Project development risks

The realisation of projects is associated with higher risk. Risks can arise from imponderables such as delays in the property use approval or planning permission processes, cost/deadline overruns, construction defects, low demand for rental premises and similar factors. Nonetheless, given the high value that can be created through development projects, this business area also offers the chance of generating additional revenue. For projects to be realised, it is essential that equity or additional loan capital (project financing) is available. Delays in credit lending can lead to delays in construction work, which has a negative knock-on effect on project valuation; where pre-letting has been secured, this can result in the imposition of contractual penalties. Loss of rental revenue can in turn have serious implications for the company’s cash flow. Moreover, financing conditions can be tightened where construction costs increase. With all of this in mind, CA Immo takes various steps to control the risks associated with project development (cost monitoring, variance analyses, long-term liquidity planning and observance of minimum pre-letting quotas, and so on). In general, CA Immo is countering project development risk by choosing partners and service providers with care whilst maintaining stringent controlling, both internally and externally. Controlling involves regular cost monitoring, variance analyses and appropriate reporting. The start-up losses that typically arise in connection with project development also have a detrimental effect on earnings with the accrual of non-capitalisable costs. Over the project lifecycle, these losses are offset against revenue from lettings and sales; accordingly, projects are only launched after comprehensive and long-term liquidity planning. CA Immo invariably seeks to secure pre-letting (50–60 % in Germany, for example) before actually commencing a project. In Eastern and South Eastern Europe in particular, however, this may not be achievable (or only possible to a limited degree) on account of the specific market situation. In this region, lease contracts tend to be signed as soon as there is a sufficient likelihood of project completion and projects are sometimes initiated even with low levels of pre-letting, but ever having a secured funding in place.

CA Immo also faces the risk of significant cost variation linked to price trends in the raw materials sector (steel, aluminium, copper, etc.). With this in mind, cost pools are formed for large-scale projects to pass on the risk of rising commodity prices or production costs to the contractor. All current projects are being implemented within their approved budgetary frameworks. Pressure on development earnings results primarily from the market-driven extension of the stabilisation phase (initial renting) and from the risk of rising yields due to restrictive lending.

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