Risks and Risk Management
The purpose of Citycon's risk management is to ensure that the company meets its strategic and operational goals and recognizes risks threatening these goals before they materialise.
The company's risk management process includes the identification of risks related to the company's business operations, assessment of their significance, planning and implementation of risk management actions, regular risk reporting, and control. The purpose of risk management actions is to decrease the likelihood of materialisation of risks and to mitigate effects of a materialised risk. The task of risk management is to generate up-to-date and consistent information for senior executives and the Board of Directors on any risks threatening the targets set in strategic and annual plans.
The basic process of Citycon's risk management can be described like this:
You can find more information on the company's risk management under the following links:
- Risk Management Process
- Risk Management Principles
- Risk Management Organisation
- Major Risks
- Risk Management Actions
Major short-term risks and uncertainties
The company's Board of Directors evaluates major risks and uncertainties that it is aware of quarterly and reports on those in conjunction with the interim and full-year reports issued by the company as well as in the Report by the Board of Directors. Latest evaluation of major short-term risks and uncertainties is included in the Interim Report issued on 25 April 2012, quoted in its entirety as follows:
"Citycon’s Board of Directors considers the company’s major short-term risks and uncertainties to be associated with economic development in the company’s operating regions, which affects demand, vacancy rates and market rents in retail premises. In addition, key near-term risks include any rise in loan margins, weaker availability of debt financing and the fair value development of properties in uncertain economic conditions.
Although the financial crisis’ effects on rent levels for retail premises, and on occupancy rates, have so far been minor in Citycon's operating areas, demand for retail premises, reduction of vacancy rates and market rent levels pose challenges in a sluggish economic environment. Economic developments, particularly trends impacting on consumer confidence and consumer behaviour, inevitably affect demand for retail premises. Sovereign debt problems in the euro area continued at the beginning of 2012, and as a result, financial growth forecasts for 2012 involve more uncertainty than normally is the case. Risks to financial growth are still present and in conditions of weak economic growth, rental levels typically fall in the case of retail premises, demand for new premises is lower, and vacancy rates rise.
Implementation of Citycon's growth strategy requires new financing, which means that risks associated with the availability and cost of financing are of fundamental importance to Citycon. Banks’ willingness to lend money to real estate companies is still rather moderate, availability of financing is limited and loan margins have remained on a high level. In the future, tightening regulation of the banking and insurance sectors (Basel III and Solvency II regulations) is likely to push the costs of debt financing upwards, and to limit the availability of long-term bank loans. This will probably raise the cost of Citycon's new loan financing. So far this change in margins has been mitigated by reduced underlying base rates and Citycon’s active financing policy. In 2012, the company has no major refinancing needs, whereas over the next few years, Citycon will have to refinance some loan agreements signed at low margins before the financial crisis, entailing that the margins on these loans will rise. Such a rise in loan margins is likely to push Citycon's average interest rate upwards in the future, even if market interest rates remain largely unchanged.
The company is actively seeking to diversify its funding sources in order to mitigate the risks related to bank financing, but there are no guarantees, that such alternative funding sources would be available at cost efficient margins.
The fair value development of investment properties continue to be characterised by high uncertainty caused by the sovereign debt crisis and the resulting harsh economic conditions. Several factors are affecting the fair value of the investment properties owned by Citycon, such as general and local economic development, interest rate levels, foreseeable inflation, the market rent trend, vacancy rates, property investors' yield requirements and the competitive environment. This uncertainty will reflect most strongly on retail properties located outside major cities, or in otherwise less attractive properties, because investor demand is not currently focused on these properties, and banks are not particularly keen to offer financing for such projects. Yet, at the same time, the fair value of winning shopping centres, which attract investor interest in uncertain conditions, remained stable or even increased during the opening months of 2012."
The company’s short-term risks and uncertainties, as well as its risk management and risk management principles, are discussed in more depth on pages 40–42 of the Financial Statements for 2011, and on pages 73–74 of the Annual Report for 2011.