Gratifying 2014 half-year result

The portfolio of income-producing real estate grew noticeably thanks to the reclassification of four investment properties under construction. The additions concern the second stage of the Eikenøtt residential development in Gland VD, the two residential buildings Favrehof in Wallisellen ZH and Escher-Terrassen in Zurich-West as well as the Toni-Areal in Zurich-West. Transfer of the space rented by Canton Zurich was carried out on schedule with effect from 1 May 2014; the demanding settlement of the entire project's accounts is currently in progress. Fit-out to tenant specifications financed in advance by Allreal is recorded as a financial asset in the consolidated balance sheet and depreciated across the 20-year duration of the rental agreement. The tenant fit-out decreases the property’s market value by the corresponding amount. Rental of the 100 apartments in the building has begun in April 2014. By the end of the period under review, rental agreements for some 80% of the apartments were signed.

The sale of the commercial building located on Buckhauserstrasse 32 in Zurich Altstetten effective 1 April 2014 resulted in a profit of CHF 0.9 million, or 15% above market value.

When taking into consideration changes of ownership and reclassifications carried out in the first half of 2014, the portfolio of income-producing real estate grew from 60 to 63 properties effective 30 June 2014 and now comprises 21 residential and 42 commercial buildings.

Following reclassification of four completed projects from investment real estate under construction to income-producing real estate, the portfolio of investment real estate under construction currently includes three projects.

Valuation of the 66 investment properties by an external estimator resulted in a higher valuation of the portfolio value by CHF 12.4 million effective 30 June 2014.

The entire value of the investment real estate portfolio on the cut-off date amounted to CHF 3.46 billion (31 December 2013: CHF 3.44 billion). The market value of income-producing real estate amounted to CHF 3.25 billion and that of investment real estate under construction CHF 0.21 billion. The operating result excluding revaluation gains (EBIT) for the period under review amounted to CHF 62.4 million (1^st half 2013: CHF 63.1 million).

The Real Estate division’s contribution toward the group’s net profit represents a share of 64.4% (1^st half 2013: 73.1%).

Projects & Development division

The Projects & Development division’s result from business activity for the period under review amounted to CHF 63.0 million (1^st half 2013: CHF 54.3 million). The result is 16% above that of the previous year and characterised by a large number of transfers in the ownership of development real estate. A pre-tax profit of CHF 28.3 million is reported on a sales volume of about CHF 183 million in total.

The division’s earnings before interest and taxes (EBIT) in the first half of 2014 grew to CHF 31.6 million or 50.5% above that of the comparable period in 2013 (1^st half 2013: CHF 21.0 million).

The Project Development department worked at consistently high capacity throughout the period under review. Successfully completed projects in the first half of 2014 include the site development in Bülach Nord and Dielsdorf, and construction of the commercial and residential building on Schiffbaustrasse in Zurich-West is in the starting blocks. An architecture competition with international participation was carried out during the first half of 2014 for the commercial building on Schiffbauplatz. The residential project on Pfruendmattstrasse in Mettmenstetten with an estimated investment volume of CHF 37.0 million was transferred to the Realisation department during the period under review.

As expected, completion of several projects in the Realisation department during the period under review represents a lower volume of completed projects amounting to CHF 489.6 million (1^st half 2013: CHF 536 million). The on-schedule transfer of the rented space in Toni Areal to Canton Zurich on 1 May 2014 represented an important milestone for the department.

The share of own projects of the entire project volume in the period under review amounted to 42.5% (1^st half 2013: 54.9%). The lower share compared to the previous year reflects the completion of large own projects on Richti-Areal in Wallisellen and Toni-Areal in Zurich-West. Of the project volume completed in the first six months of 2014, 88% applies to newly constructed projects and 12% to refurbishment and conversion projects (1^st half 2013: 89%/11%).

The order backlog on the cut-off date of CHF 1.08 billion will secure utilization of available capacity in the Realisation department for a period of over one year.

The sale of 47 residential units from own development and production in the first half of 2014 is clearly lower than the record result reported for the comparable period the previous year. The highly successful sales volume experienced in 2013 and the resulting lower number of available units for sale in the first six months of 2014 is considered to be the most important reason for the decline. A higher supply surplus and stricter financing regulations applied by the banks additionally handicapped the sale of residential real
estate. As on 30 June 2014, 8 projects comprising a total of 176 units were unsold, of which 19 units were ready for occupation.

The sale of development real estate implemented in the first six months of 2014 increased to CHF 182.8 million (1^st half 2013: 97.1 million). This amount includes the transfer of ownership to an institutional investor on 17 June 2014 of the Ringhof residential and commercial building (71 rental units/about 4 600 m2 office space) on Richti-Areal in Wallisellen.

Thanks to the operating net profit of CHF 20.3 million, the Projects & Development division’s contribution to the group’s net profit represents a share of 35.6% (1^st half 2013: 26.9%).

Strong capital resources as basis for business success

Financial debt in the first six months of 2014 grew by CHF 123 million to CHF 1.8 billion and was refinanced by means of a new 1.25% debenture loan of CHF 125 million maturing in 2019.

The average interest rate for financial liabilities on the cut-off date amounted to 2.07%, slightly below the comparable rate the previous year, with an average time to maturity of 51 months (31 December 2013: 2.13%/56 months).

Open credit lines of CHF 651 million and borrowing capacity of CHF 1.3 billion on the cut-off date ensure unproblematic refinancing of the 2.125% convertible bond scheduled for repayment in October 2014. Repayment of the CHF 200 million convertible bond in the fourth quarter will result in even lower average interest payments for financial liabilities.

Equity ratio on the cut-off date amounted to 47.0% and net gearing to 88.5% (31 December 2013: 49.3%/80.8%).

Demanding second half-year

Allreal’s portfolio of income-producing properties will continue to grow in the second half of 2014 owing to the reclassification of three commercial buildings, namely Herostrasse in Zurich Altstetten, Lilienthal-Boulevard in Opfikon and Richtiring in Wallisellen. In the medium term, the subsequent growth in rentable space will show a positive influence on the Real Estate division’s results. Owing to portfolio growth, Allreal expects a strong increase in rental income for the second half of 2014.

Development and implementation of new and conversion projects are subject to high pressure from the competition and margins. Consequently, Allreal’s focus on projects with good profit potential connected with the consolidation of the Projects & Development division is very demanding. In terms of residential units, we continue to expect longer absorption times and, therefore, lower sales profits. Hence, Allreal expects the Projects & Development division to report results for the second half of 2014 below those of the period under review.

Despite a gratifying business development in the first half of 2014, Allreal expects operating results for the entire financial year at the level of earlier years but below that of the previous year.

The Board of Directors and Group Management wish to take this opportunity to thank all staff members for their contribution to the half-year results and our shareholders for their trust and support.