Real Estate division

Income derived from the rental of income-producing real estate grew by 4.5% compared to the previous year to CHF 148.5 million (2012: CHF 142.1 Mio.). In addition to portfolio growth, success in initial letting and re-letting of residential and commercial properties and the resulting low vacancy-related loss of revenue made a significant contribution to the division’s result. Of the total rental income in 2013, the share of residential properties amounted to 17% and that of commercial properties 83%.

In terms of total targeted rental income, marginal changes were recorded in the share of the various usage categories. In the period under review, office/commercial accounted for 53.1%, residential 19.0%, sales 8.7%, parking 7.3%, trade/warehousing 7.0% and remaining usages accounted for 4.9%.

The average duration of limited rental agreements for commercial properties on the cut-off date was 5.6 years (2012: 6.4 years). A 9.4% share of agreements is eligible for renewal in 2014. Of the income resulting from the rental of commercial buildings, the 10 largest tenants generated 50.4% (2012: 29%).

As supply of commercial space continued to exceed demand in the period under review, the rental of office space grew increasingly challenging, especially in the Zurich metropolitan area. At 4.7% the cumulative vacancy rate (2012: 5.0%) is considered all the more positive, while 39.5% was accounted for by three properties located in Glattbrugg, Urdorf and Zurich. Based on foreseeable changes in 2014, Allreal expects the vacancy rate for the current year to range between 5% and 6%.

Expenses for the administration and operation of let income-producing properties and for value-preserving maintenance and repair work amounted to CHF 22.3 million (2012: CHF 19.6 Mio.). Compared to the rental income, this corresponds to a long-term average of 15%.

In the period under review, about CHF 5.5 million was invested in the refurbishment of a residential building in Bülach ZH comprising 49 rental apartments. Thus the more than 30-year-old building has been elevated to modern standards in terms of environmental compatibility and comfort.

Large investments are budgeted for the Escher-Wyss-Areal in Zurich-West. in order to embrace the long-term requirements of the main tenant, MAN Diesel & Turbo AG Schweiz. As a result, real-estate expenses in the follow-up period will be significantly above the average reported in recent years.

Similar to the previous year, net income derived from the rental of residential and commercial real estate reported in 2013 amounted to a respectable 4.8%.

The Hammer Retex Group, which was acquired in 2012, became income relevant for an entire financial year for the first time in the period under review and generated earnings of CHF 76.8 million (2012: CHF 4.4 million), representing a pleasing contribution to the Real Estate division’s good result. The number of properties in Allreal’s own portfolio and managed by Hammer Retex is expanded gradually.

Numerous changes in the portfolio of investment real estate were reported in the period under review. The portfolio of income-producing properties showed two additions and six divestments and the portfolio of investment real estate under construction three additions and two divestments.

The first addition to the income-producing real estate portfolio concerns the Neunbrunnenstrasse residential building in Zurich Oerlikon. The apartment building developed by Allreal and constructed in accordance with Minergie standards comprises 40 generous 3½ to 5½ room units in the medium price segment.

The second addition concerns the office complex at Richti-Areal in Wallisellen for which Allianz Suisse was secured as key tenant by means of long-term lease agreements. The 18-storey office building and the 6-storey annex together represent usable space of 50 000 square metres for more than 1800 employees, numerous meeting rooms and several catering facilities. The building developed and realised by Allreal became income relevant on 1 June 2013, while the tenants took the building into operation by December 2013.

Both additions to the portfolio of income-producing buildings refer to projects formerly classified as investment real estate under construction.

In the 2012 financial year, four commercial and two residential buildings valued at about CHF 200 million were divested. Profits before tax generated from the sale amounted to a gratifying CHF 217 million.

The divested buildings included a smaller commercial building erected in 1979 located at Kronenstrasse in Dielsdorf (with effect from 1 April 2013), two older residential buildings at Zürcherstrasse in Schlieren consisting of 51 rental apartments (with effect from 1 April 2013), a smaller commercial building at Farlifangstrasse in Zumikon (with effect from 30 September 2013), a building near Wallisellen railway station (with effect from 1 October 2013) and a commercial building at Dreikönigstrasse in central Zurich (with effect from 2 December 2013).

In the period under review the portfolio of real estate under construction experienced the addition of three commercial buildings under construction from own development and production representing a total expected rental income of CHF 48 million, namely a building at Lilienthal Boulevard in Opfikon of which 50% was let on the cut-off date, a seven-storey office building at Herostrasse in Zurich Altstetten of which 50% was let on the cut-off date, and a six-storey office building at Richti-Areal in Wallisellen let to UPC Cablecom as key tenant. The three commercial buildings with a total floor space of about 48 000 square metres will be completed in 2014 and transferred to the portfolio of income-producing real estate.

As at 31 December 2013, the portfolio of investment real estate included a total of 67 buildings: 18 residential, 42 commercial and 7 investment real estate under construction.

The valuation of the entire investment real estate portfolio executed by an external estimator resulted in a higher valuation of the portfolio before tax of CHF 8.1 million (2012: CHF –8.2 million). The revaluation was supported mainly by CHF 19.2 million from investment real estate under construction while the higher valuation of residential real estate by CHF 43.5 million nearly balanced the lower valuation of commercial real estate bhy CHF 54.6 million. The IFRS 13 accounting standard introduced with effect from 1 January 2013 requires the valuation of income-producing buildings in accordance with the concept of best possible usage of a building. This resulted in the higher valuation in the period under review of CHF 19 million.

When taking into consideration inventory changes and positive revaluation gains, the market value of the entire portfolio on 31 December 2013 amounted to CHF 3.44 billion (2012: 3.16 billion).

The average value of the 60 income-producing buildings thus amounted to CHF 43.5 million and that of investment real estate under construction to CHF 119.4 million (2012: CHF 39.5 million/CHF 104.8 million).

Compared to the total market value of the income-producing buildings at 31 December 2013, 50.5% are located in the city of Zurich, 34.8% in canton Zurich, 8.1% in both cantons Basel, 4.2% canton Geneva and 2.4% the Zug region.

The Real Estate division’s contribution toward net profit excluding revaluation gains reported for 2013 represents a share of 75.6%.