Real estate division

In terms of rental income, the share by category in the period under review provides the following breakdown: office and services 60.4 percent, residential 20.0 percent, trade and warehousing 7.8 percent, parking 6.4 percent, and retail 5.4 percent.

Of the total earnings from letting commercial real estate in the year under review, the ten largest tenants contributed a share of 56.8 percent while the five largest tenants contributed a share of 40.6 percent (2018: 56.3%/41.8%).

As at 31 December 2019, the average duration of limited rental agreements for commercial properties amounted to 5.8 years. The share of rental agreements expiring in the 2020 financial year is a low 1.6 percent.

Owing to the high level of portfolio quality and a solid demand for rental space, the cumulated vacancy rate showed a stable development and increased by only 20 base points to remarkably low 2.2 percent. In the period under review, the high share of yield-producing properties managed by Allreal itself amounting to about 60 percent in 2018 grew to about 70 percent. This development shows that Allreal provides a high degree of service quality and the in-house facility management is very successful thanks to its close proximity to customers and short response times.

In 2019, the company successfully concluded new rental agreements and extended existing rental agreements – some of them early – representing total space of more than 14,000 square metres. In terms of earnings, some of the significant new or extended agreements were concluded for commercial real estate on Sonnentalstrasse in Dübendorf ZH, on Vulkanstrasse in Zurich Altstetten or Birmensdorferstrasse / Weststrasse in Zurich Wiedikon.

The cumulated earnings loss on the cut-off date concerning the largest unlet spaces amounted to CHF 2.7 million (2018: CHF 1.9 million), representing a share of 59.2 percent of the entire vacancy rate. The spaces concerned are located in the yield-producing properties Lindbergh-Allee in Opfikon ZH, Baarermatte in Baar ZG, Fangletenstrasse in Bülach ZH, individual street level retail spaces in Richti-Areal in Wallisellen ZH, and in a commercial building in Le Grand-Saconnex GE.

Real-estate expenses in the 2019 reporting period amounted to CHF 27.6 million, corresponding to an expense rate in terms of total rental income of 13.5 percent (2018: CHF 22.6 million/11.6%). The slight increase of the expense rate is due to several large refurbishment and renovation projects, some of which were completed in the previous financial year and will also result in higher real-estate expenses in the coming years. Overall, the expense rate is again moving toward the long-term mean of about 15 percent.

Despite higher real-estate expenses, Allreal reports net yield of 4.3 percent based on the portfolio’s high occupancy rate and the connected reduction in vacancy-related earnings losses.

Adjustments strengthen the portfolio

In the second half of the year, Allreal acquired from its pension fund a 40-percent co-ownership share in the Heerenwiesen residential properties in Zurich Schwammendingen. The company successfully divested a commercial property on Thurgauerstrasse 111 in Glattbrugg ZH at a profit of CHF 1.8 million. Allreal strengthened its portfolio by means of the divestment of Trendhouse and the sole acquisition of residential space in Heerenwiesen.

The portfolio of investment real estate under construction recorded no changes in the year under review. An office building replacing the one built in 1962 is currently under construction on a site representing a part of the Escher-Wyss site. The property at Hardstrasse 301 will include 5,800 square metres of rentable space. Construction of the building at an investment volume of some CHF 37 million began in summer 2018. Occupation and transfer to yield-producing properties will presumably be carried out at the end of the 2020 financial year. The building will affect net income fully from 2021. Nearly the entire building has been leased to an insurance company, and target rental income is CHF 2.3 million in total.

Allreal is putting up a new building on Grünhof site in Zurich Aussersihl which will include 80 rental apartments in the courtyard formerly used for commercial purposes and a replacement building consisting of eight rental apartments and commercial space. The entire useful floor space covers 8,022 square metres. Construction of the project at an investment volume of about CHF 80 million started in summer 2018. Following scheduled completion in 2020, the building will be transferred to the portfolio of yield-producing properties. From the following year, it will fully contribute toward the portfolio’s rental income. Target rental income is CHF 4.3 million.

As at 31 December 2019, the investment real estate portfolio comprised a total of 66 yield-producing properties consisting of 21 residential and 43 commercial buildings and two investment properties under construction.

Valuation of the investment real estate portfolio carried out by an external valuer as at 31 December 2019 resulted in a considerable, positive value adjustment before taxes of CHF 139.1 million (2018: CHF 60.6 million).

The higher valuation was significantly influenced by the ongoing yield compression and connected adjustment of lower discount and capitalisation rates. Simultaneously, the high occupancy rate and the low number of rental agreements up for renewal in the 2020 financial year positively influenced valuation. Of the total value adjustments, the 21 residential properties represented CHF 70.7 million (2018: CHF 46.9 million), the 43 commercial properties CHF 51.4 million (2018: CHF –0.5 million) and the two investment properties under construction 17.0 million (2018: CHF 14.2 million).

Changes in the portfolio and its positive continued development compared to the cut-off date the previous year resulted in growth of the entire real estate portfolio’s market value by CHF 216.0 million to CHF 4.38 billion (31.12.2018: CHF 4.19 billion). Market value of the portfolio of yield-producing properties amounted to CHF 4,276.3 million and that of investment real estate under construction to CHF 99.6 million. Of the market value as at 31 December 2019, the city of Zurich represented 50.6 percent (31.12.2018: 48.7%), the remaining canton of Zurich 36.1 percent (37.2%), the two cantons of Basel 5.6 percent (5.7%), the cantons of Geneva and Vaud 5.3 percent (5.5%), canton Bern 1.7 percent (2.1%) and canton Zug 0.7 percent (0.8%).

Net profit excluding revaluation gains of CHF 118.9 million reported by the Real Estate division for the period under review represents a contribution toward Group net profit excluding revaluation gains of 86.3 percent.

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