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Strategic risks

Risks relating to the business environment

Uncertainty in the business environment and an oversupply of new office premises are expected to result in the vacancy rates for business premises in Finland remaining at a stable level. The occupancy rate of Sponda’s office premises is high, but increasing supply and weaker economic growth may have a negative effect on Sponda’s rental operations. The occupancy rate of retail premises has remained high despite the weaker business environment, but the prospects for logistics properties have become dimmer as Finnish exports have begun to decline.

At the end of the year 2013 Sponda’s economic occupancy rate was 87.9 per cent (2012: 88.1). The development of Sponda’s economic occupancy rate of office properties was better than the market average.

Changes in the fair value of properties

The value of real estate is sensitive to cyclical fluctuations. It is affected by several factors, including interest rates, inflation, economic growth, business environment, availability of credit, property taxation, demographic factors and construction activity. Changes in supply and demand can also significantly affect property values regardless of the general economic trends of regional real estate markets.

Loss of rental income

In 2013, Sponda’s ten largest clients accounted for approximately 30 (31) per cent of rental income. The loss or insolvency of one or several tenants may lead to a substantial loss in revenue for the company. The sustained vacancy of a property may also have a negative impact on the property value as well as the company’s balance sheet and operating profit.

Sponda was successful in managing the risks relating to its tenants’ solvency in 2013, despite the solvency of tenants in general becoming weaker during the year according to Sponda’s estimate. Receivables from tenants increased slightly, but the amount did not reach a significantly high level, nor was cash flow weakened.

At the end of 2013, Sponda had a total of 3,037 (3,228) lease contracts and 1,984 (2,130) customers. The largest client sectors were retail, banking and the public sector.

Exchange rate risk from Russian operations and differences in property markets

Sponda’s Russian properties are located in Moscow and St. Petersburg. At the end of 2013, Russian properties represented 8 (8) per cent of the company's balance sheet total. Differences in legislation and official practices between Russia and Finland may cause risks for Sponda’s operations, but these risks did not materialise in 2013.

The exchange rate risk associated with the Russian business operations may have a negative effect on the company’s profit, but exchange rate risk did not have a substantial effect on Sponda’s cash flow in 2013. The impact of changes in exchange rates on the fair value of properties in 2013 was EUR -5.7 million.

According to Sponda’s updated strategy, the company is planning to exit the Russian market within three to five years.

Risks relating to property development

Sponda’s property development operations focus on development projects of unbuilt land areas and buildings requiring modernisation that are profitable but require extensive planning and may go on for several years. Due to the long-term nature of the projects, rental income and cash flow can, in some cases, be delayed by several years. Sponda also incurs expenses from the planning phase that takes place before a project is confirmed. The key risks are related to the degree of success in leasing premises and the potential increase in construction costs.

Sponda manages the risks relating to property development by primarily requiring a minimum pre-leasing rate of 50 per cent before launching projects.

Due to the uncertainty in the business environment, Sponda assesses carefully the launching of new property development projects. In 2013, the company completed two significant property development projects in Helsinki: the Citycenter project in the central business district and an office building project in Ruoholahti. In addition, late in the year the company signed an agreement with Sweco Finland on an office complex to be constructed in Ilmala, Helsinki.

In 2013, Sponda invested approximately EUR 14.0 million in property development projects, and the company owned unbuilt land areas worth EUR 59.6 million.

 

Sensitivity analysis

Change in investment property fair value, M€ and %

    -10%  -5%  0% 5%  10% 
   

Change,

M€

Change,

%

Change,

M€

Change,

%

M€

Change,

M€

Change,

%

Change,

M€

Change,

%

Yield requirement 332 10.6 157 5.0 0 -143 -4.6 -272 -8.7

Rental income

(contractual rents)

-85 -2.7 -43 -1.4 0 42 1.3 84 2.7
Maintenance expenses 85 2.7 42 1.3 0 -43 -1.4 -86 -2.8

Economic occupancy rate

(1st year)

-25 -0.8 -13 -0.4 0 12 0.4 24 0.8

The sensitivity analysis has been carried out as a quantitative analysis of the investment properties in Finland calculating the 15 year cash flow and of the properties in Russia calculating the 10 year cash flow.

The changes in yield requirements and economic occupancy rates have been calculated for average figures. The analysis includes only investment properties generating cash flows.