Allreal achieves a good operating profit in 2023

Dear shareholders

Allreal can look back on a turbulent year for the business in 2023. After ten years of expansion and growth the real estate sector is facing challenges from the economic environment. Higher interest rates are pushing up financing costs. The flow of net new money into real estate has slowed considerably. Constant revaluations upwards are a thing of the past. All this is reflected in the transaction market. Moreover, the shortage of skilled staff and inflation are driving up construction costs, slowing demand for new build projects.

But thanks to the robust state of the Swiss economy, demand for modern office space remains steady. The anticipated growth of the population will also ensure the demand for residential space continues to increase in future. So high-quality properties will remain a secure, long-term investment with reliable payouts. They provide stability and form a key part of any investment strategy.

Our three divisions Real Estate, Development and Realisation cover the entire value chain. At the heart is a high-quality portfolio of modern office and residential premises in well-connected locations in the metropolitan area of Zurich and around Lake Geneva. We manage the portfolio actively and are constantly optimising the income and costs of our properties. The high level of development and realisation expertise creates long-term added value and enables entrepreneurial growth.

Because the portfolio has a sound economic basis we are able to take a long-term view when it comes to project development. By getting our construction skills involved at an early stage and applying our knowledge as owners we can ensure projects are developed and realised efficiently and to a high standard. This expertise in construction and development also helps us to generate maximum value from the portfolio.

“The good operating profit in 2023 confirms the Group is well placed to cope with a challenging environment. Adjusted for the revaluation effect, the profit was CHF 122.0 million.”

Operating profit in line with expectations

The good operating profit in 2023 confirms the Group is well placed to cope with a challenging environment. Adjusted for the revaluation effect, the profit was CHF 122.0 million. Rental income on our properties rose 2.6% due amongst other things to a slight increase in sales-based rents, the indexation of commercial rents and the fact that residential rents are linked to the reference interest rate. This was more than enough to make up for the CHF 3.1 million of rental income no longer received after the sale of two properties in Basel in the previous year and from the sale of a property in Urdorf ZH in the first half of the year. In addition, we recognised a gain overall from selling several properties that no longer fitted in the portfolio. The revaluation of our properties was negative at CHF –64.5 million. On a portfolio worth more than CHF 5 billion the effect is minor and underlines the high fundamental quality of our portfolio. The vacancy rate at the balance sheet date was a very low 1.7%. The net yield on the portfolio is 3.8%.

The earnings from Development & Realisation were considerably lower than the previous year. Apart from special effects in the previous period this was also caused by lower construction volumes on third-party projects and irregular earnings from selling condominiums. Our gross margin on realisation for third parties was a solid 10.6%.

Our purchase of the Rieter site in Winterthur ZH secured us a large plot in an urban location with much long-term potential. The site has already been generating income since ownership was transferred in September, and this is gradually being increased. In the long term we are keen to develop in dialogue with the city of Winterthur and other stakeholders an attractive district that has both jobs and homes.

Several of our own developments are in the planning phase or under way. The office building at Bellerivestrasse 36 in Zurich was fully renovated and handed over to new tenants at the end of the year. We are realising pioneering sustainability projects for our own portfolio, for instance in Baar ZG and on Badenerstrasse in Zurich. And by selling condominiums we are raising further income, as on Spiserstrasse in Zurich, in Zumikon ZH, Lucerne and Riehen BS. Allreal has also proved itself to be a reliable partner for complex new build and conversion projects in the third-party market. High-profile buildings we are working on include the Höfe in Adliswil ZH, the Rieter Campus in Winterthur ZH and the Haus zum Falken at Stadelhofen station in Zurich.

Payout remains stable

Allreal shares underperformed the sector index last year. On the cut-off date Allreal shares were unchanged from the previous year at CHF 150.40.

Allreal has a predictable dividend policy. This stipulates that up to 100% of the net operating profit from the Real Estate segment can be distributed. Our shareholders too will once again benefit from the good performance last year. The Board of Directors is proposing to the annual general meeting to be held on 19 April 2024 an unchanged distribution of CHF 7.00 per share, giving an attractive yield of 4.7%.

Outlook 2024

Allreal faces 2024 with confidence despite the challenging environment. Real estate offers reliable protection against inflation thanks to the indexation of commercial rents and the fact that residential rents are linked to the reference interest rate. Demand for apartments in the urban centres of Zurich and Geneva remains strong in the new year and attractive commercial premises are still finding takers. Our extensive pipeline of developments also gives us long-term growth potential which we have the ability to control ourselves in terms of when investments have to be made.

However, net financial expense will increase again in 2024, placing a significant burden on net operating profit. We therefore assume net operating profit will be slightly down from the previous year.

Proposals to the annual general meeting

All members of the Board of Directors are standing for re-election at the forthcoming 25th annual general meeting. The meeting will also consider a proposal to amend the company’s articles of association to bring them up to date. In addition, an entirely revamped remuneration system for Group Management will be put forward to meet the expectations of the capital market for the remuneration policy to be transparent and based on the company’s long-term performance.

The Board of Directors and Group Management would like to take this opportunity to thank employees for the work they put in last year, and the shareholders for the trust they have placed in us.

Ralph-Thomas Honegger

Stephan Widrig