Our approach to risk is closely aligned with our aim of generating sustainable growth and increasing the value of our company. Our policy is to minimise risks as much as possible. Risk management is therefore an integral part of the planning and implementation of our business strategies. Due to the small number of staff our Company employs, the Executive Board is directly involved in all risk-relevant decisions.
Regular reporting to the Executive Board and the Supervisory Board
As part of its risk management, the Executive Board of Deutsche EuroShop is continuously briefed about the course of business at individual property holding companies. Deutsche EuroShop’s investment decisions are reviewed by the Supervisory Board. External appraisals are also commissioned if required.
Risk analysis and risk assessment
Risk analysis and risk assessment is performed on the basis of monthly and quarterly reports on each property holding company submitted by the service companies engaged to manage the centers or, in the case of centers under construction, engaged to provide project management. The Executive Board regularly reviews and monitors these reports, using the following key items of information to assess the level of risk:
1. Portfolio properties
Development of outstanding accounts
Development of retail sales in the shopping centers
Variance against projected income from the properties
2. Centers under construction
Documentation of risk management
The Company’s risk management activities are documented once a quarter and the results
submitted to the Supervisory Board at its meetings.
The sections below describe the key risks that could materially impact our business and our net assets, financial position and results of operations from a current perspective.
Deutsche EuroShop is affected by the general economic and political conditions. Weak economic growth, the ongoing difficulties in the labour market situation and the continuing discussion about tax and contribution hikes are having a sustained negative impact on private spending in Germany. We do not anticipate any economic stimulus for the retail sector if consumer confidence does not improve noticeably in the coming year.
An industry risk exists when the retail trade in the broad sense of the word suffers a sustained decline in sales. Industry risk is defined as the potential development from unfavourable changes in the retail sector, which saw sales decline by 1.6% in Germany in 2004. We try to anticipate this risk with in-depth market intelligence and minimise it by concluding long-term contracts with tenants with strong credit ratings.
| Risks from operating activities
Risk of rent loss
A risk of rent loss arises when tenants become insolvent and are no longer able to meet their rental contract obligations because of their business performance. We counter this risk by regularly analysing tenants’ sales trends and the development of outstanding accounts. Measures to find new tenants are initiated at an early stage if there are signs of any sustained negative development. In addition, the Company is largely protected against the risk of rent loss by the security deposits furnished by the tenants.
A cost risk could arise in particular in the event of unforeseen additional expenses for current investment projects. We minimise risks from cost over-runs in current investment projects (as is currently the case with City-Arkaden in Klagenfurt) by prophylactically costing in all identifiable risks in the planning stage. In addition, construction contracts are only awarded on a fixed-price basis to prime contractors with strong credit ratings. The construction phase is supported by professional project management services from service providers engaged by the Company.
The subsidiaries of Deutsche EuroShop mostly do business in a single currency area, which means that they are not exposed to currency risk. However, the consolidated financial statements of Deutsche EuroShop are subject to translation risks in the case of the subsidiaries/investees whose financial statements are denominated in Polish zlotys and Hungarian forints. These risks are not hedged as a rule because this is purely an issue of translations performed as of the reporting date and therefore does not expose the Company to cash flow risks. At the same time, the gains from the modified closing rate method are included in the profit and loss account and could have a not insignificant effect on consolidated income/loss due to the high currency volatility in Eastern European countries.
The currency risk from operations is largely hedged by linking rents and loan liabilities to the euro. A risk could arise if the forint or the zloty were to plummet against the euro and the tenants were no longer able to pay what would then be considerably higher rents denominated in foreign currency. However, because the Árkád Pécs and Galeria Dominikanska properties account for only around 3% each of Deutsche EuroShop’s aggregate portfolio, this risk is manageable. Nevertheless, we will continue to pay particular attention to exchange rate developments in the future.
In financial year 2003 we had our properties appraised by independent experts for the first time. Since then, all portfolio properties undergo an annual rating and new properties or shopping centers that have newly opened are valued in full. Changes in the fair value of individual shopping centers will in the future be included in the Group’s profit and loss account in accordance with the provisions of IFRS 40. This can lead to consolidated income being subject to increased levels of volatility.
A financing risk could arise in the event of a change in the interest rate of ongoing debt finance. We reduce the interest rate risk for new property financing by entering into long-term loans with fixed-interest periods of 10 to 15 years.
In addition to improving the performance of the system, IT investments in 2004 focused on security. This is ensured by continual screening of data traffic to identify hidden and unsafe content, and especially by way of a centrally administered anti-virus system. All data is backed up on a daily basis.
Legal and other risks
No material legal or other risks can be identified.
Evaluation of the overall risk position
According to an assessment by the Executive Board, the total risks do not impact the continued existence of Deutsche EuroShop.