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 for its own yield-producing properties (Real Estate division). The general contractor activities encompass the development, realisation, purchase and sale of real estate (Projects & Development division).

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

On 11 February 2020, 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 24 April 2020.

1.2  Presentation of accounts

The consolidated financial statements were prepared as at 31 December 2019 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.

In the 2019 consolidated financial statements, Allreal applied the following new IFRS standards and interpretations for the first time:

With the exception of the amendments to IFRS 16 explained below, the IFRS amendments have no significant impact on the consolidated financial statements.

IFRS 16

The standard sets out the principles for the recognition, measurement and presentation of leases previously defined in IAS 17. The changes affect in particular operating lease contracts with the lessee, which are now recognised in the balance sheet.

Initial application of the new standard followed the modified retrospective approach, thus eliminating the need to restate the previous year’s figures.

As lessee, Allreal is affected in its capacity as ground lessee of yield-producing properties and with regard to long-term rental agreements for offices and parking spaces. As ground lessee, Allreal recognised a right-of-use asset of CHF 34.8 million for future ground rent and a right-of-use asset of CHF 6.8 million for long-term rental agreements. At the same time, a lease liability in the same amount was recognised for both positions on 1 January.

Leasehold agreements are in place in connection with yield-producing properties or investment real estate properties under construction. Ground rent accruing is index-linked, any changes in the index are made prospectively. Ground rent was previously deducted from income from renting investment real estate. Right-of-use assets arising from leasehold agreements count as yield-producing properties and are reported separately in the Notes.

The initial valuation of lease liabilities for both positions corresponds to the value of the discounted future payments. An interest rate with a comparable term and level of security is used as the discounting rate. Lease liabilities incurred in the capacity as ground lessee bore an interest rate of 2.0%, and long-term rental agreements an interest rate of 0.5%. Right-of-use assets were initially recognised at the amount of the lease liabilities.

Right-of-use assets arising from long-term rental agreements for offices and parking spaces are reported under other property, plant and equipment. Right-of-use assets are depreciated on a straight-line basis. This position was previously recognised as rental expenses under other operating expenses.

Payments of ground rent and rental expenses are now divided into an amortisation component and an interest component and thus result in shifts between cash flow from financing activities and cash flow from operating activities.

Application of the new standard does not entail any material adjustments for Allreal in its capacity as lessor.

Effects of initial application of IFRS 16

Opening balance sheet after application of IFRS 16

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.

Apart from additional disclosure requirements, these IFRS amendments are not expected to result in any significant 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.

Capital is consolidated at the time of purchase using the acquisition method. Transaction costs in connection with a corporate acquisition will be charged to the income statement.

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

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 remained unchanged during the period under review.

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. Since the Group operates in Switzerland only, a geographical breakdown is not required.

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) and Apalux AG (commercial and residential properties).

The Projects & Development division consists largely of Allreal Generalunternehmung AG and Bülachguss AG.

The activities of Allreal Holding AG (parent company) and Allreal Finanz AG (finance company) 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 2.28.

2.2  Derivative financial instruments

In the past, Allreal used interest rate swaps (swaps) to reduce interest rate risk. These swaps were terminated early in 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. 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 control.

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.

2.6  Earnings from Projects & Development division

The earnings from the Projects & Development division include earnings from realisation Projects & Development (third-party projects), earnings 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 (contract assets or liabilities).

Direct expenses from realisation Projects & Development contain the accrued project costs of all third-party projects.

Income from the sale of development real estate is recognised as of the time the contract of sale of the development real estate unit is notarised. Project costs and gains on the notarised units are recognised by the percentage of completion (POC) method.

Direct expenses from sales Development contain the accrued project costs.

Capitalised company-produced assets accrue from investment real estate under construction as well as development real estate and are taken to income at cost.

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 under construction 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 non-current assets is divided into yield-producing properties (residential and commercial properties as well as right-of-use assets arising from leasehold agreements) and investment real estate under construction. All investment real estate is carried at fair value. The valuation of residential and commercial properties at the time of initial recognition is based on acquisition cost, including directly attributable transaction costs. The initial recognition of right-of-use assets arising from leasehold agreements corresponds to the discounted future payments. 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 2.28. 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 current assets 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, and a building permit and construction approval which can no longer be contested by third-parties need to have been issued for the project.

2.10  Development real estate

Development real estate includes land reserves, buildings under construction, and completed properties which have not yet been notarised. 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 recognised at acquisition or production costs or, if lower, their net realisable value. The latter corresponds to the estimated selling 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 purchases and third-party costs (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 for which the contract of sale to a third party has not yet been notarised 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 up to notarisation.

2.11  Other property, plant and equipment

With the exception of right-of-use assets arising from long-term rental agreements, 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 right of use arising from long-term rental agreements corresponds, on conclusion of a rental agreement, to the discounted future payments and is depreciated over the term. Depreciation is calculated on a straight-line basis.

2.12  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 since the associated payments qualify as repayment and interest only, are freely available and not pledged.

2.13  Intangible assets

Intangible 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.

2.14  Contract assets and liabilities

This position includes accrued investment costs (land and project costs) for the notarised development real estate offset against prepayments made by purchasers. Positive net positions are reported as contract assets and negative net positions as contract liabilities.

This position also includes receivables from construction activities undertaken on behalf of third parties and which 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 reported as contract assets and negative net positions as contract liabilities.

2.15  Short-term receivables

Contract assets, trade receivables and other receivables are reported at their transaction price 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 historical empirical values as well as future factors. All short-term receivables are freely disposable and are not pledged.

2.16  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 and correspond to the fund for the cash flow statement.

2.17  Share capital

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.

2.18  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.

2.19  Borrowings

In addition to bond issues, financial debt includes bank loans secured by mortgages and is recognised under financial liabilities. Borrowings are recognised at amortised costs using the effective interest method.

2.20  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 non-occurrence. If the effect is material, provisions are discounted.

2.21  Lease liabilities

As lessee, Allreal is affected in its capacity as ground lessee of yield-producing properties and with regard to long-term rental agreements for offices and parking spaces. The initial valuation of lease liabilities corresponds to the value of the discounted future payments. An interest rate with a comparable term and level of security is used as discounting rate. Payments of lease liabilities are divided into an amortisation component and an interest component.

2.22  Current liabilities

Trade payables, prepayments for development real estate and other liabilities (accrued liabilities) due within one year are recorded at their nominal value.

2.23  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 higher 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.

2.24  Taxes

Tax expense covers 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.

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 discrepancies leading to delays in the timing of taxation. For the higher valuation of investment real estate an individual tax rate is applied, with a holding period of at least ten years defined for said investment real estate property. Following this ten-year holding period, a three-year holding period is assumed.

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

2.25  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).

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

These pension plans are classed as defined benefit plans. 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. The expenditure reported during the period under review corresponds to the employer’s payments to the plan.

2.26  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 an 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 or three 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.

2.27  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.

2.28  Valuation uncertainties

Investment real estate

As at 31 December 2019, Allreal holds investment real estate with a book value of CHF 4,375.9 million (31.12.2018: CHF 4,159.9 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. Yield-producing properties totalling CHF 4,276.3 million (31.12.2018: CHF 4,101.8 million) and investment real estate under construction totalling CHF 99.6 million (31.12.2018: CHF 58.1 million) are recognised as at 31 December 2019 at fair values according to category 3. Right-of-use assets arising from leasehold agreements were recognised at CHF 34.8 million on 1 January 2019 and amounted to CHF 33.9 million on 31 December 2019.

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. 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.

In the case of leasehold agreements in place in connection with yield-producing properties or investment real estate properties under construction, future payments are discounted and recognised as a right-of-use asset.

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.

Development real estate

As at 31 December 2019, Allreal holds development real estate with a book value of CHF 167.2 million (31.12.2018: CHF 147.6 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 19.5 million (31.12.2018: CHF 27.8 million) and liabilities totalling CHF 274.1 million (31.12.2018: CHF 237.2 million), which stem mainly from valuation differences relating to investment real estate; see 2.24. 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.

2.29  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 in particular. 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 2.28.

3.1  Income from renting investment real estate

The rental income is calculated as follows:

The accumulated vacancy rate for the 2019 financial year amounted to a total of 2.2% of projected rental income (2018: 2.0%), with residential properties accounting for 3.3% and commercial properties 2.0% (2018: 2.9% and 1.8%, respectively), 0.2 percentage points of which are attributable to the sold property at Thurgauerstrasse 111 in Glattbrugg ZH.

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 2019, real estate expenses for unlet properties amounted to CHF 1.2 million (2018: CHF 0.6 million).

3.3  Income from real estate management services

The real estate management service operation for third parties was divested in the 2018 financial year.

3.4  Earnings from sale of investment real estate

In the second half of 2019, the commercial property at Thurgauerstrasse 111 in Glattbrugg ZH was divested at a selling price of CHF 20.1 million. After deduction of transaction costs, earnings from the sale amounted to CHF 1.8 million.

3.5  Earnings from Projects & Development division

Earnings from realisation Projects & Development consists of architects’ and project & development fees (CHF 21.4 million) and earnings from construction activity (CHF 18.6 million) (2018: CHF 23.1/CHF 17.7 million). This contrasts with directly offset sales deductions of CHF –4.2 million for warranty expenses, construction insurance and guarantees, performance guarantees, bad debt allowances and third-party expenses arising from tendering (2018: CHF –3.0 million).

Income from sales Development was attributable to the partial disposal of the Bäuler development reserves in Rümlang ZH, entailing the sale of a 17,424 square-metre plot (CHF 26.2 million), and to revenue from the Solistrasse, Bülach ZH project (CHF 31.6 million), resulting in gains on sales of CHF 22.9 million.

Diverse income includes fees for third-party project development activities amounting to CHF 0.2 million and other earnings from commissions and services provided for third parties amounting to CHF 0.2 million and rental income from development reserves in the amount of CHF 0.5 million.

3.6  Personnel expenses

An expense of CHF 3.5 million was credited to employee pension expenses in application of IAS 19 (2018: CHF 3.6 million), see 3.11. Other personnel expenses include spending on actual and flat-rate staff expenses (CHF 1.4 million), training and development (CHF 0.4 million), expenses for employee events (CHF 0.3 million), costs for the recruitment of new employees (CHF 0.1 million) and other directly attributable staff expenses (CHF 0.6 million).

On the balance sheet cut-off date, the staff headcount stood at 232 employees, corresponding to 220 full-time equivalents (31.12.2018: 229 employees/216 full-time equivalents).

3.7  Other operating expenses

Owing to the first-time application of IFRS 16, rental expenses are reported under the write-downs on other property, plant and equipment with effect from the 2019 financial year, see 4.3.

3.8  Financial income

3.9  Financial expense

Expense for derivatives is in connection with the recycling of hedging reserves, CHF 8.9 million (2018: CHF –12.1 million) of which was charged to the income statement as non-cash expense in the period under review.

The interest expense for bond issues includes paid and accrued interest of CHF –11.6 million as at the balance sheet cut-off date (2018: CHF –11.3 million) and amortisation of CHF 0.6 million (2018: CHF 0.2 million) between the debt components and the redemption amounts.

Capitalised building loan interest of CHF 0.2 million (2018: CHF 0.3 million) relates in full to investment real estate under construction (2018: CHF 0.2 million – development real estate CHF 0.1 million), applying an average interest rate of 0.66% (2018: 0.80%)

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 15,889,169 to 15,890,569 shares.

3.11  Employee pension plans

Swiss pension institutions are subject to 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 defines and implements investment strategy.

Plan members of the pension fund 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:

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 (31.12.2018: CHF 4.0 million/CHF 4.3 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 0.3 million higher or CHF 0.3 million lower.

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

A probable CHF 5.2 million will be paid out under defined benefit commitments within the next twelve months, and a probable CHF 41.1 million in the subsequent nine years.

The average term of defined benefit commitments to the end of the period under review is 16.5 years (31.12.2018: 15.7 years).

For the following year, contributions to the plan are expected to come to CHF 2.4 million (employer) and CHF 2.4 million (employees) (2018: CHF 2.4 million and CHF 2.4 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 0.8 million (2018: CHF 1.0 million).

In 2019, employee benefits came to a total of CHF 4.6 million (2018: CHF 4.6 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.

Provided that all preconditions are met, a total of 1,534 shares of Allreal Holding AG will in future be distributed to eligible beneficiaries.

Total expenses for share-based reimbursement amounted to CHF 0.26 million in the period under review (2018: CHF 0.19 million).

4.1  Investment real estate

In the second half of 2019, Allreal acquired from the Allreal pension fund 40% co-ownership rights to the residential real estate Heerenwiesen 23–41 in Zurich Schwamendingen (annual gross target rental income CHF 1.0 million). Transfer of ownership took effect on 1 January 2020. The purchase price was CHF 28 million. The remaining 60% of co-ownership rights were previously already held by Allreal.

With the sale of the commercial real estate Thurgauerstrasse 111 in Glattbrugg ZH, the market value of this property, amounting to CHF 18.1 million (CHF 23.4 million in acquisition costs and CHF –5.3 million in revaluation) as at 31 December 2018, was eliminated from assets.

The value-enhancing investments relate to the yield-producing property Grüngasse 27–31/ Badenerstrasse 119–133, Zurich (CHF 6.1 million), and ten other properties (CHF 2.2 million).

4.2  Development real estate

The purchases of development reserves relate to the projects Inzlingerstrasse, Riehen BS (CHF 18.5 million), Spiserstrasse, Zurich (CHF 8.2 million) and Hauserstrasse, Zurich (CHF 7.0 million).

The disposals relate to the partial disposal of the Bäuler development reserves in Rümlang ZH (CHF 9.2 million), entailing the sale of a 17,424 square-metre plot. This resulted in earnings from sales Development of CHF 17.0 million.

The reclassification from development reserves to buildings under construction relates to the projects Alter Züriweg, Zufikon AG, and Florenstrasse, Winterthur ZH, as a result of the start of construction in the period under review.

As at 31 December 2019, the balance sheet position of development properties comprised the following:

Florenstrasse, Winterthur ZH

Eight new-build apartment buildings with a total of 51 condominiums and 74 underground parking spaces with lettable floor space (100% residential) of 6,232 square metres. It is being built by Allreal Generalunternehmung AG and is scheduled for completion in 2022. As at 31 December 2019, contracts of sale had been notarised for none of the 51 residential units, nor had any been reserved.

Alter Züriweg, Zufikon AG

Two connected new-build stepped apartment blocks with a total of 20 condominiums and 30 underground parking spaces with lettable floor space (100% residential) of 3,646 square metres. It is being built by the Projects & Development division and is scheduled for completion in 2021. As at 31 December 2019, contracts of sale had been notarised for none of the 20 residential units and 16 had been reserved.

Solistrasse, Bülach ZH

Five new-build apartment buildings with a total of 73 condominiums and 78 underground parking spaces to Minergie-Eco standard with lettable floor space (100% residential) of 8,150 square metres. It was built by the Projects & Development division and completed in 2019. As at 31 December 2019, contracts of sale had been notarised for 72 out of 73 residential units (68 of which with transfer of ownership) and 0 had been reserved.

4.3  Other property, plant and equipment

The additions reflect capitalised rental expenses relating to business premises and parking spaces in Zurich, Basel, Bern and Cham ZG. 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 0.5 million, have fixed terms, the longest of which runs until January 2022.

As at the balance sheet cut-off date, the book value of other property, plant and equipment comprises capitalised rental expenses (CHF 2.4 million), capitalised interior fit-out costs (CHF 0.7 million), works of art (CHF 0.4 million) and IT equipment (CHF 0.2 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 in full 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 102.9 million (31.12.2018: CHF 109.5 million), the largest individual positions for tenant fit-outs on the Toni site, Zurich, and on Zürcherstrasse, Winterthur ZH, are with the Canton of Zurich as counterparty.

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

On the balance sheet cut-off date, pension plan assets (IAS 19) stood at CHF 20.2 million (31.12.2018: assets of CHF 10.6 million).

4.5  Intangible assets

4.6  Contract assets

4.7  Trade receivables

The CHF 4.4 million in receivables due to the Real Estate division include balances (not yet due) owed by property management companies.

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

The stated values are 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 29.8 million (31.12.2018: CHF 40.6 million), CHF 12.2 million is freely disposable in the form of current account balances and CHF 17.6 million can only be used for certain third-party construction projects of the Projects & Development division.

4.10  Share capital

As at the balance sheet cut-off date, the share capital of Allreal Holding AG comprises 15,942,821 registered shares with a par value of CHF 1.00 each. Each share carries one vote and confers entitlement to attend the general meeting if entered in the share register.

Shareholdings developed as follows:

The average purchase price per treasury share stands at CHF 155.40 (31.12.2018: CHF 155.35).

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 20 April 2020 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 1.0 million by issuing up to 1,000,000 registered shares each with a nominal value of CHF 1.00 (authorised capital).

For the purpose of issuing convertible bonds, warrant bonds or other financial instruments, there exists – excluding the subscription rights of shareholders – conditional capital of up to CHF 2.5 million through the issue of up to 2,495,763 registered shares with a par value of CHF 1.00 each. Bearers of the convertible and/or warrant bonds are entitled to subscribe to the new shares.

Further, Allreal Holding AG has conditional capital of CHF 0.2 million (200,000 registered shares at a par value of CHF 1.00 each) at its disposal for the purpose of issuing options to the members of the Board of Directors and management.

The Board of Directors will propose to the Allreal Holding AG annual general meeting of 24 April 2020 a distribution of CHF 6.75 per share, corresponding to a total amount of CHF 107.6 million.

Of this amount, CHF 3.25 per share is deemed to be repayment of reserves from contribution of capital and CHF 3.50 per share is deemed to be a dividend. In 2019, CHF 103.3 million in the form of a repayment of reserves from contribution of capital were distributed to shareholders, corresponding to CHF 6.50 per share.

4.11  Borrowings

Maturity of liabilities at nominal values

The financial debt consists of bank loans secured by mortgage (fixed advances and fixed-rate mortgages) and of bond issues. The bank loans in the form of fixed advances are extended on a rolling basis.

Bond issues with a total par value of CHF 1,155 million and a book value of CHF 1,154.3 million are recognised under borrowings. During the period under review, CHF 0.6 million was spent on the amortisation of the issuing costs.

4.12  Provisions

The provisions for construction guarantees cover risks arising from current or 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

4.13  Lease liabilities

In the 2019 financial year, lease liabilities were recognised for ground rent and rental agreements for the first time, see 1.2. Payments in the amount of CHF 4.5 million were made and CHF 4.4 million are due in the coming 12 months.

4.14  Contract liabilities

4.15  Prepayments for development real estate

4.16  Trade payables

5.1  Taxes

5.1.1  Tax expense

In the income statement, the tax expense for 2019 and 2018 breaks down as follows:

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.

Other deferred taxes in the income statement

The year-on-year change in temporary valuation differences is attributable to the impact of the tax reform (STAF) as a result of lower tax rates. This was offset by higher expenses for the capitalised tax effects of loss carry-forwards and deferred taxes on revaluation.

5.1.2  Tax liabilities

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

5.1.3  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 are based on a tax rate of up to 32% (2018: 32%).

Valuation differences on write-downs on investment real estate in the Canton of Zurich and on other balance sheet positions are calculated at a rate of 18 to 19% (2018: 20–22%). A tax rate of up to 24% was applied to valuation differences on write-downs on investment real estate outside the canton of Zurich (2018: 14–24%).

Deferred tax assets comprise the following positions:

The deferred tax assets from loss carry-forwards were valued at a tax rate of 19.7% (2018: 22.0%).

The recognition of pension commitments results in deferred tax liabilities amounting to CHF 4.0 million as at the balance sheet cut-off date (31.12.2018: CHF 2.3 million), representing a year-on-year increase of CHF 1.7 million, CHF 1.9 million of which was taken directly to other earnings and CHF 0.2 million to income.

5.1.4  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 reduction to 21% of the reference tax rate is reflected in the increase in tax effects from revaluations.

Income subject to a lower tax rate factors in that a number of the Group companies are domiciled, or an investment property is situated, at a location where the total tax burden is lower than the reference tax rate.

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%. 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 commitment conforms to contractual agreements for the acquisition of development real estate.

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 246.5 million in connection with financing transactions with third parties on behalf of individual subsidiaries (2018: CHF 373.5 million).

5.3  Assets pledged as security for own liabilities

5.4  Finance, capital and risk management

5.4.1  Management of finance and capital

In the context of the financing strategy, in the investment and financing guidelines the Board of Directors issued rules on the extent to which the 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 as a percentage 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.

Interest rate risks

As at 31 December 2019 fixed advances amounting to CHF 250 million (12.5% of all financial liabilities) are in place.

The average interest rate of all financial liabilities as at 31 December 2019 is 1.33% (31 December 2018: 1.48%).

The average interest lock-in period for all financial liabilities as at 31 December 2019 is 56 months (31 December 2018: 52 months).

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 CHF 1.3 million (2018: CHF 0.0 million/CHF –1.9 million).

Credit risks

At CHF 20.8 million, the maximum default risk relating to cash is lower than the book value of CHF 29.8 million, since waiver of the right to offset credit balance against liabilities was contractually excluded with a number of lending banks.

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

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.

The maximum default risk relating to receivables and other claims corresponds to the book value. As at the balance sheet cut-off date, the credit risk relating to financial assets amounts to CHF 118.8 million, which, with the exception of the pension plan assets of CHF 20.2 million, corresponds to the balance sheet item.

Refinancing and liquidity risk

Under the financial covenants, Allreal has the option of taking out around CHF 1.6 billion in new borrowings before new equity is required.

Interest and nominal amount payments on liabilities

5.4.3  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 0.5% (2018: 0.6%).

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 members of the Board of Directors received fixed remunerations totalling CHF 0.69 million (2018: 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 3.11 million (2018: CHF 3.54 million) paid to Group Management was recognised in the consolidated financial statements, from which the highest total remuneration of CHF 1.20 million (2018: CHF 1.16 million) was paid to Roger Herzog.

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 of the balance sheet cut-off date, 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 Philipp Gmür performs the function of Group CEO, is not included in the table.

The shares held by the members of the Board of Directors and Group Management correspond to 1.69% of the share capital of the company (31.12.2018: 1.81%).

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 Philipp Gmür. Allreal works for Helvetia as a general contractor for the realisation of construction projects. These services are provided at arm’s length. During the period under review, the volume of project work completed for the Helvetia Group amounted to CHF 21.3 million. In addition, insurance contracts are in place between the Helvetia Group and individual Allreal companies which have an annual premium volume of CHF 1.3 million (policies covering buildings, construction and personnel).

Allreal obtains legal consulting services from several law firms, including Meyerlustenberger Lachenal AG, in which Andrea Sieber is a partner. In the 2019 financial year, Allreal was charged fees amounting to CHF 0.055 million.

Meyerlustenberger Lachenal AG is a tenant of office space in the commercial property at Schiffbaustrasse 2 in Zurich at arm’s length conditions and an annual rental volume of CHF 0.94 million.

In the second half of 2019, Allreal acquired from the Allreal pension fund 40% co-ownership rights to the residential real estate Heerenwiesen 23–41 in Zurich Schwamendingen (annual gross target rental income CHF 1.0 million). Transfer of ownership took effect on 1 January 2020. The purchase price was CHF 28 million. The remaining 60% of co-ownership rights were previously already held by Allreal.

5.6  Events after the balance sheet date

Between 31 December 2019 and 11 February 2020 (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.