4   Notes to the consolidated balance sheet

The additional purchase within the commercial real estate portfolio (CHF 6.0 million) relates to the acquisition of a 1 750-square-metre plot at Schiffbaustrasse in Zurich-West to round off the Escher-Wyss site (commercial building project at Schiffbauplatz).

Within the commercial real estate portfolio, value-enhancing investments were made in the buildings at Eggbühlstrasse 21–25, Zurich (CHF 1.0 million), Oberdorfstrasse 9–13, Baar (CHF 1.8 million), Missionsstrasse 60–64a, Basel (CHF 0.7 million), Kalchbühlstrasse 22/24, Zurich (CHF 0.5 million), Grünhof site, Zurich (CHF 0.1 million), and at the Escher-Wyss site, Zurich (CHF 17.0 million).

With the sale of three yield-producing properties, the market value of those properties amounting to CHF 51.0 million (CHF 39.2 million in acquisition costs and CHF 11.8 million in revaluation) as at 31 December 2013 was eliminated from assets. The Zurich Opera House’s rehearsal stages (recognised as investment real estate under construction) in the Escher-Terrassen building were sold at a price of CHF 7.8 million.

Following completion, several properties totalling CHF 928.5 million (CHF 909.5 million in acquisition costs and CHF 19.0 million in revaluation) were reclassified from investment real estate to yield-producing properties. Tenant fit-outs prefinanced by Allreal (CHF 135.8 million) were assigned to financial assets; see 4.4.

As the preconditions under the accounting and valuation principles (see 2.9) were fulfilled, the residential and commercial building under construction on Schiffbaustrasse in Zurich, along with its accumulated acquisition costs of CHF 4.7 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.

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 3 513.6 million on the balance sheet cut-off date (31.12.2013: CHF 3 445.8 million), an isolated change in discount and capitalisation rates by 50 basis points would lead to an increase or decrease in value of CHF 371.9 million or CHF 368.3 million, respectively (31.12.2013: CHF 360.6 million/CHF –372.1 million). The bandwidths for the discount and capitalisation rates used in the sensitivity analysis range between 3.5% and 4.0% (residential properties) and between 3.9% and 5.3% (commercial properties) for lower interest rates and between 4.5% and 5.0% (residential properties) and between 4.9% and 6.3% (business properties) for higher interest rates.

The valuation of the yield-producing properties as at 31 December 2014 was based on the following rent bandwidths for the various regions and types of properties:

When determining the highest and best use, the external real estate valuer identified the Escher-Wyss site, Zurich, and the residential property Zollikerstrasse 185–187, Zurich, as two yield-producing properties which satisfy the requirements of IFRS 13. The decision not to exploit the potential value of these properties is connected with existing and not immediately terminable rental contracts, some of which have a term of several years.

A lower net realisable value for the Holengass Meilen project resulted in an impairment of CHF 0.8 million being taken to direct expenses from sales Development. The value adjustment was due to an appraisal concluding that local market prices for residential properties had fallen in the period under review.

The CHF 4.7 million reclassification to investment real estate relates to the Schiffbaustrasse project in Zurich, previously reported under development real estate.

Other property, plant and equipment comprises capitalised fit-out costs and installations for commercial and sales premises at the Basel, Bern, St. Gallen, Volketswil and Zurich sites (CHF 0.7 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 business and commercial premises which will be repaid by the tenants over the term of their leases on an annuity basis. Final maturities for repayment of the prefinanced tenant fit-outs run until 2034, with interest rates at 1–5.5% p.a., depending on the individual contractual arrangements. The largest individual position (CHF 127.2 million) has the canton of Zurich as counterparty (tenant fit-outs on the Toni site). Interest received in the year under review amounted to CHF 0.8 million and was credited to financial income.

As at the balance sheet cut-off date, the prefinanced tenant fit-outs break down as follows:

The intangible assets relate to project and development contracts for third parties and property management customers, taken over as part of the acquisition of Hammer Retex in 2012 and which will be amortised over the remaining term until the end of 2015.

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 0.3 million (2013: 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 5.2 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 prepayments made for each project which as at 31 December is under construction for third parties and has not yet been billed and paid.

Of the cash amounting to CHF 31.9 million (31.12.2013: CHF 25.0 million), CHF 21.9 million is freely disposable in the form of current account balances and CHF 10.0 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 a BBB+ rating (if rated).

As at the balance sheet cut-off date, the share capital of Allreal Holding AG comprises 15 942 821 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 2014, Allreal held 1 568 treasury shares (31.12.2013: 33 237 shares). The average purchase price per share stands at CHF 126.18 (31.12.2013: CHF 130.72). 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 2016 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 100.0 million by issuing up to 2 000 000 registered shares each with a par value of CHF 50 (authorised capital).

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 2014) 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 17 April 2015 a distribution of 5.50 per share, corresponding to a total amount of 87.7 million, in the form of a repayment of reserves from contribution of capital. In 2014, CHF 87.6 million in reserves from contribution of capital were distributed to shareholders, corresponding to CHF 5.50 per share. Treasury shares are not entitled to a dividend.

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) and three bond issues. The bank loans in the form of fixed advances are extended on a rolling basis. Apart from the bond issues, 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 2014, the 2.00% bond issue is recognised at CHF 149.1 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, which corresponds to an effective interest rate of 2.12%, is also deferred to the income statement.

1.25% bond issue 2014–2019

As at 31 December 2014, the 1.25% bond issue is recognised at CHF 124.7 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 1.25% actually payable, the expense – corresponding to an effective interest rate of 1.32% – is also deferred to the income statement.

2.50% bond issue 2011–2016

As at 31 December 2014, the 2.50% bond issue is recognised at CHF 149.6 million in long-term borrowings, and 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, the expense – corresponding to an effective
interest rate of 2.71% – is also deferred to the income statement.

2.125% convertible bond 2009–2014

Until 19 September 2014, each bearer bond at CHF 5 000 par could be converted into 36.79447 registered shares of Allreal Holding AG.

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.

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 2014, deferred taxes amounting to CHF 0.9 million were written back in favour of the tax expense.

In the second half of 2014, CHF 0.135 million in convertible bonds were converted into 992 registered shares of Allreal Holding AG. The 2.125% convertible bond was repaid on 9 October 2014 at a remaining par value of CHF 199.79 million.

As at 31 December 2013, the debt component of the convertible bond was recognised in an amount of CHF 195.9 million in short-term borrowings. This means that during the period under review CHF 4.1 million was charged to financial expense for the amortisation of the difference between the debt component and the redemption amount (2013: CHF 3.1 million).

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. In calculating the capital lock-up and interest lock-in periods, the respective par values of the bonds and their coupons were taken into account.

As at 31 December 2014, fixed advances amounting to CHF 1 097.2 million and fixed-rate mortgages amounting to CHF 229.8 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) existed towards the following banking groups and insurance companies:

In the next twelve months, three interest rate swaps each with a value of CHF 50 million will mature, one at 1.42% in January 2015, one at 2.14% in September 2015 and one at 2.10% in December 2015.

If Allreal had not concluded any interest rate swaps, 62.6% 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 2013: 61.0%).

The average interest rate of all financial liabilities as at 31 December 2014 is 1.93% (31 December 2013: 2.13%).

The average interest lock-in period for all financial liabilities as at 31 December 2014 is 50 months (31 December 2013: 56 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 80.8 million (31.12.2013: CHF 45.7 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 66.66 million), and on the other hand to the pension fund commitments arising from treatment in accordance with IAS 19 (CHF 14.2 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 0.5 million), diverse liabilities also include liabilities from the settlement of social security and taxes at source (CHF 0.5 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 31.12.2014 this accrual amounted to CHF 2.2 million (31.12.2013: 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.