Risks and Risk Management
Citycon uses a holistic Enterprise Risk Management (ERM) program. The objective of risk management is to ensure that Citycon will reach its business targets and to identify key risks which may threaten its ability to meet these targets before they realise.
Citycon’s risk management process involves identifying, analysing, measuring, mitigating and controlling business-related risks. Citycon’s Board of Directors has approved the company’s risk management guidelines specifying risk management principles, which are subject to regular updating in order to cover effects of changes in business operations.
Part of the ERM process includes identification of existing, and the planning of new, risk mitigation plans in the event that current actions are not deemed sufficient for each risk identified. Successful risk management decreases the likelihood of risk realization and mitigates the negative effects of realised risk.
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:
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 16th October 2013, 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 developments in the company’s operating regions. Such developments affect demand, vacancy rates and market rents in retail premises. In addition, key near-term risks include rising financial expenses due to higher loan margins and interest rates, reduced availability of debt financing and the fair value development of properties in the current uncertain economic conditions. However, the company’s refinancing risk was considerably reduced as a result of the EUR 500 million eurobond issued in June.
Although the financial situation has so far had only minor effects on the rent levels of retail premises and on occupancy rates, in Citycon's operating regions lower demand for retail premises, higher vacancy rates and lower market rent levels pose challenges in a sluggish economic environment. Economic developments, particularly trends impacting on consumer confidence and behaviour, inevitably affect demand for retail premises. During 2013, risks to economic growth have persisted. During periods of weak economic growth the rental levels of retail premises typically fall, leasing of new premises is more difficult and vacancy rates rise.
The implementation of Citycon's strategy will require new financing going forward, which means that risks associated with the availability and cost of financing are of importance to Citycon. Banks’ willingness to lend money continues to be moderate, availability of financing is limited and loan margins remain at a high level. In the future, tightening regulation of the banking and insurance sectors (e.g. the Basel III and Solvency II regulations) is likely to elevate the costs of debt financing and to limit the availability of long-term bank loans. This may 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. Loan agreements were signed at low margins before the financial crisis; when new loans are taken out, the margins are likely to be higher. Along with rising market interest rates, such a rise in loan margins is likely to push Citycon's average interest rate upwards in the future.
The company is actively seeking to diversify its funding sources, as demonstrated by the EUR 500 million eurobond issued in June 2013 and the EUR 150 million domestic bond issued in May 2012, in order to mitigate the risks related to bank financing. However, there are no guarantees that such alternative funding sources will be available in the future at cost-efficient margins. Bond issues, along with the EUR 360 million credit facility agreement signed with Nordic banks in September 2012, the EUR 90 million rights issue in October 2012 and the EUR 200 million rights issue in March 2013 considerably strengthened the balance sheet, improved the available liquidity and decreased the refinancing risk for the coming years.
The fair value development of investment properties continues to be characterised by uncertainty caused by the sovereign debt crisis and the resulting tough 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 rates, market rent trends, vacancy rates, property investors' yield requirements and the competitive environment. This uncertainty will be reflected most strongly in 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 more reluctant to offer financing for such projects. On the other hand, the fair value of winning shopping centres, which attract investor interest in uncertain conditions, has remained stable or even increased during 2013.
The company’s short-term risks and uncertainties, as well as its risk management and risk management principles, are discussed in more depth at www.citycon.com/riskmanagement, on pages 43–46 of the Financial Statements for 2012 and on pages 50–51 of the Annual Report for 2012.
updated on 16 Oct 2013