Selected notes

1.1  Presentation of accounts

Since 1 January 2020, the financial statements of Allreal Group have been prepared according to Swiss GAAP FER (FER). The consolidated half-year financial statements 2020 were prepared in accordance with Swiss GAAP FER 31 “Complementary recommendation for listed companies” and are compatible with the Listing Rules as well as Article 17 of the Directive on Financial Reporting (DFR) of SIX Swiss Exchange. The effects of the change in accounting standards from IFRS to FER on the principles of recognition and valuation are outlined under section 2.

1.2  Scope of consolidation

The scope of consolidation remained unchanged in the first half of 2020.

1.3  Valuation uncertainties

Investment real estate

Owing to the coronavirus (COVID-19), the evaluation of the market value of investment real estate is subject to increased uncertainty. Accordingly, external real estate valuer JLL issued the following disclosure:

“The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a ‘Global Pandemic’ on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.

Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.

Our valuations are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuations of under frequent review.

For the avoidance of doubt, the inclusion of the ‘material valuation uncertainty’ declaration above does not mean that the valuation cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner that - in the current extraordinary circumstances - less certainty can be attached to the valuation than would otherwise be the case. The material uncertainty clause is a disclosure, not a disclaimer.

Although we reflect our general understanding of the status of the tenants based on publicly available information which may not be up to date, we are not qualified to advise you on the financial standing of the tenants. Based on the information currently available, we assume that the tenants have sufficient covenant status.

With the ongoing outbreak of COVID-19 virus, uncertain trading and credit market conditions may lead to rapid changes in covenant strength and/or sentiment.”

The effects that the change in accounting standards from IFRS to Swiss GAAP FER has on the principles of recognition and valuation are outlined in the following. The principles which remain unaffected are not shown. The effects on the consolidated financial statements and on consolidated equity are stated under section 2.8.

2.1  Earnings from renting investment real estate / investment real estate

Income from renting investment real estate includes net rental income after deduction of vacancy losses, losses due to bad debts and (new) deduction of ground rent. Under IFRS, ground rent was capitalised as a right-of-use asset and reported under yield-producing properties. Changes in right-of-use assets were recognised under gains from the revaluation of investment real estate. The change in recognition of ground rent obviates the need to capitalise it as a right-of-use asset and report it under yield-producing properties as per IFRS.

2.2  Employee pension plans

Under IFRS, pension funds were classed as defined benefit plans, with plan assets recognised at fair value and liabilities valued using the projected unit credit method.

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

Pension plans are now recognised in accordance with Swiss GAAP FER 16 “Pension benefit obligations”. Accordingly, actual expenditure for the pension fund is charged to personnel expenses. In application of the new standard, any economic benefit or obligation existing on the cut-off date must be taken to the balance sheet. The previous practice of reporting the net position “Pension plan assets” in the balance sheet under financial assets no longer applies.

2.3  Other operating expenses / other property, plant and equipment

Rental expenses from long-term rental agreements for offices and parking spaces are now recognised as operating leases and charged to income under other operating expenses. Under IFRS, these obligations were capitalised as right-of-use assets under the position “Other property, plant and equipment” and depreciated over the term. They are no longer capitalised as right-of-use assets under FER.

2.4  Financial expenses / Derivative financial instruments

In December 2016, Allreal terminated interest swaps (swaps) early. Their remaining negative replacement value (after deferred tax) was reported in the hedging reserve and under IFRS released to the income statement over the original residual term to maturity of the swaps.

Under FER, the balance of negative hedging reserves was allocated in the opening balance sheet of 1 January 2019 to retained earnings and has not been charged to the consolidated statement of comprehensive income since 2019.

2.5  Development real estate

Development real estate comprises land reserves, buildings under construction, and completed properties. Under FER, accrued investment costs (land and project costs) for notarised units are now no longer reported as contract assets or liabilities but – as buildings under construction – fall under development real estate.

2.6  Short-term receivables and liabilities

Receivables 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). In accordance with IFRS, positive net positions were previously reported as contract assets and negative net positions as contract liabilities. Now, under FER, order balances are reported as trade receivables or trade payables accordingly.

2.7  Lease liabilities

In connection with the two types of right-of-use assets – i.e. arising from ground rent and from long-term rental agreements – a long- and a short-term lease liability was recognised under IFRS. Under FER, rental expenses and ground rent are charged to the income statement as incurred, and no right-of-use assets are capitalised. Accordingly, there are no long- and short-term lease liabilities to recognise.

2.8  Reconciliation of net profit and equity

The changes in principles of accounting following adoption of FER were applied retroactively to 1 January 2019 with a restatement of the previous year’s figures. The effects of the change from IFRS to FER on net profit and equity are shown in the following tables.

Reconciliation of net profit from IFRS to FER

Reconciliation of equity from IFRS to FER

The accumulated vacancy rate for the first half of 2020 amounted to a total of 1.5% of projected rental income (1st half-year 2019: 1.9%), broken down into 2.1% for residential properties and 1.3% for commercial properties (1st half-year 2019: 3.8% and 1.5%).

Earnings from realisation Projects & Development consists of architects’ and project & development fees (CHF 10.4 million) and earnings from construction activity (CHF 11.1 million) (1st half-year 2019: CHF 11.1 million and CHF 12.1 million, respectively). This contrasts with directly offset sales deductions (CHF 2.7 million) (1st half-year 2019: CHF 2.5 million).

Income from sales Development is attributable to revenue from the projects Solistrasse in Bülach ZH (CHF 4.2 million) and Alter Züriweg in Zufikon AG (CHF 7.9 million), resulting in gains on sales of CHF 1.6 million.

CHF 3.9 million of the higher valuation of yield-producing properties relates to residential real estate and CHF 19.2 million to commercial real estate (1st half-year 2019: CHF 13.6 million and CHF 25.7 million, respectively). CHF 0.0 million of the lower valuation of yield-producing properties relates to residential real estate and CHF 12.9 million to commercial real estate (1st half-year 2019: CHF 0.7 million and CHF 14.3 million, respectively).

The average discount rates as at 30 June 2020 for the entire portfolio of yield-producing properties amount to 3.92% (31 12. 2019: 3.93%). The average capitalisation rates as at 30 June 2020 amount to 3.43% (31.12.2019: 3.44%).

As in the previous year, Jones Lang LaSalle AG acts as the real estate valuer on a contract basis.

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 15,898,289 to 15,899,887 shares.

The changes in the first half of 2020 can be summarised as follows:

The value-enhancing investments relate to the yield-producing properties Grüngasse 27–31 / Badenerstrasse 119–133, Zurich (CHF 2.0 million), Bellerivestrasse 36, Zurich (CHF 1.1 million), Zollstrasse / Josefstrasse 23–29 / Klingenstrasse 4, Zurich (CHF 0.7 million), the Escher-Wyss site, Zurich (CHF 0.7 million) and seven other properties (CHF 0.3 million).

Largest tenants, commercial real estate

Share in total rental income from commercial real estate:

In the first half of 2020, the five largest tenants’ share of total rental income from all yield-producing properties (commercial and residential) came to about 35%.

The weighted remaining term of fixed-term rental contracts for commercial real estate is 5.7 years (31.12.2019: 5.8 years).

Investment real estate under construction as at 30 June 2020

Grünhof site, Zurich

New-build six-floor apartment building with 80 rental apartments in the inner courtyard (previously used for commercial purposes) plus realisation of a replacement new-build containing eight rental apartments in addition to office and commercial space on Badenerstrasse. The rentable residential, office and commercial area in the new-builds on the 7,088 square metre plot in Zurich Aussersihl is 8,022 square metres in total. The project is being built by the Projects & Development division and upon completion (prospectively as at 1 December 2020 and 1 February 2021) will be reported in the portfolio of yield-producing properties. For the market valuation as at the balance sheet cut-off date, nominal discount and capitalisation rates of 3.3/3.5% and 2.8/3.0%, respectively, were applied (31.12.2019: 3.80/4.00% and 3.30/3.50%).

Hardstrasse 301, Zurich

New-build six-floor commercial building with lettable floor space of 5,800 square metres, comprising 4,900 square metres of office space on the upper floors, 580 square metres of commercial space on the ground floor, 320 square metres of storage area in the basement as well as an underground garage with 21 parking spaces. The project is being built by the Projects & Development division and, upon completion in 2020, will be reported in the portfolio of yield-producing properties. For the market valuation as at the balance sheet cut-off date, nominal discount and capitalisation rates of 3.90% and 3.40%, respectively, were applied (31.12.2019: 4.30% and 3.80%).

The two investment real estate properties under construction are 100% solely owned by Allreal.

The addition to development reserves relates to the property Am Strubenacher in Zumikon ZH, ownership of which was transferred in the first half. The changes to buildings under construction relate to the projects Alter Züriweg in Zufikon AG and Florenstrasse in Winterthur ZH. The disposal of completed real estate is in connection with the transfer of ownership of residential units under the project Solistrasse in Bülach ZH. This generated income from sales Development of CHF 1.6 million.

Development real estate as at 30 June 2020

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 30 June 2020, contracts of sale had been notarised for 0 of the 51 residential units and 44 had 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 2,007 square metres. It is being built by Allreal Generalunternehmung AG and is scheduled for completion in 2021. As at 30 June 2020, contracts of sale had been notarised for 17 of the 20 residential units, 0 of which with transfer of ownership, and 2 had been reserved.

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:

On 30 June 2020, Allreal held 43,125 treasury shares (31.12.2019: 45,708 shares). The average purchase price per share stands at CHF 155.40 (31.12.2019: HF 155.40). 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 24 April 2022 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 1,000,000 by issuing up to 1,000,000 registered shares each with a par 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 1,000,000 through the issue of up to 1,000,000 registered shares with a nominal 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 annual general meeting of Allreal Holding AG of 24 April 2020 voted in favour of a distribution of CHF 6.75 per share, corresponding to a total amount of CHF 107.3 million. Of this amount, CHF 3.25 per share was paid out in the form of a repayment of reserves from contribution of capital and CHF 3.50 per share as a dividend.

Maturity of financial liabilities (capital lock-up at nominal values)

The financial liabilities consist of 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.

The average interest lock-in period for all financial liabilities decreased to 49 months as at the balance sheet cut-off date (31.12.2019: 56 months).

In the first half of 2020, bond issues in the amount of CHF 10 million were redeemed on the market and offset against the nominal amount of outstanding borrowings. The resultant financial income of CHF 0.4 million was credited to income.

As at the balance sheet date, the bond issues and fixed-rate mortgages are recognised as follows:

During the period under review, CHF 0.1 million was spent on the amortisation of the issuing costs for the bonds (1st half-year 2019: CHF 0.1 million).

As at 30 June 2020, fixed advances amounting to CHF 292 million and fixed-rate mortgages amounting to CHF 595.8 million (at nominal values) are in place, all of which were taken out with Swiss banks, insurance companies or pension funds.

The average interest rate of all financial liabilities as at 30 June 2020 is 0.83% (31.12.2019: 0.88%).

During the reporting period, the contractual clauses (financial covenants) relating to minimum capitalisation (equity ratio, net gearing, interest coverage ratio and refinancing of properties) agreed upon with the lenders were complied with without exception.

There are no purchase commitments, 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 CHF 284.4 million in connection with financing transactions with third parties on behalf of individual subsidiaries (31.12.2019: CHF 246.5 million).

As at 30 June 2020, 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.

On 6 July 2020, a property on Badenerstrasse 501–505 in Zurich Albisrieden was acquired at a price of CHF 31.5 million as part of the development real estate. The property is suitable for new residential construction with an investment volume of about CHF 61 million. Otherwise, between 30 June 2020 and 18 August 2020 (date on which the consolidated half-year 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.