Allreal achieves record operating profit

  • Net operating profit hits new record
  • Revaluation gains confirm real estate portfolio is robust
  • Future growth underwritten by large pipeline of developments
  • CO2 reduction path set as part of ESG targets
  • Proposal for a stable profit distribution of CHF 7.00 per share

In a challenging environment, Allreal achieved a record operating profit in 2022. The whole market was affected by geopolitical changes and their impact on the overall economic conditions, with inflation rising and interest rates moving up. At the same time the after-effects of the coronavirus continued to make themselves felt, as reflected in shortages of various materials and products. However the portfolio of yield-producing properties enjoys an attractive level of protection against inflation, because rents on commercial properties are indexed and residential rents are tied to the reference rate.

Allreal took its first steps towards achieving the sustainability targets set under the ESG strategy. As a real estate company with its own Project & Developments division, the ambitions Allreal has set itself include halving the share of fossil fuels in its energy consumption by 2030 and being carbon-neutral in the portfolio of yield-producing properties by 2050. During the period under review the company set the carbon-reduction pathway and, having reviewed various standards, confirmed it will report following the rules of the Global Reporting Initiative (GRI). From 2023 onwards, the Sustainability Report will also be audited.

Record operating profit

In the period under review the company generated net operating profit of CHF 142.9 million, well ahead of last year (2021: CHF 133.3 million) and a new record. The main drivers behind the 7.2 percent increase were higher rental income in the Real Estate division, sustained low financial expenses and positive one-off tax effects.

Including the revaluation effect, however, net profit of CHF 154.7 million marked a decline year on year (2021: CHF 182.6 million). This was because revaluation gains on properties were lower than the year before at CHF 16.5 million (2021: CHF 64.3 million).

“In the period under review the company generated net operating profit of CHF 142.9 million, well ahead of last year and a new record.”

Board of Directors proposes a stable profit distribution of CHF 7.00 per share

In a negative environment for the stock market overall, Allreal put in a disappointing share price performance. On the reporting date the shares stood at CHF 150.40, a decline of –25.5 percent from the closing price on 31 December 2021. Including the distribution of CHF 7.00 paid in April 2022 gives a total negative performance of 22.0 percent per share.

The Board of Directors is proposing to the annual general meeting to be held on 21 April 2023 an unchanged distribution of CHF 7.00 per share. This is composed of an ordinary dividend of CHF 3.50 per share and a distribution of CHF 3.50 per share from capital reserves, which is tax-free to Swiss private investors.

Marked boost to rental income in the Real Estate division

In the Real Estate division Allreal increased rental income by 4.8 percent year on year to CHF 214.2 million (2021: CHF 204.4 million). The clear growth in income was thanks to the expansion of the portfolio of yield-producing properties in western Switzerland and sustained low vacancies.

The cumulative vacancy rate remained at 1.6 percent, the same level as last year and still very low by sector standards. The low vacancy rate had a positive impact on the net yield, which was a respectable 3.8 percent. Allreal had already considerably improved the maturity profile of the leases last year. The company continues to work hard to extend more leases ahead of schedule.

Direct expenses for yield-producing properties in the period under review were steady at CHF 27.4 million, slightly below last year. The expense ratio was 12.8 percent. At the end of December 2022, the company sold two residential buildings in Basel for CHF 62.5 million, roughly 2.6 percent over market value, on ESG grounds and because they lacked upside potential.

Despite a hefty increase of some 40 basis points on average in discount and capitalisation rates, the valuation of the investment properties by an external valuer resulted in a pre-tax increase in value of CHF 16.5 million. The market value of the whole portfolio was CHF 5.10 billion in total, in line with the previous year (31.12.2021: CHF 5.11 billion).

Pleasing contribution to profit from the Projects & Development division

Allreal’s Projects & Development division posted a slightly higher profit at CHF 54.6 million (2021: CHF 53.4 million). Similar to last year, the company benefited from one-off effects from selling development properties while also seeing improved profitability in third-party business.

The Realisation department managed an impressive improvement year on year in the gross margin for third-party projects, despite a challenging market with various construction materials in short supply and rising production costs, at 11.0 percent (2021: 9.1%). The volume of projects completed by the Projects and Development division in the year under review was CHF 319.6 million (2021: CHF 343.2 million). Of this figure, 22.4 percent related to in-house projects.

The secured order backlog as at the end of the year amounted to around CHF 611 million, enough to utilise the capacity available for around two years.

In French-speaking Switzerland the company successfully completed several new-build projects, such as two residential builds in Veyrier GE and Meyrin GE, and the interior fitting out of its own commercial property in Plan-les-Ouates GE, the location of the new premises for employees in western Switzerland since July 2022.

In the Development department Allreal successfully held numerous competitions to drive ahead various in-house projects for residential property or the real estate portfolio.

The total potential investment volume for these in-house projects comes to over CHF 2.0 billion. Assuming sound financing can be arranged, Allreal will be able to manage the release of this potential itself over the long term. The Development department plays a key role in the further growth in investment properties and is making an increasing contribution to utilisation for in-house projects in the Realisation department, so it is less dependent on the external market.

Stronger financing

Allreal finances up to two thirds of its financial liabilities on the capital market. Given the rise in interest rates, no use was made of the capital market in the period under review.

As at the reporting date, financial liabilities were CHF 116.2 million lower than the previous year at CHF 2.61 billion (31 December 2021: CHF 2.73 billion). Of this amount, 50.9 percent were bonds, 21.0 percent fixed-rate mortgages and 28.1 percent fixed advances.

The average interest rate on financial liabilities as at 31 December 2022 was a low 0.86 percent. The average fixed-interest period was 37 months (31 December 2021: 44 months).

The reduction in net financial debt led to a considerable improvement in the loan to value and equity ratios, confirming that Allreal continues to stand on stable financial foundations.

Group equity rose to CHF 2.60 billion, equivalent to a net asset value (NAV) per share of CHF 179.75 before deferred taxes. As at 31 December 2022 the equity ratio was 45.6 percent, net gearing was 99.9 percent and the interest coverage ratio was 11.5 (31 December 2021: 44.1% / 103.7% / 12.9).

Profit expected to be lower in 2023

Despite the change in general conditions, the prospects for the Swiss real estate and construction industry remain good overall. Demand is still high, especially for attractive residential properties in urban locations and for commercial premises in the heart of major economic centres. In the construction sector the availability of materials and the price situation on the procurement market are expected to ease slightly.

On the other hand, the impact of higher interest rates will both increase future financing costs and cool building activity in Switzerland.

In the Real Estate division Allreal will achieve operating profit (EBIT) in line with last year, thanks to higher rental income. Projects & Development will do less well despite rising fees and construction earnings, because these will be lower due to the cyclicality of recognising gains on sales in 2023.

Appreciably higher net financial expense and the absence of positive one-off tax effects mean an impact on net operating profit can be anticipated.

For fiscal year 2023, Allreal therefore expects its operating result to be lower than in the previous year.

The Board of Directors and Group Management would like to take this opportunity to thank employees for contributing to the record profit, and the shareholders for the trust they have placed in us.