4   Notes to the consolidated balance sheet

To round off the commercial property at Oberdorfstrasse 9–13, Baar, which has been under Allreal’s ownership since 2000, an adjoining condominium property was purchased for CHF 1.2 million. Following the purchase, the plots were merged.

As part of the refurbishment of the residential development at Hohfuristrasse 7–11/Unterweg 55–59/Im Stumpen 2, Bülach, CHF 3.1 million out of the total of CHF 5.5 million invested was capitalised as a value-enhancing investment.

Within the commercial real estate portfolio, value-enhancing investments were made in the office buildings at Hohlstrasse 600, Zurich (CHF 0.4 million), and Kalchbühlstrasse 22/24, Zurich (CHF 0.1 million), as well as at the Escher-Wyss site (CHF 3.8 million).

With the sale of six yield-producing properties in the year under review, the market value of those properties amounting to CHF 196.1 million (CHF 208.8 million in acquisition costs and CHF –12.7 million in revaluation) as at 31 December 2012 was eliminated from assets.

As the preconditions under the accounting and valuation principles (see 2.9) were fulfilled, the office buildings under construction at Richtiring in Wallisellen, Herostrasse in Zurich, Lilienthal-Boulevard in Opfikon and Schiffbau-/Hardstrasse in Zurich, along with their accumulated acquisition costs of CHF 140.7 million, were 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 143 to 149 of the Annual Report).

This involves the yield potential of a property being determined on the basis of future revenue and expenditure. The resulting payment flows correspond to current and forecast net cash flows. The annual payment flows are discounted to the valuation date. The discount rate used for this purpose is based on the interest paid on long-term, risk-free investments plus a specific risk premium. The latter takes account of market risks and the associated illiquidity of a property. The discounting interest rates vary according to macro and micro-locational considerations and depending on real estate segment.

This valuation process involves the real estate valuer inspecting each property at least once every three years, as well as after additional acquisitions or on completion of major alterations. The real estate valuer calculates the payment flows on the basis of the rent rolls provided by Allreal (cut-off date 1 January of the following year), all major commercial leases, detailed budgets and medium-term planning per property, as well as planned and executed investment projects. From these parameters, the real estate valuer infers his view of the contractual market rents achievable on a sustainable basis and the future real estate expenses. The results of the valuation are discussed with Group Management, which assesses their plausibility.

As in the previous year, Jones Lang LaSalle AG acts as the real estate valuer on a contract basis. There are no further business connections or investments between Allreal and the real estate valuer.

On the basis of a sensitivity analysis of investment real estate with a market value of CHF 3 445.8 million on the balance sheet cut-off date (31.12.2012: CHF 3 159.0 million), an isolated change in discount and capitalisation rates by 50 basis points would lead to an increase or decrease in value of CHF 360.6 million or CHF 372.1 million, respectively (31.12.2012: CHF 383.9 million/–312.8 million).

The valuation of the yield-producing properties as at 31 December 2013 was based on the following rent bandwidths for the various regions and types of properties:

The purchase under development reserves relates to a downpayment made for the Neuwisen Dielsdorf site.

Reclassifications of CHF 140.7 million net to investment real estate relate to the projects Richtiring Wallisellen (CHF 89.3 million), Herostrasse Zurich (CHF 30.6 million), Lilienthal-Boulevard Opfikon (CHF 19.9 million) and Schiffbau-/Hardstrasse Zurich (CHF 0.9 million) previously reported under development real estate.

In the prior-year period, an impairment test resulted in the value of the Holengass Meilen project being 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 and installations for commercial and sales premises at the Bern, Cham, Volketswil, Wallisellen and Zurich sites (CHF 1.0 million), IT equipment (CHF 0.1 million) and works of art (CHF 0.8 million).

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 at the balance sheet cut-off date, this prefinancing amounts to CHF 9.0 million with final maturities up to 2033 (annual repayments of CHF 0.9 million, interest rates of 3–5.5% p.a.).

The intangible assets relate to project and development contracts for third parties and property management customers, taken over as part of the acquisition of the Hammer Retex Group in 2012.

The value adjustments relate 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 0.1 million (2012: CHF 0.4 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 3.1 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 at 31 December:

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

The diverse other receivables consist of deposits/security paid for projects of the Projects & Development division amounting to CHF 0.4 million, as well as CHF 0.2 million for a contractually agreed retention from the sale of a commercial property which will be paid to Allreal on completion of work to remedy defects.

Of the cash amounting to CHF 25.0 million (31.12.2012: CHF 26.1 million), CHF 18.3 million is freely disposable in the form of current account balances and CHF 6.7 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 15 941 829 registered shares with a par value of CHF 50 each (fully paid up). 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 2013, Allreal held 33 237 treasury shares (31.12.2012: 7 661 shares). The average purchase price per share stands at CHF 130.72 (31.12.2012: CHF 138.04). 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 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 2013) 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 on.

The Board of Directors will propose to the annual general meeting of 28 March 2014 a distribution of 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 2013, CHF 87.6 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 two bond issues. The bank loans in the form of fixed advances are extended on a rolling basis. Apart from the 2.50% bond issue and the 2.50% convertible bond, only bank loans with contractually agreed remaining terms to maturity greater than twelve months are reported as long-term financial liabilities.

The following bond issues are recognised under borrowings:

2.00% bond issue 2013–2020

As at 31 December 2013, the 2.00% bond issue is recognised at CHF 148.9 million in long-term borrowings. During the period under review CHF 0.1 million was spent on the amortisation of the issuing costs. In addition to the interest rate of 2.00% actually payable, expense, corresponding to an effective interest rate of 2.12%, is also deferred in the income statement.

2.50% bond issue 2011–2016

As at the balance sheet date, the 2.50% bond issue is recognised at CHF 149.3 million in long-term borrowings, and during the period under review CHF 0.2 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 premature 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 then CHF 176.65 on 20 trading days within a period of 30 consecutive trading days. As at 31 December 2013, the conditions for premature 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. In other words, the conversion price was adjusted from CHF 138.75 to CHF 135.89.

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 3.1 million was charged to financial expense for the amortisation of the difference between the debt component and the redemption amount.

The difference of CHF 4.0 million between the debt component (CHF 195.9 million) and the redemption amount (CHF 199.925 million) as at 31 December 2013 is amortised over the remaining term to maturity of the convertible bond until October 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 2013, deferred taxes amounting to CHF 0.7 million were written back in favour of the tax expense.

In addition to the interest rate of 2.125% actually payable, expense, corresponding to an effective interest rate of 3.79%, is also deferred in 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 issue and convertible bond. In calculating the capital lock-up and interest lock-in periods, the respective outstanding par values of the bonds and their coupons were taken into account.

As at 31 December 2013, fixed advances amounting to CHF 988.5 million and fixed-rate mortgages amounting to CHF 132.8 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, no interest rate swaps will mature.

If Allreal had not concluded any interest rate swaps, 61.0% 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 2012: 73.4%).

The average interest rate of all financial liabilities as at 31 December 2013 is 2.13% (31 December 2012: 2.13%).

The average interest lock-in period for all financial liabilities as at 31 December 2013 is 56 months (31 December 2012: 54 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 45.7 million (31.12.2012: CHF 76.8 million) relate on the one hand to the negative replacement values of the interest rate swaps (hedge accounting) with residual maturities of more than twelve months (CHF 43.3 million, and on the other hand to the pension fund commitments arising from treatment in accordance with IAS 19 (CHF 2.4 million). 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 0.8 million), diverse liabilities also include liabilities from the settlement of social security and taxes at source (CHF 1.3 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 at 31.12.2013 this accrual amounted to CHF 2.5 million (31.12.2012: CHF 2.5 million).

Accrued expenses and deferred income essentially comprise accrued interest expenses arising from financial liabilities, prepaid rents, real estate expenses or operating expenses not yet settled and remuneration not yet paid to the Board of Directors and Group Management.