Real Estate division

Continued expansion of the portfolio of yield-producing properties in 2014 resulted in a 7.2% growth of rental earnings in the period under review to CHF 159.2 million (2013: CHF 148.5 million). An essential contribution to the earnings growth was made by two projects, Neunbrunnenstrasse in Zürich Oerlikon and headquarters of Allianz in Wallisellen, that have become fully income-relevant for the first time in 2014, as well as the additions in the year under review with a target rental income of CHF 48 million in total. The fact that rental earnings are not higher is due to the greater vacancy-related loss of earnings and the sale of investment real estate in 2013 and 2014. Of total rental income in 2014, the share of residential real estate on the cut-off date amounted to 17.5% and that of commercial real estate to 82.5%.

Only slight changes were observed in terms of usage categories during the period under review: 57% applied to Office/Services, 20% to Residential, 6% to Sales, 7% to Trade/Warehousing, and 10% to Remaining usage.

Fixed-term rental agreements for commercial real estate represented an average duration of 8.7 years (2013: 6.8 years). On the cut-off date, the share of contracts to be renewed in 2015 represented a low 4.1% (2013: 9.4%). The ten largest tenants contributed a share of 51.1% (2013: 50.4%) to total earnings from renting commercial real estate.

The oversupply of commercial space and higher-priced residential units continued to grow in the period under review. Accordingly, the reduction of vacancies has become more demanding and costly.

Despite great efforts and corresponding success in concluding rental agreements, cumulated vacancy rate grew to 7.9% (2013: 4.7%). A contribution to this growth was made in the period under review by initial vacancies in investment real estate reclassified in 2014 to yield-producing properties under construction, and one portfolio building each in Zurich Oerlikon and Winterthur with expired rental agreements. In addition to the conclusion of rental agreements for smaller to mid-sized spaces, the rental agreement with MAN Turbo Schweiz AG was extended by at least ten years. The company, which utilizes a 50 000 square-metre area on Escher-Wyss-Areal in Zurich at annual rent of more than CHF 9 million, is one of Allreal’s five largest tenants.

In the period under review, real-estate expenses grew to CHF 25.1 million (2013: CHF 22.3 million) corresponding to a real-estate expense ratio in terms of rental income of 15.8%. Especially in commercial real estate, the good condition of a building plays an increasingly significant role in its rental success. Correspondingly, Allreal expects the expense ratio to remain in the 15% to 17% range.

Real estate generating larger investment volumes in the period under review includes Escher-Wyss-Areal in Zurich, Dreieck-Areal in Winterthur, Baarermatte and Oberdorfstrasse commercial real estate in Baar, and Kalchbühlstrasse office building in Zurich.

Despite a higher vacancy rate and increased real estate expenses, net income derived from the rental of residential and commercial real estate in 2014 amounted to 4.5%, a respectable result by market comparison.

Hammer Retex generated earnings of CHF 6.6 million (2013: CHF 6.8 million) with the management, operation and marketing of commercial and residential real estate. In terms of the market value of all yield-producing properties, the share of Allreal properties managed by Hammer Retex on the cut-off date amounted to about 36%. Consequently, expenses saved by transferring the management of properties to an in-house organisation amounted to CHF 1.1 million.

The portfolio of yield-producing properties showed seven additions and three divestments.

The additions represent only reclassifications of investment real estate
under construction, which include:

• two apartment buildings in the Eikenøtt residential complex in Gland VD with a total of 57 apartments, of which 51 were rented on the cut-off date
•  Favrehof apartment building on Richti-Areal in Wallisellen with 118 rental units, of which 117 were rented on the cut-off date
• Escher-Terrassen residential high-rise in Zurich-West comprising a total of 51 units of which 30 were rented on the cut-off date.
• The commercial properties transferred to the portfolio of yield-producing properties concern:
• Toni-Areal in Zurich-West, which is let to canton of Zurich and used by two universities, represents total floor space of 87 000 square metres (including 100 rental apartments) and an occupancy rate of 96% on the cut-off date.
• a seven-storey office building on Herostrasse in Zurich Altstetten with 10 839 square metres floor space and an occupancy rate of 57% on the cut-off date
• the six-storey Lilienthal commercial building in Glattpark Opfikon with 13 131 square metres floor space and an occupancy rate of 51% on the cut-off date
• the six-storey Richtiring office building in Wallisellen let to UPC Cablecom with 25 571 square metres floor space and an occupancy rate of 96% on the cut-off date.

Profit before tax of CHF 3.1 million resulted from the sale of three properties in 2014 at a total of 6.1% above the balance sheet value: an older residential building in Schlieren ZH (with effect from 1 December 2014), and a commercial property each in Zurich Altstetten (with effect from 1 April 2014) and in Zurich Seebach (with effect from 15 December 2014).

During the period under review, the portfolio of investment real estate under construction recorded an addition of a residential and commercial building under construction at Schiffbaustrasse in Zurich-West and seven departures due to reclassification.

Consequently, as at 31 December 2014, the portfolio of investment real estate consisted of 64 yield-producing properties – 20 residential and 44 commercial buildings – and one investment property under construction.

Valuation of the 65 investment properties (2013: 67 properties) by an external assessor resulted in negative adjustment before tax of CHF 5.9 million (2013: CHF +8.1 million). While the valuation of residential properties resulted in an appreciation of CHF 23.0 million, that of commercial properties led to a decrease of CHF 28.2 million. The only investment property under construction was down-valued slightly by CHF 0.7 million. The negative value adjustment reflects both the demanding situation in letting commercial space and the higher volume of market-related vacancies. The adjustment corresponds to 0.17% of the total portfolio’s market value.

When taking into consideration inventory changes in the portfolio and value adjustments, the total value of the portfolio of investment properties amounted to CHF 3.51 billion (2013: CHF 3.45 billion) as at 31 December 2014. Of this amount, CHF 3 509.6 million apply to yield-producing properties and CHF 4.0 million to investment real estate under construction. The average market value of the 64 yield-producing properties thus amounted to CHF 54.8 million (2013: CHF 43.5 million). While the share of residential properties in the portfolio of yield-producing properties amounted to CHF 692.5 million or 19.7%, that of commercial properties amounted to CHF 2 817.1 million, or 80.3%.

Owing to the reclassification of Toni-Areal and based on numerous other additions, the geographic distribution of the portfolio of yield-producing properties has changed in terms of market value when compared to the previous year. As at 31 December 2014, the share of the City of Zurich grew to 53.5% (2013: 50.5%), remaining canton of Zurich decreased to 34.6% (2013: 34.8%), the share of the two Basel cantons decreased to 6.1% (2013: 8.1%), cantons of Geneva and Vaud decreased to 3.9% (2013: 4.2%) and the Zug region shrunk to 1.9% (2013: 2.4%).

The Real Estate division’s contribution toward net profit excluding revaluation effect reported for 2014 represents a share of 72.6%.