4   Notes to the consolidated balance sheet

During the period under review, value-enhancing investments totalling CHF 206.2 million were channelled into the commercial real estate (CHF 9.9 million) and the investment real estate under construction (CHF 196.3 million).

With the sale of an investment property, the market value of that property amounting to CHF 7.3 million (CHF 7.4 million in acquisition costs and CHF –0.1 million in revaluation) as at 31 December 2011 was eliminated from assets.

In the case of the commercial property at Neugutstrasse 2–6/Bahnhofplatz 2/Bahnhofstrasse 25 in Wallisellen, construction and project costs amounting to CHF 0.6 million stated under acquisition costs were derecognised through income and booked as a disposal as these expenses were no longer incurred.

As the preconditions under the accounting and valuation principles (see 2.9) were fulfilled, the Favrehof residential development under construction in Wallisellen, along with its acquisition costs of CHF 11.6 million, was reclassified (with no impact on income) from development real estate to investment real estate under construction.

In terms of individual regions and property types, the breakdown of acquisition costs and market values as at 31 December was as follows:

[1]From revaluation in comparison with previous year

Costs incurred in connection with the acquisition (purchase price, notary’s fees, property transaction costs, commission payments) are recognised under acquisition costs, as are the actual production costs of the additions from construction activity and value-enhancing investments and total renewals.

The revaluation of the investment real estate is based on the valuation conducted on 31 December by the external real estate valuer using the discounted cash flow method (see pages 131 to 137 of the Annual Report).

As was the case the previous year, Jones Lang LaSalle AG is acting as the real estate valuer on a mandate basis. There are no further business connections or investments between Allreal and the real estate valuer.

For details of the investment real estate, see pages 118 to 128 of the consolidated financial statements.

The purchases include purchase price payments on the transfer of ownership of land for the Kirschblütenweg Basel, Pfruendmatt Mettmenstetten and Schwyzerstrasse Steinen projects.

Reclassifications of CHF 11.6 net to investment real estate under construction relate to the Favrehof project in Wallisellen previously reported under development real estate, see page 127 of the consolidated financial statements.

Based on the impairment tests performed on the individual development properties as of 31 December 2012, it must be assumed in the case of one project that the realisable market value less selling costs is lower than the book value. The value of the residential units of the Holengass Meilen project, which are carried as completed properties on the balance sheet, was adjusted by CHF 1.7 million, taking a charge to direct expenditure from sales Development.

Other property, plant and equipment comprises capitalised fit-out costs for commercial and sales premises at the Bern, Cham, Wallisellen and Zurich sites (CHF 1.0 million), IT equipment (CHF 0.5 million) and works of art (CHF 0.8 million).

For the pre-financing and securing of a construction project, Allreal granted a loan with an indefinite term amounting to CHF 3.6 million to a third party (no repayments, interest-free).

With the proposed acquisition of land, an advance payment of CHF 1.0 million was made to the seller on the basis of a notarised preliminary contract (no repayments, interest-free).

In the Real Estate division, Allreal provided tenants with prefinancing of costs incurred for interior fit-outs of commercial premises which will be repaid by the tenants over the term of their leases on an annuity basis. As of the balance sheet cut-off date, this prefinancing amounts to CHF 7.0 million, with final maturities up to 2031 (annual repayments of CHF 0.8 million, interest rates of 2%–7.5% p.a.).

On 4 April 2012, Allreal Holding AG acquired 100% of the share capital of Hammertor AG, Cham, at a cash purchase price of CHF 8.1 million. No transaction costs were incurred. Hammertor AG, together with its subsidiaries, Hammer Retex AG, Cham, and Wohnbau Zürich AG, Zurich, forms the Hammer Retex Group.

With the acquisition of the Hammer Retex Group, all employees were taken over on unchanged terms and conditions (55 employees/50 full-time equivalents as of 31 December 2012).

Between the acquisition date and 31 December 2012, the Hammer Retex Group generated income of CHF 9.1 million and contributed CHF 0.5 million to net profit. This includes CHF 1.4 million for the amortisation of purchased intangible assets, which consist of project and development contracts for third parties and property management customers.

If the acquisition of the Hammer Retex Group had taken place as at 1 January 2012, consolidated operating earnings would have increased to CHF 834.9 million and net profit to CHF 98.2 million.

The following identifiable net assets were taken over as a result of the acquisition:

The intangible assets break down as follows:

The value adjustments relate primarily to overdue receivables from ongoing or completed orders in the Projects & Development division. These are formed on the basis of individual assessments of Group Management regarding the recoverability of the balances. The receivables of the Real Estate division include balances owed by property management companies.

The actual losses on receivables in the Projects & Development division amounted to CHF 0.4 million (2011: CHF 0.1 million). For income losses in the Real Estate division, see 3.1.

As at the balance sheet cut-off date, the receivables amounting to CHF 5.0 million in the Real Estate division are not yet due. The maturities structure for the non-value-adjusted receivables of the Projects & Development division was as follows as of 31 December:

The stated values conform to the valuation principles described under 2.14 after deduction of downpayments made for each project which as at 31 December are under construction for third parties and have not yet been billed and paid.

The receivables stemming from contaminated sites (CHF 0.8 million) relate to two investment properties in the Real Estate division for which Allreal made advance payments for decontamination work.

The diverse other receivables consist mainly of balances arising from the payment of withholding tax, deposits/security paid for projects of the Projects & Development division amounting to CHF 0.4 million, as well as CHF 0.8 million for short-term balances vis-à-vis tenants in the Real Estate division arising from the settlement of prefinancing of tenant fit-outs and value added tax.

Of the cash amounting to CHF 26.1 million (31.12.2011: CHF 71.9 million), CHF 16.4 million is freely disposable in the form of current account balances and CHF 9.7 million can only be used for certain third-party construction projects of the Projects & Development division. As at the balance sheet cut-off date, all funds are invested at standard market conditions with Swiss banks with at minimum an “A” rating (if rated).

As at the balance sheet cut-off date, the share capital of Allreal Holding AG comprises 15 941 649 registered shares with a par value of CHF 50 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 31 December 2012, Allreal held 7 661 treasury shares (31.12.2011: 13 463 shares). The average purchase price per share stands at CHF 138.04 (31.12.2011: CHF 137.65). The total purchase price is deducted from consolidated equity. For changes in the holding of treasury shares, see 3.10.

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 28 March 2014 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 200.0 million by issuing up to 4 000 000 registered shares each with a par value of CHF 50 (authorised capital). In May 2012, the authorised capital was reduced by CHF 113.9 million from CHF 200.0 million to CHF 86.1 million (as at 31 December 2012) owing to the rights issue.

For the purpose of issuing convertible bonds, warrant bonds or other financial instruments, the annual general meeting of 31 March 2006 created – excluding the subscription rights of shareholders – conditional capital of up to CHF 125.0 million through the issue of up to 2 500 000 registered shares with a par value of CHF 50 each. Bearers of the convertible and/or warrant bonds are entitled to subscribe to the new shares. This conditional capital decreased by CHF 0.2 million to CHF 124.8 million (as at 31 December 2012) following the conversion of convertible bonds into shares.

Further, Allreal Holding AG has conditional capital of CHF 10.0 million (200 000 registered shares at a par value of CHF 50 each) at its disposal for the purposes of issuing options to the members of the Board of Directors and management. This conditional capital has not been drawn.

In May 2012, Allreal Holding AG carried out a capital increase with rights offer to existing shareholders. 2 277 378 new registered shares with a par value of CHF 50 at an issue price of CHF 120 each were created out of the authorised capital. The shares are dividend-bearing as of 1 January 2012. The gross proceeds amounted to CHF 273.3, while issuing and transaction costs came to CHF 8.3 million. The net proceeds from the capital increase thus totalled CHF 265 million.

The Board of Directors will propose to the annual general meeting of 5 April 2013 a distribution of CHF 5.50 per share, corresponding to a total amount of CHF 87.7 million, in the form of a repayment of reserves from contribution of capital. In the previous year, CHF 75.0 million in reserves from contribution of capital were distributed to shareholders, corresponding to CHF 5.50 per share.

Maturity of the financing (capital lock-up at nominal values)

The financial liabilities of the Allreal Group consist of bank loans secured by mortgage (fixed advances and fixed-rate mortgages), a convertible bond and a bond issue. The bank loans in the form of fixed advances are extended on a rolling basis. Apart from the 2.50% bond issue and the 2.125% convertible bond, only bank loans with contractually agreed remaining terms to maturity greater than twelve months are reported as long-term financial liabilities.

Long-term borrowings include a 2.50% bond issued in 2011 and a 2.125% convertible bond issued in 2009:

2.50% bond issue 2011–2016

As at the balance sheet date, the 2.50% bond issue is recognised at CHF 149.0 million in long-term borrowings; during the period under review, CHF 0.3 million was spent on the amortisation of issuing costs. In addition to the interest rate of 2.50% actually payable, expense, corresponding to an effective interest rate of 2.71%, is also deferred in the income statement.

2.125% convertible bond 2009–2014

Until 19 September 2014, each bearer bond at CHF 5 000 par can be converted into 36.79447 registered shares of Allreal Holding AG. The bond may be redeemed early, and the bond terms customary for such capital market instruments shall apply. Specifically, this includes options for early redemption either at any time at par, including accrued interest, provided more than 85% of the original principal amount has been converted and/or redeemed, or if the registered share of Allreal Holding AG closes at no lower than CHF 176.65 on 20 trading days within a period of 30 consecutive trading days. As at 31 December 2012, the conditions for early redemption had not been met.

In accordance with the terms of the bond issue, the capital increase in May 2012 resulted in the subscription ratio being adjusted from 36.03604 to 36.79447 registered shares per bearer bond at par value CHF 5 000, i.e. the conversion price was adjusted from CHF 138.75 to CHF 135.89.

Under IAS 32, when a convertible bond issue is recognised for the first time, it should be subdivided into debt and equity, as the convertible bond comprises “multiple embedded derivatives”. The assignment to equity corresponds to the difference between the proceeds of the issue before issuing costs and the fair value of the financial liabilities, applying a reference interest rate of 3.02%. The issuing costs are split proportionately between debt and equity. The share of equity remains unchanged until such time as bonds are converted into equity.

As at the balance sheet cut-off date, the 2.125% convertible bond is recognised as follows:

This means that during the period under review, CHF 3.0 million was charged to financial expense for the amortisation of the difference between the debt component and the redemption amount.

The difference of CHF 7.2 million between the debt component (CHF 192.8 million) and the redemption amount (CHF 199.95 million) as at 31 December 2012 is amortised over the remaining term to maturity of the convertible bond until 2014, using the effective interest method.

Deferred tax liabilities at the consolidated tax rate of 22% are recognised on the difference between the tax value of the convertible bond and the book value of the debt component, plus proportionate issuing costs, and are written back to income over the term of the convertible bond. In 2012, deferred taxes amounting to CHF 0.6 million were written back in favour of the tax expense.

In addition to the actual interest rate of 2.125% to be paid, the expense which corresponds to an effective interest rate of 3.79%, is also deferred to the income statement.

Maturity of interest rates (interest lock-in period at nominal values)

The classification of financial liabilities by interest lock-in periods is done on the basis of the actual date of maturity of the underlying fixed advances and mortgages and the maturity of the bond issues and convertible bond. In calculating the capital lock-up and interest lock-in periods, the respective outstanding par values of the bonds and their 2.50%/2.125% coupons were taken.

As at 31 December 2012, fixed advances amounting to CHF 1 154.0 million and fixed-rate mortgages amounting to CHF 67.7 million (at nominal values) are in place, all of which were taken out with Swiss banks or insurance companies.

On the balance sheet cut-off date, financial liabilities (excluding bond issues and convertible bonds) existed towards the following banking groups and insurance companies:

In the next twelve months, two interest rate swaps will mature, one with a value of CHF 100.0 million at 2.65% in February 2013, and the other CHF 50 million at 2.80% in August 2013.

If Allreal had not concluded any interest rate swaps, 73.4% of the financial liabilities would be subject to variable interest rates and would be exposed to the risk of changes in interest rates in the market (31 December 2011: 78.1%).

The average interest rate of all financial liabilities as at 31 December 2012 is 2.13% (31 December 2011: 2.30%).

The average interest lock-in period for all financial liabilities as at 31 December 2012 is 54 months (31 December 2011: 51 months).

For additional comments on financial instruments, see 5.4.

The provisions for construction guarantees cover existing risks arising from completed projects of the Projects & Development division. The other provisions comprise possible outflows of funds arising from pending litigation. Provisions for existing risks from current orders (construction risks) are offset directly against the project balances under the receivables or liabilities.

Short-term provisions

Long-term provisions

The provisions were reassessed and adjusted as at the balance sheet cut-off date. In the assessment of the company, the provisions formed are necessary to reflect legal or de facto liabilities arising from previous events in connection with which a cash outflow is likely. The amounts and temporary classification are based on estimates and as such are subject to uncertainties.

Provisions are classified as short-term or long-term depending on whether they are expected to be utilised within one year or later.

Other long-term liabilities totalling CHF 72.4 million (31 December 2011: CHF 77.4 million) relate to the negative replacement values of the interest rate swaps (hedge accounting) with residual maturities of more than twelve months. The tax effects are recognised under deferred tax assets.

The reported values represent liabilities after deduction of corresponding counterclaims for each project, in compliance with the valuation principles described under 2.20; see also 4.6.

In addition to non-cash payables (CHF 0.7 million), diverse liabilities also include liabilities from the settlement of VAT (CHF 1.7 million).

As at the balance sheet date, all holiday entitlement not yet utilised by employees is evaluated on the basis of individual rates of pay and is recognised as an accrual in the consolidated financial statements. As of 31.12.2012, this accrual amounted to CHF 2.5 million (31.12.2011: CHF 2.0 million).

Other current liabilities comprise negative replacement values of interest rate swaps (hedge accounting) amounting to CHF 1.2 million (31.12.2011: CHF 3.7 million) with remaining terms to maturity of less than twelve months.

Accrued expenses and deferred income comprise accrued interest expenses arising from financial liabilities, temporary deferrals of rental income and accruals of real estate expenses, and remuneration not yet paid to the Board of Directors and Group Management.