial liabilities of Allreal Group consist of bank loans secured by mortgage (fixed advances and fixed-rate mortgages) and five bond issues. The bank loans in the form of fixed advances are extended on a rolling basis. Apart from the bond issues, only bank loans with contractually agreed remaining terms to maturity greater than twelve months are reported as long-term financial liabilities.

The following bond issues with a total par value of CHF 645 million and a book value of CHF 644.4 million are recognised under borrowings:

1.375% bond issue 2015–2025

As at 31 December 2016, the 1.375% bond issue is recognised at CHF 100.4 million in long-term borrowings. During the period under review, CHF –0.1 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 1.375% actually payable, the expense – corresponding to an effective interest rate of 1.32% – is also deferred to the income statement.

0.625% bond issue 2016–2024

As at 31 December 2016, the 0.625% bond issue is recognised at CHF 149.4 million in long-term borrowings, and during the period under review CHF 0.1 million was spent on the amortisation of issuing costs. In addition to the ­interest rate of 0.625% actually payable, the expense – corresponding to an effective interest rate of 0.68% – is also deferred to the income statement.

0.75% bond issue 2015–2021

As at 31 December 2016, the 0.75% bond issue is recognised at CHF 120.4 million in long-term borrowings. During the period under review, CHF –0.1 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 0.75% actually payable, the expense – corresponding to an effective interest rate of 0.67% – is also deferred to the income statement.

2.00% bond issue 2013–2020

As at 31 December 2016, the 2.00% bond issue is recognised at CHF 149.4 million in long-term borrowings. During the period under review, CHF 0.2 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 2.00% actually payable, the expense – corresponding to an effective interest rate of 2.12% – is also deferred to the income statement.

1.25% bond issue 2014–2019

As at 31 December 2016, the 1.25% bond issue is recognised at CHF 124.8 million in long-term borrowings. During the period under review, CHF 0.1 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 1.25% actually payable, the expense – corresponding to an effective interest rate of 1.32% – is also deferred to the income statement.

As at 31 December 2016, fixed advances amounting to CHF 680.0 million and fixed-rate mortgages amounting to CHF 276.3 million (at nominal values) are in place, all of which were taken out with Swiss banks or insurance companies.

On the balance sheet cut-off date, borrowings (excluding bond issues) at nominal values existed towards the following banking groups and insurance companies:

The average interest rate of all financial liabilities as at 31 December 2016 is 1.67% (31 December 2015: 2.15%).

The average interest lock-in period for all financial liabilities as at 31 December 2016 is 36 months (31 December 2015: 52 months).

4.12  Provisions

The provisions for construction guarantees cover existing risks arising from completed projects of the Projects & Development division. The other provisions comprise possible outflows of funds arising from pending litigation and recognition of the net pension commitments under employee pension plans.

Short-term provisions

Long-term provisions

The allocation of CHF 8.7 million to other long-term provisions relates to the change in net pension commitments under employee pension plans; see 3.11.

The provisions were reassessed and adjusted as at the balance sheet cut-off date. In the assessment of the company, the provisions formed are necessary to reflect legal or de facto liabilities arising from previous events in connection with which a cash outflow is likely. The amounts and temporary classification are based on estimates and as such are subject to uncertainties.

Provisions are classified as short-term or long-term, depending on whether they are expected to be utilised within one year or later.

4.13  Other long-term liabilities

Other long-term liabilities totalling CHF 71.8 million as at 31.12.2015 relate to the negative replacement values of the interest rate swaps (hedge accounting) with residual maturities of more than twelve months.

4.14  Trade payables

The reported values represent liabilities after deduction of corresponding counterclaims for each project, in compliance with the valuation principles described under 2.20; see also 4.7.

4.15  Prepayments for development real estate

4.16  Other current liabilities

As at the balance sheet date, all holiday entitlement not yet utilised by employees is evaluated on the basis of individual rates of pay and is recognised as an accrual in the consolidated financial statements. As at 31.12.2016, this accrual amounted to CHF 1.6 million (31.12.2015: CHF 1.9 million).

Accrued expenses and prepaid income essentially comprise accrued interest expenses arising from financial liabilities, real estate expenses or operating expenses not yet settled and remuneration not yet paid to the Board of Directors and Group Management.