Notes to the consolidated financial statements

1.1  Business activities

Allreal Group is a real estate company which operates exclusively in Switzerland with the main focus on the Zurich business region. It is involved in the development and management of its portfolio of residential and commercial real estate and engages in management activities both for its own yield-producing properties and on behalf of third parties (Real Estate division). The general contractor activities encompass project development and the realisation, purchase and sale of properties (Projects & Development division).

Allreal Holding AG (parent company) has its registered office in Baar, Switzerland, and is listed on SIX Swiss Exchange.

On 13 February 2018, the Board of Directors of Allreal Holding AG approved the consolidated financial statements for publication. They are also subject to the approval of the annual general meeting of Allreal Holding AG of 20 April 2018.

1.2  Presentation of accounts

The consolidated annual accounts are based on the individual company accounts, which were prepared in accordance with uniform Group accounting standards as at 31 December 2017. The consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) and conform to the Listing Rules as well as Article 17 of the Financial Reporting Directive (DFR) of SIX Swiss Exchange and with Swiss law.

The same principles of accounting apply as for the 2016 consolidated financial statements. See 2.29. in connection with the valuation uncertainties.

The scope of consolidation of Allreal Group remained unchanged in the 2017 financial year.

In the 2017 consolidated financial statements, Allreal applied the following new IFRS standards and interpretations for the first time:

These IFRS changes have no significant impact on the consolidated financial statements.

Some new or amended IFRS standards and interpretations have been adopted by the IASB, but will only enter into force in a subsequent accounting period. The new developments or amendments are listed in the following table, specifying the financial year in which the adjustment enters into force at Allreal.

IFRS 15

The standard contains new principles for recognising revenue. To date, revenue and income on the sale of development property have been recognised on transfer of ownership of the respective development real estate unit. With effect from 1 January 2018, Allreal will recognise revenue and income by the percentage of completion (POC) method as of the time the contract of sale of the development real estate unit is notarised.

In cases where the contract of sale had been notarised but ownership had not been transferred as at 31 December 2017, gains on the sale of development real estate are taken to equity with no impact in income. This concerns twelve units in the Kirschblütenweg development in Basel and four units in the Guggach development in an amount of CHF 2.1 million (before deferred taxes).

IFRS 16

The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. Long-term leases for properties fall under the scope of IFRS 16 and are to be recognised for the lessee’s right to use the asset.

A detailed analysis of the impact of IFRS 16 on the consolidated financial statements has not yet been made; it is not planned to apply the standard early. Apart from additional disclosure requirements, the remaining IFRS amendments are not expected to result in any material adjustments.

1.3  Method of consolidation

Subsidiaries are fully consolidated with effect from the date of their acquisition, i.e. from the date on which Allreal gains control. Allreal will be deemed to have gained control if, on the basis of existing rights, it is able to direct those activities of the subsidiaries that significantly affect their returns and also if Allreal is exposed, or has rights, to variable returns from its involvement with the subsidiary and is able to affect those returns through its power over the subsidiary.

Subsidiaries are deconsolidated with effect from the date on which control ends.

Capital is consolidated at the time of purchase using the acquisition method. The purchase price for a corporate acquisition is determined as the total of the market value of the assets transferred, the liabilities contracted or taken over and the equity financial instruments issued by Allreal. Transaction costs in connection with a corporate acquisition will be charged to the income statement. The goodwill arising from a corporate acquisition is reported as an asset on the balance sheet and corresponds to the surplus of the purchase price, the contribution of minority interests in the companies taken over and the market value of the share of equity held previously over the balance of the assets, liabilities and contingent liabilities valued at market values. If the difference is negative, the surplus is immediately charged to the income statement after renewed assessment of the market value of the net assets taken over.

All intra-Group balances, income and expenses, as well as unrealised gains and losses from intra-Group transactions are fully eliminated.

1.4  Scope of consolidation

The scope of consolidation of Allreal Group remained unchanged in the 2017 financial year.

1.5  Segment reporting

Allreal Group is subdivided into the two divisions Real Estate and Projects & Development, which constitute segments in their own right. This presentation is in line with the management approach under which Group Management as the decision-making body monitors the results of the two divisions on the level of net profit on a quarterly basis. For the transfer of segment reporting to the consolidated statement of comprehensive income see 2.7.

The Real Estate division comprises the companies Allreal Home AG (residential properties), Allreal Office AG (commercial properties), Allreal Toni AG (Toni site in Zurich-West), Allreal Vulkan AG (commercial properties in Zurich Altstetten), Allreal West AG (residential and commercial properties in Zurich-West), Apalux AG (commercial and residential properties) and the property management operations of Hammer Retex.

The Projects & Development division consists largely of Allreal Generalunternehmung AG and Bülachguss AG plus Hammer Retex’s activities as a general contractor.

The activities of Allreal Holding AG (parent company) and Allreal Finanz AG (intra-Group financing) are not assigned to segments as their business activities do not generate any operating income. In the segment information they are listed under Holding company/eliminations.

2.1  General

The preparation of the consolidated financial statements requires estimates and assumptions to be made. These relate to the reported amounts of assets, liabilities and contingent liabilities on the balance sheet date and to income and expenditure during the reporting period. The balance sheet is prepared strictly on the basis of acquisition costs, with the exception of investment real estate, which is entered at market values. For significant estimates and assumptions, see the following accounting and valuation principles, in particular 2.29. If these estimates and assumptions, made to the best of our knowledge at that date, subsequently transpire to diverge from the facts, the original estimates and assumptions are adjusted for the year in which the situation changed. Significant changes are disclosed in the consolidated financial statements.

2.2  Derivative financial instruments

In the past, Allreal used interest rate swaps (swaps) to reduce interest rate risk. By resolution of the Board of Directors, these swaps were terminated early on 6 December 2016. Their remaining negative replacement value (after deferred tax) in the hedging reserve is being released to the income statement over the original residual term to maturity.

2.3  Earnings from renting investment real estate

Income from renting investment real estate includes net rental income after deduction of vacancy losses, and losses due to bad debts. Costs for ground rent, management, operation, maintenance and repairs are reported separately in the income statement as direct expenses for rented investment real estate.

Rent-free periods in commercial premises are recognised on a straight-line basis over the contract term.

2.4  Earnings from sale of investment real estate

Gains and losses on the sale of investment real estate correspond to the difference between the realised net proceeds after deduction of transaction costs and the latest recorded market value of the properties sold. The earnings are taken to the income statement at the time of the transfer of benefits and risks.

2.5  Earnings from revaluation of investment real estate

The revaluation of yield-producing properties and investment real estate under construction shows changes in the market value of the real estate portfolio. The report of the external real estate valuer serves as the basis. The real estate valuation underlying the revaluation excludes the deduction of transaction costs at the time of sale.

For more details of the recognition of investment real estate see 2.9.

2.6  Earnings from Projects & Development division

The earnings from the Projects & Development division include income from realisation Projects & Development (third-party projects), income from sales Development (own projects), capitalised company-produced assets and diverse income. Income from realisation Projects & Development includes the project volume completed during the period under review for third parties (third-party projects) and corresponds to the total of all project costs, fees and earnings from construction activity recognised by the percentage of completion method (POC). In the case of loss-making projects, provisions are immediately made for the estimated final loss in the project accounts (trade receivables or payables).

Earnings realised and received from the sale of development real estate (own projects) are recognised as income from sales Development at the time of transfer of benefits and risks, i.e. on transfer of ownership of individual development real estate units and entry of this transfer in the land register. When recognising the revenues, the pro rata project costs and gains are also taken into account; for details see 1.2 for presentation of accounts with effect from 1 January 2018.

Direct expenses from realisation Projects & Development and sales Development contain the accrued project costs of all third-party projects bought in by contractors as well as cumulative investment costs including capitalised company-produced assets and pro rata gains for own projects sold.

Capitalised company-produced assets accrue from investment real estate under construction as well as development real estate and are taken to income at cost if own project work is incurred.

2.7  Transfer of segment reporting to the consolidated statement of comprehensive income

The presentation of net profit in the internal reports is similar to that in the segment reports. As regards the Projects & Development division, the segment reports differ from the consolidated statement of comprehensive income in respect of the quantification of sales.

In the segment reports, the volume of projects completed for all third-party and own projects is taken as the relevant sales figure.

In the consolidated statement of comprehensive income, sales from realisation Projects & Development and sales of development real estate are recognised in accordance with 2.6. In the segment reports, in respect of the volume of projects completed for the Real Estate division (intra-Group sales) and for own projects, the difference between projects completed and sales Development is stated.

2.8  Financial expense/capitalised building loan interest

Interest expenses are accrued/deferred between reporting periods on the basis of the effective interest rate method and taken to income.

For development real estate and investment real estate under construction, debt interest is capitalised. The underlying debt interest rate is the average borrowing rate during the reporting period.

2.9  Investment real estate

The investment real estate reported under fixed assets is divided into yield-producing properties (residential and commercial properties) and investment real estate under construction. All investment real estate is carried at fair value in accordance with IAS 40 and IFRS 13. The valuation at the time of initial recognition is based on acquisition cost, including directly attributable transaction costs. After the initial recognition, the external real estate valuer regularly determines the fair value on the balance sheet cut-off date using the discounted cash flow method (DCF). For details of the valuation method and the key assumptions see 2.29. To be able to establish the highest and best use of a project, it must be approvable, in compliance with legal requirements and financially viable. Changes in fair value are taken to the income statement, factoring in deferred taxes. In the consolidated statement of changes in shareholders’ equity, the cumulative difference between the acquisition cost and fair value of all investment real estate, factoring in deferred taxes encumbering said real estate, is recognised as part of retained earnings (revaluation reserves). Yield-producing properties whose book value is not likely to be derived from continued use but through a sale are reported separately at fair value in working capital as investment real estate held for sale. This is conditional on the sale being highly probable and the investment properties being in a condition ready to be sold immediately. For a sale to be classified as highly probable, it must be expected to take place within one year. For projects to be assigned to investment real estate under construction, realisation must be intended for the portfolio of investment real estate, which is conditional on a minuted decision by the Board of Directors. It must also be possible to form a reliable estimate of expenditure and income so that an estimate of fair value can be made, and a building permit and construction approval which can no longer be contested by third parties needs to have been issued for the project.

2.10  Development real estate

The development real estate carried in working capital includes development reserves, buildings under construction and completed properties which were not sold to third parties. If the criteria for investment real estate under construction mentioned in 2.9 are not met, such projects are carried on the balance sheet as development real estate.

Development real estate is reported in accordance with IAS 2, which requires that these properties be recognised in the consolidated financial statements at acquisition or production costs or, if lower, their net realisable value. The latter corresponds to the estimated sale price less expected project, construction and sales costs up until the disposal. Any impairment is taken to direct expenses from sales Development.

Land already owned by Allreal or payments on account for planned land pur-chases and third-party cost (but not company-produced assets) are capitalised under development reserves if the project is expected to be realised, but work has not yet started.

Projects in progress, on which structural work has yet to be completed, for which the property-specific full statement of accounts is not yet available and for which the transfer of ownership to a third party has not yet been completed are recognised as buildings under construction. Realised development real estate which has reached structural completion and development real estate destined for immediate sale to third parties are reported as completed buildings.

2.11  Other property, plant and equipment

Other property, plant and equipment is stated at acquisition or production costs less operationally necessary depreciation and, where appropriate, less additional depreciation as a result of impairment losses. The estimated useful life of plant and equipment is four to five years and three years for IT infrastructure. The works of art capitalised under other property, plant and equipment are not depreciated. Depreciation is calculated on a straight-line basis.

2.12  Intangible assets

Goodwill from acquisitions corresponds to the surplus of the purchase price, the contribution of minority interests in the companies taken over and the market value of the share of previously held equity over the balance of the assets, liabilities and contingent liabilities valued at market values. Goodwill is not amortised, but subjected to an annual impairment test.

Other tangible assets comprise software and IT developments, which are recognised at acquisition cost and, from the time they are first used, are depreciated to the income statement on a straight-line basis over their estimated useful life of three years.

2.13  Financial assets

Financial assets include long-term loans in the context of usual business operations and the pre-financing of tenant fit-outs. Loans are stated using the amortised cost method and are freely available and not pledged.

2.14  Short-term receivables

Receivables arising from construction activities undertaken on behalf of third parties are recognised according to the net principle, i.e. payments on account received from clients and partial settlements of accounts arising from the construction activities are offset against each other (order balances). Positive net positions are shown under trade receivables, while negative net positions are reported under trade payables; see also 2.6.

Trade receivables and other receivables are reported at their nominal value less necessary value adjustments for irrecoverable claims. Value adjustments are based on an individual assessment of the claim in the light of deposited collateral and also take account of appropriate historical empirical values. All short-term receivables are freely disposable and are not pledged.

2.15  Cash

Cash includes cash on hand, sight deposits with banks and short-term time deposits with maximum maturities of 90 days. They are reported at nominal value.

2.16  Share capital/treasury shares

The share capital of Allreal Holding AG is reported as equity as it is not subject to any repayment obligation or dividend guarantee. Issuing costs which are incurred in connection with a capital increase and are directly attributable to the issuance of new shares are offset against the capital reserves under equity. The premium paid with capital increases or through conversion of a convertible bond is reported under capital reserves.

Treasury shares may be held by Allreal Holding AG or by one of its Group companies on the balance sheet cut-off date. These are stated at acquisition cost offset directly against equity and are listed as a separate item in the consolidated statement of changes in shareholders’ equity. Gains and losses from transactions with treasury shares are taken to other retained earnings in equity.

2.17  Bonds

Bonds are recognised on issue on the basis of the proceeds received, net of transaction costs. The difference between reported financial liabilities and the repayment amount is amortised to the income statement over the bond’s term to maturity using the effective interest method.

2.18  Borrowings

In addition to bond issues, financial liabilities include bank loans secured by mortgages and are recognised as long-term financial liabilities in compliance with IAS 1 if the contractually agreed remaining term to maturity in the credit agreements is longer than twelve months. All other financial liabilities are recognised as a short-term bank debt, including amortisation payments due within twelve months of the balance sheet cut-off date. Borrowings are recognised at amortised costs using the effective interest method.

2.19  Provisions

Provisions are made to the extent that corresponding obligations exist as at the balance sheet cut-off date and the respective event is in the past. In addition, the amount can be estimated reliably and the probability of occurrence is rated higher than that of the non-occurrence. Provisions are classified as short-term or long-term, depending on whether they are expected to be utilised within one year or later. Provisions are reported at the best possible estimate of the amount necessary to meet the obligations as at the balance sheet cut-off date. If the effect is material, provisions are discounted.

2.20  Current liabilities

Liabilities arising from construction activities undertaken on behalf of third parties are recognised according to the net principle, i.e. payments on account received from clients and partial settlements of accounts arising from the construction activities are offset against each other (order balances). Negative net positions are shown under trade payables, while positive net positions are reported under trade receivables.

Trade payables and other liabilities (accrued liabilities) due within one year are recorded at their nominal value.

Interest-free payments (reservation fees and prepayments) made by future owners of units of development real estate are reported as a separate position under liabilities until such time as ownership has been transferred.

2.21  Leasing

Leasing agreements are reported as financial leases if essentially all risks and opportunities associated with ownership of the leased property are transferred to Allreal. They are classified at the beginning of the lease. The leased property is initially capitalised at the lower of the present value of the lease payments or fair value. Leasing instalments are broken down into interest and repayment amounts. The leased property is depreciated over its estimated useful life or over the term of the lease, whichever is the shorter.

Cash flows for operating leasing are taken to income directly at the time of payment.

2.22  Impairment

If there is reason to believe that the value of property, plant and equipment and intangible assets has been impaired, an impairment test will be carried out and the realisable value will be estimated. The realisable value is the lower of value in use or market value less selling costs. Any difference between the asset and the realisable value is depreciated to the income statement and reported separately in the Notes to the consolidated financial statements.

2.23  Taxes

The item tax expenses in the consolidated statement of comprehensive income cover current taxes on business activities, deferred taxes on revaluation and other deferred taxes.

Current taxes on business activities include income taxes due for the business year as well as property gains tax on the completion and sale of development real estate (Projects & Development division) and the sale of investment real estate (Real Estate division).

Current income taxes are calculated net of tax loss carry-forwards and in compliance with the applicable tax regulations on the basis of the results reported by the individual Group companies and are recognised under current tax liabilities.

Deferred taxes are determined using the balance sheet liability method and are calculated at the tax rates in force or announced on the balance sheet cut-off date. With the exception of taxes imposed in the previous year on the replacement values of cash flow hedges and changes in employee benefits recognised through equity, changes in deferred taxes are taken to income.

Deferred tax liabilities take account of discrepancies in income and property gains taxes between the valuation for purposes of the consolidated financial statements and the applicable tax valuation of individual assets and liabilities for tax purposes. At the same time, a deferred tax is calculated on strictly all discrepancies leading to delays in the timing of taxation. For the higher valuation of investment real estate (positive difference between acquisition cost and market value) an individual tax rate is applied, with a realistic holding period defined for each individual investment real estate property.

Deferred tax assets from tax loss carry-forwards and the downward revaluation of investment real estate (negative difference between tax value and market value) are capitalised if they appear certain to be recoverable with future taxable income.

2.24  Employee pension plans

Employees of Allreal Generalunternehmung AG are covered by the Allreal pension fund for mandatory and extra-mandatory staff pension provision as required by the Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG), while employees of Hammer Retex AG are affiliated to the collective foundation of a Swiss insurance company for occupational pension provision.

The Allreal pension fund is a legally independent pension institution based on the principle of defined contributions in accordance with Swiss law.

On the basis of IAS 19, these pension plans qualify as defined benefit plans. The assets and commitments of these plans are recalculated half-yearly by an external actuary. In accordance with IAS 19 (revised), the plan assets are recognised at fair value and liabilities are valued using the projected unit credit method.

Pension expenses comprise a past service and a net interest component which are recognised under personnel expenses as well as a revaluation component which contains actuarial gains and losses and is recognised through other comprehensive income under changes in the pension fund.

Some staff are also covered by a management insurance scheme arranged with an insurance company which is classed as a defined contribution plan under IAS 19. The expenditure reported during the period under review corresponds to the employer’s payments to the plan.

2.25  Share-based reimbursement

Part of the variable remuneration may be paid to the members of Group Management in the form of shares of Allreal Holding AG. Beneficiaries have immediate right of disposal over the first half of the shares allocated to them. The second half will be placed at the beneficiary’s disposal in two years, provided that the employment relationship has not been terminated. Entitlements will be satisfied by the company by means of treasury shares. The amount resulting from the share allocation is charged to personnel expenses over the vesting period. Shares are recognised at market value at the time of allocation.

2.26  Earnings per share

Net profit per share is calculated by dividing net profit by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share take account of additional shares that may be created as a result of the exercising of option or conversion rights and will have a dilutive effect on the result.

2.27  Consolidated cash flow statement

Liquid assets (cash on hand, postal and bank account balances) and short-term deposits with maximum terms of 90 days are used as funds. Cash flow from operating activities consists of operating cash flow before changes in net working capital (NWC), changes in NWC (excl. cash and current tax liabilities), as well as cost of finance paid, financial income received, and income and property gains taxes paid. Cash flows from investing and financing activities are presented separately.

2.28  Foreign currencies

The geographical range of Allreal Group’s activities is confined to Switzerland. The Group has no assets or liabilities in foreign currencies. As all Group companies prepare their annual accounts in Swiss francs, consolidation does not result in any currency translation differences.

2.29  Valuation uncertainties

Investment real estate

As at 31 December 2017, Allreal holds investment real estate with a book value of CHF 3,956.6 million (31.12.2016: CHF 3,574.5 million). The investment real estate is valued at market value calculated using the discounted cash flow method (DCF). The DCF method is based on various estimates and assumptions, with the yield potential of a property being derived on the basis of future revenue and expenditure. Market values do not take account of transaction costs upon sale. Recognised at fair value as at 31 December 2017, yield-producing properties totalling CHF 3,931.2 million (31.12.2016: CHF 3,505.0 million) and investment real estate under construction totalling CHF 25.4 million (31.12.2016: CHF 69.5 million) qualify as category 3 fair values. During the period under review, no adjustments were made to valuation techniques or processes, and there were no shifts within the fair value categories.

Future rental income is forecast on the basis of current contractual rents and target annual rental income. In the case of expiring commercial leases, a typical local market rent which appears sustainable from a current perspective is used. Where tenants have extension options, as a rule the lower of market rent and contractual rent is stated. Sustainable market rents will also be used in the case of open-ended leases where there is a significant difference between the contractual rents and the market level in the exit year. Moreover, property-specific assumptions with regard to temporary and structural vacancies will be factored into the market valuation.

Management and building costs are in principle based on the relevant property accounts and include non-apportionable operating and maintenance costs, as well as future repair costs based on Allreal’s multi-year budgets. These costs include costs for asset maintenance to secure the long-term level of contractual and market interest rates on which the valuation is based as well as value-enhancing investments generating future additional income.

A property-specific discount is made on each investment property on the basis of macro- and micro-locational considerations and depending on real estate segment. Inflation is taken into account in the forecast cash flows. The discount and capitalisation rates are based on the interest paid on long-term, risk-free investments plus a specific risk premium.

If the actual market rents in subsequent years are lower than projected in the DCF valuations, this may lead to an adjustment of the fair values. This devaluation effect on investment real estate would be even stronger in combination with increasing discount and capitalisation rates.

In the case of investment real estate under construction, future rental income is also ascertained on the basis of typical local market rents or rents already contractually agreed. On the cost side, expenses are determined with the aid of investment calculations, the chronological progress of construction phases and cost forecasts. If actual construction costs and rental income in subsequent periods differ from the estimates and planned figures, the fair values may need to be adjusted; see also 4.1.

Development real estate

As at 31 December 2017, Allreal holds development real estate with a book value of CHF 116.5 million (31.12.2016: CHF 165.7 million). It was valued at acquisition or production costs – including company-produced assets for buildings under construction – less value adjustments for impairment losses. On the balance sheet cut-off date at the latest, an impairment test is carried out for all development projects by comparing incurred and future costs with the realisable value. On the cost side, expenses are, among other methods, determined with the aid of investment calculations, the chronological progress of construction phases and cost forecasts. The proceeds are based on market assessments, empirical values and completed sales to date. If actual construction costs and sales proceeds in subsequent periods differ from the estimates and planned figures, the book values may need to be adjusted.

Taxes

Allreal has significant deferred tax assets totalling CHF 23.3 million (31.12.2016: CHF 34.6 million) and liabilities totalling CHF 202.6 million (31.12.2016: CHF 192.5 million), which stem mainly from valuation differences relating to investment real estate; see 2.23. In calculating the deferred taxes on investment real estate, a remaining holding period was estimated for each property. If the actual holding period of the investment real estate does not correspond to the assumed holding period, this may result in a considerable difference between the tax due and the capitalised deferred taxes when the property is sold.

2.30  Information on the implementation of a risk assessment

Allreal has a comprehensive management system (PAQ) in place. This system describes all parent processes and associated controls and integrates the tasks of management, operational processes and support processes. The PAQ also covers non-financial processes. There is also a documented internal control system in place for accounting and financial reporting to prevent, minimise or identify the risk of material misrepresentation in the annual accounts. The financial reporting controls are based on the COSO framework.

The Board of Directors evaluates quarterly at corporate level the risk assessment prepared by Group Management (identification, quantification, monitoring and control). In particular, the risk assessment must explicitly give consideration to the reliability and completeness of financial information (fair presentation), asset protection, compliance with laws, regulations and contracts, as well as the risk of balance sheet fraud.

Effective internal control and management systems are in place to ensure that the consolidated financial statements of Allreal Group comply with the applicable accounting rules and to ensure the fair presentation of reporting. Accounting and valuation involve making forward-looking estimates and assumptions. Estimates and assumptions which pose a significant risk in the form of an adjustment to the book values of assets and liabilities within the next financial year are shown under the individual positions in the Notes; see 2.29.

3.1  Income from renting investment real estate

The rental income is calculated as follows:

The accumulated vacancy rate for the 2017 financial year amounted to a total of 2.6% of projected rental income (2016: 5.1%), with residential properties accounting for 1.6% and commercial properties 2.8% (2016: 2.4% and 5.7%, respectively).

The rest of the rental income breaks down as follows:

3.2  Direct expenses for rented investment real estate

The real estate expenses relate solely to the yield-producing properties in the Real Estate division.

The administrative and operating expenses break down as follows:

In 2017, real estate expenses for unlet properties amounted to CHF 0.5 million (2016: CHF 0.6 million).

3.3  Income from real estate management services

3.4  Earnings from sale of investment real estate

No yield-producing properties were sold in the period under review. In 2016, the sale of four properties produced earnings of CHF 5.6 million.

3.5  Earnings from Projects & Development division

Income from realisation Projects & Development consists of architects’ and Project & Development fees (CHF 27.1 million) and earnings from construction activity (CHF 23.5 million) (2016: CHF 29.3 million)/CHF 16.9 million). This contrasts with directly offset sales deductions of CHF –5.6 million for warranty expenses, construction insurance and guarantees, performance guarantees, bad debt allowances and third-party expenses arising from tendering (2016: CHF –3.5 million).

During the 2017 financial year, ownership of units under the projects Fangleten-/Solistrasse Bülach (CHF 29.7 million), Guggach Zurich (CHF 30.3 million), Pfruendmatt Mettmenstetten (CHF 8.6 million), Lerchenbergstrasse Erlenbach (CHF 15.7 million), Stauffacher Steinen (CHF 1.7 million) and Cholplatz Bülach (CHF 0.4 million) was transferred to third parties, resulting in gains on sales of CHF 11.8 million (2016: eight projects / CHF 34.6 million).

Diverse income includes fees for third-party project development activities amounting to CHF 0.6 million as well as other earnings from commissions and services provided for third parties amounting to CHF 0.5 million and rental income from development real estate in the amount of CHF 1.3 million.

3.6  Personnel expenses

A CHF 4.5 million past service cost was credited to employee pension expenses in application of IAS 19 (2016: CHF 4.2 million), see 3.11. Other personnel expenses include spending on actual and flat-rate staff expenses (CHF –1.5 million), training and development (CHF −0.2 million), costs for the recruitment of new employees (CHF –0.1 million) and other directly attributable staff expenses (CHF –0.5 million).

On the balance sheet cut-off date, the staff headcount stood at 274 employees, corresponding to 259 full-time equivalents (31.12.2016: 292 employees/ 276 full-time equivalents).

3.7  Other operating expenses

Rental expenses relate to business premises and parking spaces in Zurich, Basel, Bern, Cham and St. Gallen. For its head office in Zurich, Allreal has a lease which runs until 31 January 2021, with an annual rent of CHF 2.7 million. The leases for the other sites, with annual rents of CHF 0.7 million, have fixed terms, the longest of which runs until January 2022.

Administrative expenses include the cost of corporate communications, telecommunications, property insurance and office supplies.

Other general operating expenses consist essentially of costs for the operation, maintenance and repair of operating facilities, postage costs and the cost of pre-tax cuts in VAT.

3.8  Financial income

3.9  Financial expense

The expense for derivatives is in connection with the recycling of hedging reserves, CHF 13.3 million of which was charged to the income statement as non-cash expense in the period under review.

The financial expense for bond issues includes paid and accrued interest of CHF –8.7 million up to the balance sheet cut-off date (2016: CHF –9.4 million) and amortisation of CHF –0.3 million (2016: CHF –0.2 million) between the debt components and the redemption amounts.

Capitalised building loan interest of CHF 0.4 million (2016: CHF 0.6 million) breaks down into development real estate under construction (CHF 0.0 million) and investment real estate under construction (CHF 0.4 million), applying an average interest rate of 0.85% (2016: 1.67–2.31%).

The average interest rate on the outstanding financial liabilities is 1.53%, with an average interest lock-in period of 49 months for all financial liabilities (2016: 1.67% and 36 months).

3.10  Earnings per share/net asset value (NAV) per share

The share-based remuneration of members of Group Management has the effect of diluting the earnings per share. For this calculation, the average number of outstanding shares increases from 15,928,874 to 15,929,790.

At the end of the year, the share price stood at CHF 164.80 (31.12.2016: CHF 151.30). This represents a premium of 21.9% compared to the net asset value per share after deferred taxes of CHF 135.15 (31.12.2016: premium 15.5%).

3.11  Employee pension plans

Swiss pension institutions are regulated by the Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG). The BVG stipulates that pension institutions must be managed autonomously and as legally independent institutions.

The Board of Trustees, as the governing body of the pension fund, is made up of an equal number of employee and employer representatives. The Board of Trustees is tasked with defining and implementing investment strategy.

Plan members are insured against the economic consequences of old age, disability and death, in respect of which the BVG stipulates minimum benefits. Both employer and employee pay a share of the contributions to the pension fund; these are based on the insured salary and on the age of the plan member. Pension contributions and annual interest are credited to the individual savings accounts. Upon retirement of a plan member, the balance of the savings account is either paid out or, applying a statutory conversion rate, converted into a retirement pension. Benefits will also be paid in cases of long-term occupational disability.

All actuarial risks, comprising demographic risks (life expectancy) as well as financial risks (return on plan assets or development of wages, salaries and pensions), are borne by the pension fund and regularly assessed by the Board of Trustees. In the event of a shortfall in cover as defined by the BVG, recourse may be had to various measures. These primarily include increasing current contributions, payment of additional restructuring contributions by the employer, or adjusting the conversion rates.

Development of pension fund commitments and assets

Defined benefit pension plan expenses break down as follows:

In the period under review, there was no past service cost (2016: CHF –1.2 million).

Change in pension commitments

Changes in pension fund assets at market value

As at the balance sheet cut-off date, plan assets break down into the individual investment categories as follows:

The calculation was performed on the basis of the following assumptions:

The discount rate and the future development of wages and salaries were identified as significant actuarial assumptions.

If the discount rate were 25 basis points higher or lower than at the balance sheet cut-off date and if all other variables were to remain constant, the present value of pension fund commitments would be CHF 4.4 million lower or CHF 4.6 million higher (31.12.2016: CHF 4.9 million / CHF 5.3 million).

If the development of wages and salaries were 25 basis points higher or lower than the assumptions made at the balance sheet cut-off date, and if all other variables were to remain constant, the present value of pension fund commitments would be CHF 0.4 million higher or CHF 0.4 million lower.

The revaluation component of pension fund positions recognised in other comprehensive income breaks down as follows:

A probable CHF 4.8 million will be paid out under defined benefit commitments within the next twelve months, and a probable CHF 42.2 million in the subsequent nine years.

The average term of defined benefit commitments to the end of the period under review is 16.2 years (31.12.2016: 16.8 years).

For the following year, contributions to the plan are expected to come to CHF 2.9 million (employer) and CHF 2.6 million (employees) (2016: CHF 3.0 million and 2.7 million, respectively).

In addition to the Allreal pension fund, some Allreal staff are covered by a management insurance plan taken out with an insurance company. Allreal’s only commitment in respect of this plan is to pay the annual contributions. In the period under review, these amounted to CHF 0.9 million (2016: CHF 0.7 million). The management plan is classified as a defined contribution plan in accordance with IAS 19.

In 2017, employee benefits came to a total of CHF 5.4 million (2016: CHF 4.9 million).

3.12  Share-based reimbursement

Members of Group Management receive an additional remuneration in the form of shares of Allreal Holding AG. Entitlements will be satisfied by the company by means of treasury shares. The amount in connection with the share allocation is charged to personnel expenses over the vesting period.

Provided that all preconditions are met, a total of 1,083 shares of Allreal Holding AG will in future be distributed to eligible beneficiaries.

Total expenses for share-based reimbursement amounted to CHF 0.15 million (2016: 0.14 million).

4.1  Investment real estate

The purchases comprise the commercial properties at Soodmattstrasse 2/4/6/8/10 in Adliswil (Canton of Zurich) and at Avenue Perdtemps in Nyon (Canton of Vaud) acquired as at 1 November 2017.

Within the commercial real estate portfolio, the value-enhancing investments relate to Bellerivestrasse 30, Zurich (CHF 4.6 million), Schiffbaustrasse 2 (Schiffbauplatz) (CHF 6.5 million), Grüngasse 27–31/Badenerstrasse 119–133, Zurich (CHF 1.7 million) and six other properties (CHF 3.7 million).

The reclassification from investment real estate under construction to yield-producing properties relates to the commercial property at Schiffbauplatz, Zurich, completed as at 1 October 2017, recognised at CHF 79.3 million (CHF 56.8 million in acquisition costs and CHF 22.5 million in revaluation).

The property at Grindelstrasse 3/5 in Bassersdorf (Canton of Zurich) was reclassified from yield-producing property to development real estate at CHF 15.6 million. Following the merger with an undeveloped 6,000-square-metre adjacent plot carried as development reserves since 2008, the land area reserved for project development or sale increased to approximately 12,000 square metres.

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 127 to 133 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 the 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 2017 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 182.9 million (2016: CHF 161.0 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.

n the basis of a sensitivity analysis of investment real estate with a market value of CHF 3,956.6 million on the balance sheet cut-off date (31.12. 2016: CHF 3,574.5 million), an isolated change in discount and capitalisation rates by 50 basis points would lead to an increase or decrease in value of CHF 597.7 million or CHF 457.2 million, respectively (31.12.2016: CHF 530.0 million) / CHF –408.2 million). The bandwidths for the capitalisation and discount rates used in the sensitivity analysis range between 3.00 and 3.50% (residential properties) and between 3.50 and 4.00% (commercial properties) for lower interest rates and between 3.60 and 4.10% (residential properties) and between 5.20 and 5.70% (commercial properties) for higher interest rates.

4.2  Development real estate

The reclassification from investment real estate to development real estate relates to the property at Grindelstrasse in Bassersdorf (Canton of Zurich) (CHF 15.6 million). As a result of sale to a third party and the start of construction, the Bülachguss project was reclassified from development real estate to trade receivables (CHF 15.4 million). Moreover, accrued costs of CHF 8.6 million in connection with the property at Solistrasse in Bülach were reclassified from development reserves to buildings under construction.

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 116.1 million (31.12.2016: CHF 123.9 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 1.7 million and was credited to financial income (2016: CHF 1.8 million).

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

Owing to the positive development of the pension fund, pension plan assets (IAS 19) stood at CHF 9.9 million (previous year: commitments of CHF 12.9 million).

4.5  Purchase of companies

In 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.

4.6  Intangible assets

4.7  Trade receivables

The CHF 5.2 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 (2016: CHF 0.0 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 38.1 million (31.12.2016: CHF 21.4 million), CHF 18.2 million is freely disposable in the form of current account balances and CHF 19.9 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 nominal 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 2017, Allreal held 29,528 treasury shares (31.12.2016: 12,000 shares). The average purchase price per share stands at CHF 165.25 (31.12.2016: CHF 139.97). 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 nominal 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 nominal 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 2017) 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 nominal 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 20 April 2018 a distribution of CHF 6.25 per share, corresponding to a total amount of CHF 99.6 million, in the form of a nominal value reduction. In 2017, CHF 91.7 million in reserves from contribution of capital were distributed to shareholders, corresponding to CHF 5.75 per share. Treasury shares do not rank for distributions.

4.11  Borrowings

Fristigkeit der Finanzierung zu Nominalwerten

The financial liabilities of Allreal Group consist of bank loans secured by mortgage (fixed advances and fixed-rate mortgages) and seven 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 955.0 million and a book value of CHF 954.7 million are recognised under borrowings:

0.875% bond issue 2017–2027

As at 31 December 2017, the 0.875% bond issue is recognised at CHF 160.2 million in long-term borrowings. During the period under review, CHF 0.0 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 0.875% actually payable, the expense – corresponding to an effective interest rate of 0.86% – is also deferred in the income statement.

0.75% bond issue 2017–2026

As at 31 December 2017, the 0.75% bond issue is recognised at CHF 149.9 million in long-term borrowings. During the period under review, CHF 0.0 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 0.76% – is also deferred in the income statement.

1.375% bond issue 2015–2025

As at 31 December 2017, the 1.375% bond issue is recognised at CHF 100.4 million in long-term borrowings. During the period under review, CHF 0.0 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 in the income statement.

0.625% bond issue 2016–2024

As at 31 December 2017, the 0.625% bond issue is recognised at CHF 149.5 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 in the income statement.

0.75% bond issue 2015–2021

As at 31 December 2017, the 0.75% bond issue is recognised at CHF 120.3 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 in the income statement.

2.00% bond issue 2013–2020

As at 31 December 2017, the 2.00% bond issue is recognised at CHF 149.5 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 in the income statement.

1.25% bond issue 2014–2019

As at 31 December 2017, the 1.25% bond issue is recognised at CHF 124.9 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 in the income statement.

As at 31 December 2017, fixed advances amounting to CHF 555.0 million and fixed-rate mortgages amounting to CHF 403.3 million (at nominal values) are in place, all of which were taken out with Swiss counterparties.

On the balance sheet cut-off date, borrowings (excl. bond issues) at nominal values existed towards the following counterparties:

The average interest rate of all financial liabilities as at 31 December 2017 is 1.53% (31 December 2016: 1.67%).

The average interest lock-in period for all financial liabilities as at 31 December 2017 is 49 months (31 December 2016: 36 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.

Short-term provisions

Long-term provisions

The write-back of CHF 12.9 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  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.

4.14  Prepayments for development real estate

4.15  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 31.12.2017, this accrual amounted to CHF 1.5 million (31.12.2016: CHF 1.6 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.

5.1  Taxes

5.1.1  Breakdown of tax expense

In the income statement, expense for 2017 and 2016 breaks down as follows:

5.1.2  Current taxes on business activities

Current income taxes are calculated using the actual tax rates in force.

This position comprises income taxes and property gains taxes:

In the Projects & Development division, expenses for property gains taxes are contingent on the time of sale of development real estate; in the Real Estate division, they are contingent on sales from the portfolio. These property taxes are incurred on a cyclical basis accordingly.

5.1.3  Current tax liabilities

As at 31 December, the following receivables and liabilities are due from or owed to municipal and cantonal tax authorities:

5.1.4  Deferred taxes on revaluation in the income statement

The deferred taxes on revaluation break down as follows:

The upward valuation of CHF 21.8 million on the investment real estate led to a net charge of CHF –5.9 million to deferred taxes in the income statement, CHF –1.3 million of which was attributable to investment real estate under construction and CHF –4.6 million to yield-producing properties.

5.1.5  Other deferred taxes in the income statement

During the period under review, the temporary valuation differences between the tax-relevant individual financial statements of the Group companies and the consolidated financial statements increased, such that deferred tax income of CHF –2.3 million was charged to the income statement.

In addition, tax effects amounting to CHF 8.4 million arising from loss carry-forwards and valued at the consolidated tax rate of 22% were charged to the income statement.

Recycling of the hedging reserve, see 3.9, led to deferred taxes of CHF 2.9 million.

5.1.6  Deferred tax liabilities and assets

The deferred tax liabilities from the provision for deferred taxes reported under long-term liabilities break down as follows:

The deferred tax liabilities in connection with the higher valuation of investment real estate (difference between market and acquisition value) are based on an average holding period of at least ten years from date of purchase, or year of construction in the case of new properties, and a tax rate of up to 32% (2016: 31%). Deferred taxes are calculated separately for each investment property.

Temporary valuation differences on investment real estate (difference between acquisition value and taxable book value) and other balance sheet positions record the differences between the individual financial statements of the Allreal Group companies and the consolidated financial statements. These mainly involve write-downs on investment and development real estate, additional value adjustments on receivables and the recognition of additional provisions deducted from the current tax assessment.

Valuation differences on write-downs on investment real estate in the Canton of Zurich and on other balance sheet positions are calculated at 20 to 22% (2016: 21–22%). A tax rate of 14 to 24% (2016: 14–24%) was applied to valuation differences on write-downs on investment real estate outside the Canton of Zurich.

In 2017, with the amortisation of the bond issues, deferred taxes totalling CHF 0.2 million were credited to the income statement (2016: CHF 0.1 million).

Deferred tax assets comprise the following positions:

As at 31 December 2017, capitalised deferred taxes existed on tax loss carry-forwards of CHF 23.0 million (31.12.2016: CHF 31.0 million) relating to Group companies domiciled in Zurich which reported cumulative losses in the individual financial statements, which losses are likely to be offset against gains in the following years (expiry of first tax loss carry-forward as of 2018). A tax rate of 22% was applied (2016: 22%).

The recognition of pension commitments results in deferred tax liabilities amounting to CHF 2.2 million as at the balance sheet cut-off date (31.12.2016: deferred tax assets of CHF 2.8 million), representing a year-on-year decrease of CHF 5.0 million, CHF 5.4 million of which was taken directly to other earnings and CHF 0.4 million to income.

5.1.7  Reconciliation

The following table shows the reconciliation between the theoretical tax rates applicable to the Group and the effective taxes.

The reference tax rate used is the sum total of the national, cantonal and municipal income tax rates which are applied on average.

The adjustment of tax effects on revaluations reflects the change in the upward and downward valuations of investment properties and their cumulative balance, encumbered with up to 32% deferred taxes and as the difference versus the reference tax rate of 10%.

The credit of CHF 0.5 million for current taxes of previous years results from the recalculation of the tax status of each Group company on the basis of tax returns submitted or definitive tax assessments received.

Income subject to a lower tax rate factors in that a number of the Group companies are domiciled at locations where the total tax burden is significantly lower than the reference tax rate of 22%.

Income subject to a higher tax rate factors in that gains on real estate subject to property gains tax are taxed at total tax rates of up to 40% and are therefore above the reference tax rate of 22%. In particular, this relates to gains taxed in connection with the invoicing of completed projects in the Projects & Development division or from the sale of investment properties in the Real Estate division.

5.2  Capital commitments, contingent liabilities and legal disputes

The capital commitments relate to contractual agreements for the acquisition of development real estate. Whether the commitment is invoked depends on the fulfilment of the conditions agreed with the counterparties.

As in the previous year, there are no guarantees or sureties in favour of third parties. Beyond this, in the individual financial statement, Allreal Holding AG has issued guarantees and sureties amounting to an additional CHF 346.0 million in connection with financings with third parties on behalf of individual subsidiaries (2016: CHF 421.6 million).

As at 31 December 2017, there are no pending legal disputes of a nature liable to have a significant impact on the asset and income situation of Allreal Group for which no corresponding provisions are in place.

5.3  Assets pledged as security for own liabilities

5.4  Financial instruments

5.4.1  Management of finance and capital

In the context of the financing strategy, in the investment and financing guidelines last amended on 1 October 2013 the Board of Directors issued rules on the extent to which Allreal Group can take out external debt. The share of consolidated equity must be over 35% on the balance sheet cut-off date, net gearing must not exceed 150%, the interest coverage ratio must not fall below 2.0 and the investment and development real estate balance sheet positions may only be refinanced with a maximum of 70% interest-bearing borrowings.

The Board of Directors reviews the capital structure on a quarterly basis and monitors in particular compliance with the limits set out in the investment and financing guidelines. Capital management encompasses both equity capital and interest-bearing borrowings (net financial debt).

The contractual terms agreed with lenders regarding minimum capitalisation (financial covenants) are identical to those laid down by the internal investment and financing guidelines. During the period under review, they were complied with without exception and are as follows as at the balance sheet cut-off date:

Equity ratio

(equity as a percentage of total assets)

Net Gearing

(net financial debt as a percentage of consolidated equity)

Interest coverage ratio

(EBITDA excl. revaluation gains divided by net financial expense)

Refinancing of properties

(Borrowings in percent of the book value of investment and development real estate)

If the financial covenants are not complied with, the lenders are contractually entitled to raise the margins for financing, introduce amortisation obligations or demand full repayment of loans.

5.4.2  Financial risk management

Allreal Group is exposed to various financial risks stemming from the market, changes in interest rates, receivables, refinancing and liquidity. Risk management is conducted in compliance with the investment and financing guidelines approved by the Board of Directors. The operational implementation of the guidelines is undertaken directly by the Chief Executive Officer or the Chief Financial Officer, who submits reports to Group Management on key financial ratios at least once a month. The Board of Directors is informed of the development of financial risks in writing every three months by Group Management.

5.4.3  Market interest rate risk

Fluctuations in the market interest rate give rise to an interest rate risk for Allreal as part of the borrowings are in the form of fixed advances with mortgage collateral or mortgage loans on a short-term basis up to a maximum of six months. Advances are taken out with banks and are denominated exclusively in Swiss francs. As at the balance sheet cut-off date, these advances amounted to CHF 555.0 million, corresponding to 29.0% of all borrowings.

The remaining financial liabilities are refinanced through bond issues and fixed-rate mortgages to prevent interest rate risk during their term.

The maturity structure is reviewed by the Board of Directors and Group Management at least quarterly, and the risks are analysed by means of simplified liability management. The aim is to achieve an even distribution of the maturities structure of the financial liabilities.

For the purposes of a sensitivity analysis, it was assumed that all balance sheet positions as at 31 December were in place on the same scale for a whole year and that the interest rate level changes by one percentage point at the beginning of the period. This would mean that net profit would remain unchanged if interest rates fell by 1%. If interest rates were to go up by 1%, net profit would decrease by –1.4 million (2016: CHF 0.0 million) / CHF –0.7 million).

5.4.4  Credit risk

The credit risk to which Allreal is exposed is that a counterparty might be unable to meet its financial obligations owing to default, resulting in losses for the Group. Customers’ payment arrears and credit standing are continuously monitored in both the Projects & Development division and the Real Estate division. Monthly reports with comments on the largest positions are submitted to Group Management.

Trade receivables and other receivables consist of a large number of balances owed by counterparties in the Projects & Development division and owed by tenants and property management companies in the Real Estate division. Receivables from tenancies are typically secured via separate bank guarantees or tenant deposits. There are no concentrations of risk in which a single debtor accounts for more than 20% of total trade receivables. Payments on account are periodically requested for current construction projects. Allreal’s close monitoring of receivables explains its low historical default rate.

The credit risk relating to cash and derivative financial instruments is considered small as the counterparties consist solely of banks and insurance companies with good credit ratings (minimum long-term rating of BBB+). Allreal endeavours to work with a large number of banks which mainly operate in Switzerland. At CHF 23.9 million, the maximum default risk relating to cash is lower than the book value of CHF 38.1 million, since with a number of lending banks waiver of the right to offset credit balance against liabilities was contractually excluded.

The maximum default risk relating to receivables and other claims corresponds to the book value. The guarantees and sureties issued in favour of banks in connection with financing transactions are not likely to give rise to any additional charges greater than the recognised borrowings from banks and insurance companies amounting to CHF 958.3 million.

As at the balance sheet cut-off date, the credit risk relating to financial assets amounts to CHF 133.2 million, which, with the exception of the pension plan assets (IAS 19) of CHF 9.9 million, corresponds to the balance sheet item.

5.4.5  Refinancing and liquidity risk

As at the balance sheet cut-off date, unutilised immediately callable credit limits granted by banks are in place in an amount of CHF 544 million. The binding financial ratios agreed with banks in the credit agreements are the same as those laid down in the investment and financing guidelines; during the period under review they were complied with at all times. Three-year medium-term planning is in place for Allreal Group which ensures that the thresholds are complied with on a rolling basis through early extension of maturing loans. Under the financial covenants, Allreal has the option of taking out around CHF 1.35 billion in new borrowings before new equity is required.

The following breakdown shows the non-discounted payment outflows of existing liabilities. In accordance with contractual agreements, the earliest possible repayments are entered as the maturity dates.

Interest and nominal amount payments on liabilities

5.4.6  Market valuation of financial assets and liabilities

Financial assets and borrowings are recognised using the amortised cost method.

With the exception of the borrowings shown below, it can be assumed that the book values of the financial assets and the other financial liabilities correspond to fair values.

The fair values of the bond issues correspond to the market price as at the balance sheet cut-off date. The fair values of the fixed-rate mortgages are determined using the CHF interest rates current as at 31 December for the respective terms (at least 0.0%) plus a credit margin of 0.7% (2016: 0.7%).

The following table shows the book and market values (fair values) of all financial instruments recognised on the balance sheet.

5.5  Transactions with related parties

The Board of Directors, Group Management and the Allreal pension fund are deemed to be related parties. The parties to the shareholders’ pooling agreement were also deemed to be related parties until it was terminated on 24 April 2017.

The seven members of the Board of Directors received fixed remunerations totalling CHF 0.63 million (2016: CHF 0.63 million), which is paid out after the annual accounts have been approved by the annual general meeting. These persons do not receive any other remuneration.

The remuneration of the Board of Directors is paid directly by Allreal Holding AG. The members of Group Management are employees of Allreal Generalunternehmung AG – a wholly owned subsidiary of Allreal Holding AG – which pays the remuneration of these persons. All amounts represent gross payments before the social insurance contributions paid by the remuneration recipients. The employer’s share of the social insurance contributions is not included.

In the period under review, remuneration totalling CHF 3.35 million (2016: CHF 3.12 million) paid to Group Management was recognised in the consolidated financial statements, out of which the highest total remuneration of CHF 1.17 million (2016: CHF 1.15 million) was paid to Roger Herzog.

Variable bonuses will be paid out in cash after the annual accounts, and the compensation report have been approved by the Board of Directors.

In summary, the following remunerations paid to the Board of Directors and Group Management were recognised in the consolidated financial statements:

In the period under review and in the previous year, no loans, credits or sureties were granted to members of the Board of Directors and Group Management or parties related to them, nor to former members of these bodies.

As at 31 December 2017, the following members of the Board of Directors and Group Management were directly or indirectly invested in Allreal Holding AG:

The shareholding of the Helvetia Group, St. Gallen, in which Dr Ralph-Thomas Honegger performs the function of Chief Investment Officer (CIO) and is a member of the executive management, is not included in the table.

The shares held by the members of the Board of Directors and Group Management correspond to 1.78% of the share capital of the company (31.12.2016: 1.81%).

During the year under review, the Projects & Development division carried out construction projects for a total of CHF 6.5 million (2016: CHF 18.7 million) for several parties to the shareholders’ pooling agreement (until termination of the latter on 24 April 2017) under standard market conditions, which corresponds to 1.8% of income from realisation Projects & Development (2016: 4.5%).

The Helvetia Group, which holds 10.6% of Allreal Holding AG’s share capital, is represented on the Board of Directors of Allreal Holding AG by Dr Ralph-Thomas Honegger. Insurance contracts (policies covering buildings, construction and personnel) are in place between the Helvetia Group and individual Allreal companies with an annual premium volume of CHF 1.4 million (2016: CHF 1.2 million).

For several years, Allreal has had a business relationship with Banque Cantonale Vaudoise, where Olivier Steimer, member of the Board of Directors of Allreal Holding AG, held the office of Chairman of the Board of Directors until 31 December 2017. As at the balance sheet cut-off date, there are mortgage-backed loans in the amount of CHF 50.0 million (interest rate of 0.6% with terms to February 2018) in place.

Allreal obtains legal consulting services from several law firms, including Meyerlustenberger Lachenal Attorneys at Law, in which Andrea Sieber is a partner. In the 2017 financial year, Allreal was charged fees amounting to CHF 0.032 million (2016: CHF 0.057 million).

The Allreal pension fund holds Allreal registered shares with a value of CHF 1.9 million (2016: CHF 1.7 million). As at the balance sheet cut-off date, there are no receivables or liabilities between the Allreal pension fund and the Allreal companies. During the period under review, Allreal’s employer’s contributions amounted to CHF 2.4 million (2016: CHF 2.5 million).

Taking the above-mentioned into account, as at the balance sheet date, there are no significant outstanding receivables or liabilities between any related parties, and no other transactions with related parties took place in 2017.

5.6  Intercompany relationships

The transactions between the individual Group companies are carried out at arm’s length. This also applies in particular to building services provided to the Real Estate division by the Projects & Development division.

In addition, the Projects & Development division performs management services for the other parts of the company. In 2017, it received CHF 5.0 million (2016: CHF 5.0 million) from the Real Estate division as well as CHF 0.6 million (2016: CHF 0.6 million) from Allreal Holding AG for such services. These sums were eliminated in the consolidated financial statements.

5.7  Events after the balance sheet date

Between 31 December 2017 and 13 February 2018 (date on which the consolidated financial statements were approved by the Board of Directors), no further events took place which would result in any adjustments to the book values of the assets and liabilities or which would need to be disclosed here.