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ePaper created 2012-04-27, 18:43:33 | version 1.23.1
In view of its business model – long-term, inflation-proof letting of re- tail space – and the associated risks, Deutsche EuroShop AG is not as severely affected by short-term economic developments as other sec- tors. Past experience has demonstrated that by locating our shopping centers in prime locations and by ensuring broad sector diversification within the centers, we can achieve commercial success even during periods of stagnation. Market and sector risks There has been a structural change in the retail trade in recent years, caused by shifts in demand patterns and new product formats. The greatest success has been enjoyed by large-scale retail operations that are able to offer customers a wide range of goods. Deutsche EuroShop’ business model enables it to benefit from this development, especially as the experience aspect of shopping has gained in importance and a trend towards shopping as a recreational and lifestyle activity has become apparent. We regard this development as more of an opportunity than a risk, as a decline in consumer spending at the macroeconomic level would not necessarily have a negative impact on retailers’ revenue in our shop- ping centers. Provisional calculations show that nominal retail revenues rose by 2.6% in 2011, thus exceeding the 2.3% increase seen in the previous year. We therefore believe that domestic demand will remain strong. We minimise market and sector risks through in-depth market intelli- gence and by concluding long-term contracts with tenants with strong credit ratings in all retail segments. Risk of rent loss It is possible that tenants may be unable to meet their obligations un- der existing leases or that the previous rents may no longer be obtained in the case of new and follow-on rentals. As a result, income would turn out to be less than budgeted, and distributions to shareholders might have to be reduced. If the rental income for a property company is no longer sufficient to meet its interest and repayment obligations, this could lead to the loss of the entire property. Tenants’ revenue trends and the accounts receivable trends are regularly analysed in this respect, and measures to find new tenants are initiated at an early stage if there are signs of any negative developments. The tenants furnish corresponding security deposits against the risk of default. In addition, write-downs are recognised in the accounts in individual cases. Cost risk Expenditure on current maintenance or investment projects can turn out higher than budgeted on the basis of experience. We minimise risks from cost overruns in current investment projects by costing in all identifiable risks in the planning stage as a precautionary measure. In addition, construction contracts are only awarded on a fixed-price basis to general contractors with strong credit ratings. During the building phase, professional project management is assured by the companies we commission. However, it is impossible in principle to completely avoid cost overruns in ongoing construction projects in individual cases. Valuation risk The value of a property is essentially determined by its capitalised earnings value, which in turn depends on factors such as the level of annual rental income, the underlying location risk, the evolution of long-term capital market rates and the general condition of the prop- erty. A reduction in rental income or a deterioration of the location risk necessarily results in a lower capitalised earnings value. The appre- ciation of the properties is therefore also significantly influenced by a variety of macroeconomic or regional factors as well as developments specific to the property that can neither be foreseen nor influenced by the Company. The factors described are taken into account in the annual valuations of our portfolio properties by independent apprais- ers. Changes in value are recognised in the income statement of the consolidated financial statements in accordance with the requirements of IAS 40 and may thus increase the volatility of the consolidated profit. However, this generally has no effect on the Group’s solvency. 20 DES Annual Report 2011 Group Management Report risks and opportunities management, internal control system