Risks and risk management

Vasakronan has been tasked with delivering a high and stable, long-term return to its owners. At the same time, consideration needs to be given to people, the environment and professionalism. To best reach these goals, several external and internal factors that affect our operations need to be taken into consideration and managed.

Reasonable and desirable levels for risk taking

All business operations are associated with risks, which when managed correctly can give rise to opportunities. When managed incorrectly, risks can have considerable negative consequences in the form of lower revenue, higher costs or reduced credibility.

Efforts to identify, analyse, manage and follow up risks are therefore a prioritised area at Vasakronan.

Ultimately, it is the Board’s responsibility to establish appropriate and effective systems for risk management and internal control. The Board has delegated day-to-day responsibility to the CEO and has established guidelines in terms of how to conduct these efforts.

The CEO is supported by a steering committee for internal control that, in addition to the CEO, comprises the CFO, General Counsel and Group Controllers. The steering committee’s responsibilities include follow up and ongoing development of internal control. Vasakronan’s day-to-day risk efforts involve all employees and follow a structured process.

Process for risk efforts

Risk inventory – Material risks are determined through an inventory by the Management Team and the Board carried out in collaboration with the steering group for internal control.
Risk assessment – The Management Team assesses material risks based on likelihood and impact. Material risks are reported to the Audit Committee and the Board.
Risk management – Workshops are held with the relevant representatives for each risk area to determine causes, impact and management. Preparation of overall action plans and integration into the company’s business plan.
Follow-up – Ongoing follow-up by the Management Team. Yearly reporting of risk efforts to the Audit Committee and Board.

Energy prices

Risk description
The management of properties is an energy-intensive operation. Accordingly, the cost of energy has a considerable impact on property companies’ earnings, but also impacts tenants and their payment capacity.

Assessment, analysis and exposure
Energy prices rose sharply in 2022, with increasing costs for Vasakronan. At the same time, price hedging of electricity supplies has limited the scope of the increase, and agreements with tenants also entail onward invoicing of energy costs. Indirectly, however, Vasakronan may be impacted in the event tenants’ payment capacity deteriorates, but in 2022 there were no such indications. A price increase of SEK 0.10 per kWh has an impact of approximately SEK 8 million on Vasakronan’s costs.

Financing – access

Risk description
Property is a capital–intensive industry and it is important to secure access to borrowed capital. An increasingly turbulent operating environment and/or system problems as a result of company-specific problems in the financial sector could lead to new financing or refinancing becoming more expensive or impossible.

Assessment, analysis and exposure
Vasakronan has a stable ownership structure, a strong financial position and an LTV of 40%. The company’s A3 rating from Moody’s provides wider access to more sources of finance as well as financing with longer tenors. The company strives for an even maturity structure for its liabilities, with a low portion of short-term financing. Altogether, this reduces the risk in new financing and refinancing.

Financing – interest rates

Risk description
Interest on borrowed capital is a large cost item for property companies. Rising interest rates negatively affect borrowing costs and ¬financial key metrics. Moreover, they lead to higher yield requirements and a consequent decline in property values.

Assessment, analysis and exposure
In 2022, the average interest rate on Vasakronan’s borrowing rose as a result of rising market interest rates. However, the increase was limited due to long fixed-interest tenors, which at the end of 2022 were 4.0 years. The interest coverage ratio remained healthy at a multiple of 4.8, well above the target of not less than 2.0. Vasakronan holds a strong credit rating of A3 stable outlook, which creates possibilities for continued funding at a relatively low cost. A one percentage point hike in interest rates would have an impact on Vasakronan’s earnings of SEK 256 million.

Projects

Risk description
Redevelopments, extensions and new construction projects entail risks across all phases, which increases with the project’s complexity. Risks in construction projects are primarily financial, technical or time-related.

Assessment, analysis and exposure
Vasakronan has a large number of ongoing projects, several of which are complex, extend over a long period of time and involve many different parties. Calculation errors, delivery delays, lack of resources and competence or increased expense due to unforeseen events or carelessness can lead to substantial financial consequences. Construction costs rose sharply in 2022 due to high material prices and high transport and energy costs. The increase in construction costs has resulted in cost increases for Vasakronan’s ongoing projects. Residential construction halted at year end and as a result, construction prices began to level off.

Suppliers

Risk description
Violations of human rights, unethical behaviour or operations that are not conducted according to good business practice from any of our partners or anyone acting on behalf of Vasakronan can lead to reduced confidence in Vasakronan and therefore entail harm to financial performance and the brand.

Assessment, analysis and exposure
Vasakronan is one of Sweden’s largest property companies and there is considerable public interest in Vasakronan’s operations. We have many suppliers and partners, often in several parts of the supply chain. Violations of human rights or unethical behaviour at any of them can lead to reduced confidence from stakeholders and therefore to financial damage.

Unsafe neighbourhoods

Risk description
Neighbourhoods that are perceived as unsafe due to crime, graffiti, planning or negative reputation are less attractive.

Assessment, analysis and exposure
Neighbourhoods that are perceived as unsafe lose appeal, which in turn leads to increased vacancies and declining property values. Vasakronan works actively with neighbourhood and street strategies, which includes developing action plans for various neighbourhoods and streets. The goal is to invigorate places and create neighbourhoods where people want to spend their days as well as their evenings.

Lettings – retail

Risk description
Digitalisation, the economy and new consumption patterns are affecting the lettings market for retail premises and resulting in downward pressure on rents and increased vacancies.

Assessment, analysis and exposure
Lower demand for store space means lower rental revenue and higher vacancies for Vasakronan. Vasakronan’s retail locations are primarily in central locations with heavy foot traffic. The company believes demand will remain firm for these types of properties, even for other uses, which will reduce the negative effect of the decline in shopping in physical stores.

Lettings – offices

Risk description
Technological development, the economy and new work patterns are affecting the lettings market for office premises and resulting in downward pressure on rents and increased vacancies.

Assessment, analysis and exposure
Lower demand for office space means lower rental revenue and higher vacancies for Vasakronan. Vasakronan’s office premises are located in attractive areas in growth areas. The company offers products that are in demand in the market and continuously broadens its offering, which reduces the negative impact of a waning demand for office premises.

Changed needs of tenants

Risk description
Changed patterns of working and increased digitalisation set new requirements for premises and the offering. Companies who do not adapt their operations and offerings to new conditions risk losing customers and market shares, which in the long run can lead to becoming unprofitable.

Assessment, analysis and exposure
Vasakronan aims to be at the forefront as regards the use of modern technical solutions, and of service and product offerings. This requires the company to identify trends and demand as well as to develop and try new and unproven solutions. Vasakronan strives to develop the right skills in combination with close partnerships with customers, suppliers and other companies.

Information and data security

Risk description
In pace with increasing property sector digitalisation, there is a growing vulnerability to data hacking, virus attacks and fraud.

Assessment, analysis and exposure
Well-functioning information and data security is essential for operations. Development in these areas 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.

Regulatory compliance

Risk description
All companies must adhere to the applicable laws, rules and regulations, which are often extensive and complex. At the same time, non-compliance with regulations can lead to economic consequences or damaged confidence.

Assessment, analysis and exposure
To ensure regulatory compliance, Vasakronan continuously strives to stay updated vis-à-vis current and new regulations as well as to monitor compliance. No material deviations from applicable regulations were noted in 2022.

Employees

Risk description
Employees with the right skills are essential if operations are to function and deliver the desired results, where technological developments impose new requirements. Retaining and developing existing employees as well as recruiting new staff is therefore critical.

Assessment, analysis and exposure
The development of operations and remaining relevant for the market requires that the company continuously adds new skills in the form of further training and new recruitments. Vasakronan strives to be an attractive employer for qualified personnel. The strong brand together with the innovative, values-driven corporate culture engender considerable interest in working at the company.

Climate changes

Risk description
Higher temperatures, extreme weather events and rising sea levels entail risks that properties and/or buildings will be damaged. In the long term, properties in areas that are close to the sea risk permanent flooding.

Assessment, analysis and exposure
Climate change poses new demands on properties, which comprise our largest asset. Vasakronan needs to monitor climate issues and work proactively to minimise the risk that, in the future, some properties will be unusable or the cost of rectifying the damage will be high.

Sustainability

Risk description
Sustainability is a relatively young area. It lacks traditional concepts and definitions. Legal requirements are constantly changing or growing more stringent. This entails high requirements for internal and external communication as well as solid monitoring.

Assessment, analysis and exposure
Vasakronan has high sustainability ambitions and goals. A large share of the company’s financing is green, which has stringent requirements for accurate information and reporting. It is critical that at any given moment, Vasakronan complies with the applicable legal requirements as well as the requirements set by other partners. If the company does not meet these requirements, stated promises and goals, there is a risk of damage to the company’s reputation and a loss of trust from stakeholders. This will also lead to higher interest expenses if the company no longer meets the terms for green financing.