Risks and risk management
Vasakronan has been tasked by its owners with delivering a high and stable, long-term return while taking people, ethics and the environment into consideration. A reasonable and desirable level of risk-taking and good internal controls in all parts of the organisation are needed to achieve this.
How risk efforts work
Responsibility for establishing appropriate and effective systems for risk management and internal control lies with the Board. The Board have delegated day-to-day responsibility of risk management and internal control to the CEO and established guidelines in terms of how to conduct these efforts and the risk levels that are acceptable.
The day-to-day risk efforts follow a structured process. Material risks in all parts of the organisation are identified every year prior to business planning. This is done through workshops with the Audit Committee and parts of the Management Team, based on business processes and previous experiences. The risks are then assessed by the Management Team regarding their likelihood and what effects they would have on the company’s finances and reputation. Each unit manages its material risks in its business plan, with on-going follow-up of results. Measures may vary depending on the nature of the risk.
- Market and business risks relate to external factors and market developments that Vasakronan is unable to directly influence, but that the company still needs to relate to, and where the negative effects can be mitigated. These risks also include risks linked to the ownership, management and development of properties.
- Operational risks are risks in operating activities that can result from insufficient or inadequate internal processes or routines, human error or system error.
- Financial risks and regulatory compliance are risks that are related to our funding, our financial reporting and inadequate compliance with ordinances, laws and regulations.
- Sustainability and reputation risks are risks connected with environmental impact, climate change, work environment and reputation.
Risks that affect our reputation, and that are largely connected to employees’ actions, can arise in all parts of the business. Risks are limited through comprehensive efforts within corporate culture and values.
Material risk areas
Market value of the properties
In the short term, the single largest impact on the company’s financial performance is from the value of the properties, even if it does not directly affect cash flow. Market value of the properties is affected both by changing yield requirements and changing market rent levels as well as other factors impacting value. To manage these risk, Vasakronan has chosen to focus on properties deemed to have the best long-term conditions for high returns with a controlled level of risk. The portfolio should be concentrated in markets with strong economic growth and high liquidity in the transaction markets and retail properties. In the short term, however, these properties can be the most volatile in terms of yield.
The value of the properties is also affected by the estimated future cash flow from rental revenue, property expenses and investments. Here we have greater opportunities to affect value through active and structured efforts, see more below in each risk area.
Changing operating environment
The pace of technical development is rapid. Digital solutions are replacing old technology, new participants are entering the market with a wider offering and customers are demanding new solutions and services. Those who are unable to adapt their operations and offerings to these new conditions risk losing customers, suppliers and employees.
This is why we aim to be at the head of the pack as regards the use of modern technical solutions and of service offerings. This means that we have to carefully watch the market to ascertain trends and demands and to ensure that we have the right skills and work closely with customers, suppliers and other companies.
Information and data security
In pace with increasing property sector digitalisation, there is an accelerating need for secure information and data processing. Development is rapid and is becoming increasingly complex.
If critical information is lost or falls into the wrong hands as a result of a computer crash, data hacking or inadequate IT security, the financial consequences could be considerable and the company’s credibility may be damaged. We have therefore prioritised this issue highly and actively monitor developments in the area at the necessary rate.
Building new properties and developing existing ones is one way to increase returns. The risks in project development pertain to rental market trend assessment as well as to product development and own project completion. These risks are curbed by investing only in markets where Vasakronan has good market insight and where there is a strong demand for premises. Quality-assured internal processes and a high level of competence in project organisation ensures that both the process and the product are of high quality and fulfil high sustainability standards. The risks are normally minimised in major investments and in leases, in relation to both entrepreneurs and tenants. The construction of a new building is often subject to the requirement that the majority has already been let before any investment is made.
Growth in the economy directs the employment rate, which is a material basis for supply and demand in the rental market, thereby affecting vacancy rates and rent levels A balanced maturity structure for leases, where only 15–20% of the lease portfolio is subject to renegotiation every year, limits the effects of short-term macroeconomic factors on rental revenue. The lease portfolio also is spread across many tenants and industries, which further reduces risk.
Offering a broad selection of attractive premises in prime locations is judged to increase demand and loyalty among tenants. It is also important to meet tenants’ increased demand for premises that reflect their high environmental standards. This limits the effects of macroeconomic factors from a long-term perspective.
Operating and maintenance costs
Property expenses are affected by inflation, but some protection against the negative effects of inflation is built into leases, which allow for rent adjustments based on changes in the consumer price index.
The costs are also affected by efficiency in the purchasing process, where economies of scale are managed and environmental and social risks at the supplier level are curbed through structured procurement efforts.
Actively working to reduce energy consumption also makes it possible to lower property expenses over the long term.
Interest expense and value change in derivatives are items that can have a major impact on Vasakronan’s profit. The goal is a low and balanced risk in financing, and risk management regulated by a financial policy determined by the Board.
Achieving this goal requires diversified borrowing with good reserves, and diversifying further by issuing green corporate bonds and commercial paper.
Climate and environment
The property sector both affects and is affected by the climate. Global climate change is leading to higher temperatures, extreme weather events and rising sea levels. For property companies, this means increased risk of property damage due to temporary flooding and of buildings and/or material not coping with the new weather conditions or temperature changes. In areas that are close to the sea, climate change also entails permanent risks in the long term. That is why environmental initiatives are a natural and integral part of business activities.
For more detailed information about risks and risk management, see the 2019 annual report.