Good result in a demanding business environment

In this interview, Allreal CFO Marc Frei looks back on the past financial year and explains how the company creates added value with its three core competencies of real estate, devel­op­ment and realisation.

Allreal’s net profit in 2023 was in line with expectations. Are you pleased with the result?

The operating profit of CHF 122.0 million is a good result, especially considering that times have been demanding for businesses with interest rates rising. Positives have been the higher rental income, with property expenses up only slightly on the previous year, and the active management of our portfolio.

You mentioned that times have been challenging for businesses. Can you tell us more about that?

The higher interest rates are causing our net financial expenses to increase. We can’t offset this fully with the increased rental income. We’re also seeing the impact of rising interest rates in the valuation of our portfolio. Taking into account the revaluation effect, we achieved a lower net profit of CHF 65.2 million. The revaluation effect in the reporting period was CHF –64.5 million. However, this effect is minor compared to the total value of the portfolio and confirms the fundamentally high quality of our properties. As interest rates go up, so do the expected returns and this leads to price pressure in the transaction market. The interest rates are also slowing down construction activity, which is difficult anyway due to tight regulations.

Allreal saw rental income increase in the Real Estate segment. What caused this?

Rental income increased by 2.6% to CHF 219.8 million despite us having sold two properties in Basel in the previous year and one property in the middle of the year. There were two main reasons for this increase in income. Rental income went up because commercial rents are linked to inflation and because the reference interest rate for residential rents increased. We also completed the total renovation of the property at Bellerivestrasse 36 by Lake Zurich. This office building is fully let and has been generating income again since the third quarter. In Bülach ZH, we also handed over the Widstud shooting centre to the operating company in the summer. This specialist asset has been contributing income ever since too.

“With a cumulative vacancy rate of 1.7%, we’re among the best in the sector.”

Marc Frei

Supply is ahead of demand for commercial premises. How has the vacancy rate changed?

The cumulative vacancy rate was 1.7%, which is only marginally up on the previous year. We remain among the best in the sector in this regard. We successfully signed major new leases for our property on Freiburgstrasse in Bern, with BLS as the new anchor tenant, and for the vacated space in the former UPC building Richtiring in Wallisellen ZH, with around two-thirds of this space being taken over without interruption. In addition, we gained attractive commercial clients on Zollikerstrasse and Kalchbühlstrasse in Zurich who will occupy the space in these two properties. We signed leases for around 52,200 m2 in total in the reporting year.

Allreal manages its portfolio actively. What does that mean?

Our portfolio consists of high-quality commercial properties in busy urban areas and residential properties in the metropolitan regions of Zurich and Geneva. We are constantly optimising the income and costs of our assets with the aim of generating stable cash flows. Our property at Bellerivestrasse 36 in Zurich, which I already mentioned, is an excellent example. After the previous tenant moved into our property at Hardstrasse 299/301, we used our owner knowledge and our development and realisation skills to develop a sustainable reference project. Active management also includes reviewing the portfolio on an ongoing basis. In the first half of the year, we disposed of a commercial property in Urdorf ZH that no longer fitted in our portfolio. In the second half of the year, we also sold one residential building in Oberglatt ZH and another one in Allschwil BL. Our total income from these sales was CHF 5.8 million.

There has been a decline in earnings in the Development & Realisation segment. Why is that?

Our income from business activities in this segment last year was CHF 37.7 million compared to CHF 54.6 million in the previous year. The lower result is partly due to lower income from new realisation projects. Also, 2022 was significantly affected by a one-off effect from the sale of a development reserve. The volume of projects completed was CHF 263.5 million. Despite the lower volume, we still managed to achieve a stable gross margin of 10.6% on third-party projects. This shows that we are able to realise our projects profitably and implement consistent risk management despite the challenging market environment.

“The Rieter site has excellent long-term development potential and has already been generating stable income since ownership was transferred. We’re not under any time pressure here.”

Allreal also sells apartments it has developed itself. How much of the income in the segment can be attributed to that activity?

The sale of condominiums generated total earnings of CHF 7.1 million in 2023. Out of a total of 63 con­do­mini­ums in the Spiserstrasse project in Zurich Albisrieden, 49 units were reserved and 45 had been notarised by the end of the year. The contribution to earnings from sales in this project will be higher in the years up to com­ple­tion in 2025 than they were in the reporting year. Other sales successes included the projects at Avenue du Cimetière in Petit-Lancy GE and Route du Pas-de-l’Echelle in Veyrier GE. The contribution to earnings from sales of condominiums does tend to be irregular because development projects are long-term endeavours.

The development reserves are well stocked. Allreal recently acquired a large site in Winterthur. Are there already any plans in place?

We acquired a site spanning 75,000 m2 in Winterthur Töss from Maschinenfabrik Rieter in 2023. It’s a key part of the city’s 2040 development plan and has excellent transport connections, being close to the railway station, several bus stops and a motorway junction. In other words, the site has excellent long-term development potential and has already been generating stable income since ownership was transferred. We’re not under any time pressure here. An attractive district will be developed in the long term. Coming up next, we are focusing on two projects intended for sale – the Strubenacher project in Zumikon ZH, where we are planning to start building a total of 19 terraced houses in 2025, and the Eggen project in the Büttenen district of Lucerne, where we are also set to start construction work on 76 condominiums in 2025. In Western Switzerland, we moved a development project on Avenue du Curé Baud in Grand-Lancy into realisation over the last year. A property with 13 condominiums will be completed there by 2025.

“We are in a position to manage future investments ourselves.”

The development of the project pipeline will require investments. How is Allreal positioned on the financing side?

By selling three properties last year, we continued the capital recycling strategy, strengthened our balance sheet and invested further in the development pipeline. In April, we issued our first green bond for CHF 150 million, maturing in 2028. With an equity ratio of 44.5% on 31 December 2023 and net gearing of 105.3%, we are feeling positive. Moreover, we are in a position to manage future investments ourselves.

And how are the construction projects coming on?

We transferred the new Rieter head office in Winterthur to the owner at the start of 2024. The complex covering around 30,000 m2 is home to a customer centre and spaces for product and technology development and administration. What is currently our largest construction project in Western Switzerland will also be completed in 2024. Over four storeys, the Clinique de Genolier will offer laboratories, operating theatres, radiotherapy treatment rooms, an auditorium, an information centre, offices and a car park. We are also demonstrate our realisation skills with the construction of the new Calatrava building next to Stadelhofen train station. We won several orders in the reporting year as a result of our intensive acquisition efforts. At the end of the year, our secured order backlog amounted to CHF 565 million.

You can read more about the 2023 financial year