Annual financial report 2013

\ 147

Notes to the Consolidated Accounts

\ Annual Accounts

This amount does not include the insurances taken during works, nor those that are contractually borne by the occupant (i.e. for healthcare real estate, the cafés/restaurants of the

Pubstone portfolio as well as certain office buildings), nor those related to lease finance contracts. Furthermore, this amount does not include the MAAF buildings-related insurances

(first rank insurance on all the freehold properties and second rank insurance on the co-owned properties) which are covered for the value of their reconstruction.

NOTE 3.

MANAGEMENT OF OPERATIONAL RISK

By operating risk, Cofinimmo means the risk of losses due to inadequacies

in the company’s procedures or failures in its management.

The Group actively manages its client base in order to minimise vacan-

cies and tenant turnover in the office segment. The Property Management

team is responsible for swiftly resolving tenant complaints while the let-

ting team maintains regular contact with them so as to offer alternative

solutions from within the portfolio should tenants require more or less

space. Although this activity is fundamental to protect rental income, it

has little impact on the price at which a vacant property can be let, as that

depends on the prevailing market conditions. Almost 100% of the lease

contracts include a provision whereby rents are annually indexed. Before

accepting a new client, a credit risk analysis is requested from an outside

rating agency. An advance deposit or bank guarantee is usually required

from non-public-sector tenants corresponding to six months of rent.

Rents are payable in advance, on a monthly, quarterly or yearly basis. A

quarterly provision covering property charges and taxes incurred by the

Group but contractually rechargeable to tenants is also requested. The

level of rental defaults recorded net of recoveries represents 0.053% of

the total turnover over the period 1996-2013. An important deterioration in

the general economic situation is likely to magnify losses on lease receiv-

ables, particularly in the office sector. The possible insolvency of a major

tenant can represent a significant loss for Cofinimmo, as well as an unex-

pected vacancy or even having to rent out the vacant space at a price

significantly lower than the level of the terminated contract.

Direct operating costs, on the other hand, are driven essentially by two

factors:

•

the age and quality of buildings, which determine the level of

maintenance and repair expenses, both closely monitored by the

Property Management team, while the execution of the works is

outsourced;

•

the vacancy level of office properties and the tenant turnover, which

determine the level of expenses for unlet space, the letting fees,

the refurbishment costs, the incentives granted to new clients,

etc. which the active commercial management of the portfolio is

designed to minimise.

The buildings for healthcare and accommodation of elderly people and the

buildings of the distribution networks are almost occupied at 100%. The

former are rented to opertor groups which solvency is analysed annually.

The latter are let to large companies. The reletting or reconversion scenar-

ios at the end of the lease are cautiously analysed and prepared in due

time. The smaller buildings included in the distibution networks are sold

when the tenant leaves.

Construction and refurbishment projects are prepared and supervised by

the Group’s Project Management team with a mandate to complete them

on time and on budget. For the management of large-scale projects, spe-

cialised outside companies are brought in by the Group.

The risk of buildings being destroyed by fire or other disastrous events is

insured for a total reconstruction value of €1,805.64 million

, compared to

a fair value of the investment properties of €1,498.04 million at 31.12.2013,

including the value of the land. Cover has also been taken against vacan-

cies resulting from these events. Moreover, Cofinimmo has an insurance

for its public liability as the building owner or project supervisor.

Details of the Group’s financial risk are provided in Note 23.