3   Notes on the consolidated statement of comprehensive income

The rental income is calculated as follows:

The accumulated vacancy rate for the 2011 financial year amounted to a total of 4.4% of projected rental income (2010: 4.8%), with commercial properties accounting for 4.6% of vacancies, while residential properties accounted for 3.7% (2010: 5.2% and 2.5% respectively).

Loss of income as a result of rent-free periods relates to commercial premises let out for the first time or re-let during the period under review in cases where tenants moved into the premises in stages in accordance with contractual agreements and during this period paid no rent or reduced rent totalling CHF 0.6 million (2010: CHF 0.8 million). The effective collection losses amounted to CHF 0.1 million (2010: CHF 0.2 million).

In the case of two yield-producing properties, Allreal is the ground lessee, but ground rent is only due for one commercial property. Under a contractual agreement, the ground rent is reset annually for a further 12-month period on the basis of capital market interest rates. Future ground rents will be due as follows:

The rest of the rental income breaks down as follows:

The year-on-year change in rental income from commercial and residential real estate held on a continuous basis came to –0.7% and +1.2% respectively (like-for-like rental growth). In calculating the growth rate on the real estate portfolio, additions and disposals in 2011 and 2010 were not taken into account.

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 2011, real estate expenses for unlet properties amounted to CHF 0.5 million (2010: CHF 0.8 million).

In the period under review, a residential property in Zurich-Affoltern was sold for CHF 6.7 million and a commercial property in Basel for CHF 3.6 million. After deduction of transaction costs, the sales generated a pre-tax profit of CHF 0.8 million.

The third-party fees and earnings from construction activities consist of architects´ and project & development fees (CHF 32.2 million) and earnings from construction activity (CHF 23.5 million). This contrasts with directly offset sales deductions for construction insurance and guarantees, performance guarantees, bad debt allowances and third-party expenses arising from tendering costs (CHF –2.2 million).

Profits on sales from the three completed projects Ahornweg Adliswil, Lidostrasse Unterägeri and Bauarena Volketswil account for 23.7 million of the earnings from project development and sale of development real estate in the amount of CHF 26.3 million (2010: CHF 26.7 million). Further project development and sales activities generated CHF 2.6 million.

The diverse income of CHF 1.1 million includes rental income from development real estate amounting to CHF 0.8 million and other earnings from commissions and services provided for third parties amounting to CHF 0.3 million.

With the exception of the Board of Directors' compensation (holding company, CHF 0.5 million), personnel expenses relate to the Projects & Development division. Personnel services provided to other divisions are paid in the form of management fees (see 5.6).

The wages and salaries amounting to CHF 39.1 million take account of variable compensation in the form of bonuses (CHF 4.6 million) and share allocations to employees (CHF 0.1 million). For share-based reimbursement to management see 3.11.

Other personnel expenses include spending on training and development (CHF 0.7 million), voluntary long-service benefits for employees (CHF 0.1 million), costs for the recruitment of new employees (CHF 0.1 million) and other employee-related expenses (CHF 0.1 million).

On the balance sheet cut-off date, the staff headcount stood at 316 employees, corresponding to 297 full-time equivalents (2010: 275 employees/261 full-time equivalents).

Rental expenses relate to business premises and parking spaces used by Allreal in Zurich, Basel, Bern and St. Gallen. For its head office in Zurich, Allreal has an indexed lease which runs until 31 January 2018, with an annual rent of CHF 2.8 million (total CHF 17.0 million by 2018). Up until 30 September 2011, CHF 0.3 million of the total was paid by a subtenant. The leases for the other three sites, with annual rents of CHF 0.4 million (total CHF 1.7 million by the end of the contract), have fixed terms, the longest of which runs until January 2017.

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

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

The finance expense for the 2.50% bond issue 2011–2016 includes accrued interest of CHF 2.3 million up to the balance sheet cut-off date and amortisation of CHF 0.2 million between the debt component and the redemption amount.

The finance expense for the 2.125% convertible bond 2009–2014 comprises paid and accrued interest of CHF 4.2 million up until the balance sheet cut-off date (2010: CHF 5.5 million) and amortisation of CHF 2.9 million between the debt component and the redemption amount (2010: CHF 3.8 million). In the previous year, costs for the 1.875% convertible bond 2006–2010 were charged to finance expense until June 2010.

Capitalised building loan interest of CHF 7.6 million relates either to directly attributable interest costs from third-party financing or reflects apportionment of an average 55–60% of the debt incurred on development real estate under construction (CHF 4.1 million) and investment real estate under construction (CHF 3.5 million), assuming an average interest rate of 2.4% (2010: 2.6%).

The average interest rate on the outstanding financial liabilities is 2.30%, with an interest lock-in period of 4.3 years (2010: 2.59%, interest lock-in period 3.8 years).

Based on the financial liabilities with interest lock-in periods of less than one year outstanding on the balance sheet date debt, a rise in interest rates by 1% would increase the annualised interest costs by CHF 1.4 million (2010: CHF 0.3 million).

In line with IAS 33, the issuing of convertible bonds has the effect of diluting the earnings per share. To calculate the dilution, the net profit was corrected for the effects resulting from the convertible bonds (finance expense, deferred and current taxes). This results in a diluted net profit of CHF 146.3 million including revaluation effect and CHF 114.5 million excluding revaluation effect. The average number of outstanding shares increases by the maximum number of equity securities to be issued on conversion (time-weighted) from 13 616 086 to 15 057 167 shares.

If all the conversion rights arising from the 2009–2014 2.125% convertible bond were exercised at a conversion price of CHF 138.75 per registered share, this would result in the creation of 1 441 081 new shares from conditional capital.

Under IAS 19, the pension fund qualifies as a defined benefit plan. The projected unit credit method which applies to such plans produces the following picture for the consolidated financial statements of the Allreal Group:

Change in pension commitments

Changes in pension fund assets at market value

The effective yield on the pension fund assets amounted to 0.7% in 2011 (2010: 4.2%).

As at 31 December 2011, plan assets break down into the individual investment categories as follows: real estate 44.4% (2010: 47.0%), bonds 28.6% (2010: 29.8%), equities 19.6% (2010: 17.8%) as well as cash and receivables 7.4% (2010: 5.4%).

The expected return on the pension assets stands at 3.7% (2010: 3.5%) and corresponds to the weighted average of the asset distribution and the expected returns for each investment category. These break down as follows: real estate 4.8% (2010: 4.8%), bonds 2.0%–3.0% (2010: 1.5%–1.8%), equities 6.0%–6.2% (2010: 6.3%–6.6%) and cash 0.5% (2010: 0.75%).

The pension commitments were calculated on the basis of the following assumptions:

Effective 1 January 2012, the pension fund amended the pension plan such that retirement credits were increased by 0.5%, while risk premiums were reduced by 0.5%. In addition, the conversion rates were reduced and death and disability benefits increased. Savings capital was increased for all actively insured members by means of a single premium to the debit of the pension fund in order to partly offset the reduction in the conversion rate. The difference of CHF 0.4 million between the pension commitments under the new plan and under the previous plan is recognised as past service cost and amortised over the average remaining service period of 9.8 years.

The following table shows the cover of the defined benefit pension plan and the impact of deviations stemming from expected and actual values of the pension commitments and the assets of the pension fund for recent reporting periods:

Statement of development of net pension liabilities/technical shortfall

Experience-based adjustments to the plan assets amounted to CHF 2.8 million (2010: CHF –2.4 million), while such adjustments to the pension liabilities amounted to CHF –1.2 million (2010: CHF –1.3 million).

Under IAS 19.58 (IFRIC 14), an economic benefit to be capitalised in the balance sheet may arise if the current pension expenditure is greater than the regulatory contributions. As in the previous year, these preconditions do not apply as at the balance sheet cut-off date.

For the following year, employer and employee contributions to the plan are each expected to come to CHF 2.8 million (2010: CHF 2.8 million).

Calculation of pension expenses

In addition to the Allreal pension fund, some Allreal staff are covered by an executive 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 0.6 million (2010: 0.6 million). The executive plan is classified as a defined contribution plan in accordance with IAS 19.

In 2011, employee benefits came to a total of CHF 3.2 million (2010: CHF 3.2 million).

Under IAS 24, the pension fund is regarded as a related party; see also 5.5.

The Board of Directors may, at its discretion and without giving rise to any recurrent entitlement, award members of Group Management and selected senior executives remuneration in the form of shares of Allreal Holding AG. Beneficiaries have immediate right of disposal over the first half of the shares allocated to them. The second half of the shares allocated will be placed at the beneficiary's disposal in two years, provided that the employment relationship has not been terminated by such time. Entitlements will be satisfied by the company by means of treasury shares. The amount in connection with the share allocation is charged to personnel expenses over the vesting period.

[*] Market price on 31.12.2011

Total expenses for share-based reimbursement amounted to CHF 0.11 million in the period under review (2010: CHF 0.07 million).