4  Notes to the consolidated balance sheet

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.