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ePaper created 2014-04-29, 17:58:02 | version 1.30.00
DEUTSCHEEUROSHOPANNUALREPORT2013/GROUPMANAGEMENTREPORT 132 Online trading advanced 12% to €33.1 billion in 2013. The German Retail Federation anticipates a further 17% rise in 2014 to €38.7 billion. We minimise market and sector risks by closely monitoring the mar- ket and by concluding long-term contracts with tenants with strong credit ratings in all retail segments. Deutsche EuroShop AG is not as strongly affected by short-term eco- nomic developments as other sectors are in terms of its business model – long-term, inflation-proofed leasing of retail space – and the associated risks. Long-term trends such as the growing impact of e-commerce on stationary retail will affect our business in the medium term, however. 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 com- mercial success even during periods of stagnation. Provided that sta- tionary retailers review their networks in response to the rise of online trading and focus on strong locations, our prime shopping center locations could emerge even stronger from the structural changes. RISK OF RENT LOSS It is possible that tenants may be unable to meet their obligations under 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 share- holders 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 ana- lysed 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 provide 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 taking into account cost models in the calculation for 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 contrac- tors with strong credit ratings. During the building phase, professional project management is assured by the companies we commission. However, it is impossible 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 develop- ments specific to the property that can neither be foreseen nor influ- enced by the Company. The factors described are taken into account in the annual market valuations of our portfolio properties by inde- pendent appraisers. 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. CURRENCY RISK Deutsche EuroShop AG’s activities are limited exclusively to the Euro- pean economic area. Manageable currency risks arise in the case of the Eastern European investment companies. These risks are not hedged because this is purely an issue of translation at the reporting date and is therefore not associated with any cash flow risks. The currency risk from operations is largely hedged by linking rents and loan liabilities to the euro. A risk could arise if the Hungarian forint or the Polish zloty were to plummet against the euro such that tenants were no longer able to pay what would then be considerably higher rents denominated in foreign currency. FINANCING AND INTEREST RATE RISKS We minimise the interest rate risk for new property financing as far as possible by entering into long-term loans with fixed-interest peri- ods of up to 20 years. There is a risk that refinancing may only be available at higher interest rates than before. The interest rate level is materially determined by the underlying macroeconomic conditions and therefore cannot be predicted by us. The possibility cannot be completely excluded that, due for example to a deterioration in the Company’s results of operations, banks may not be prepared to provide refinancing or to extend credit lines. We monitor the interest rate environment closely so as to be able to react appropriately to interest rate changes with alternative financing con- cepts or hedging if necessary. With average interest rates at 3.88% (2012: 4.25%), this does not currently present a significant risk within the Group, particularly since the most recent refinancing was con- cluded at lower interest rates than the original financing and the cur- rent average interest rate.