Cofinimmo - Annual Financial Report 2014

150

ANNUAL ACCOUNTS /

Notes to the consolidated 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 insurances related to the buildings let to MAAF (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 inade-

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

The Group actively manages its client base in order to minimise

vacancies and tenant turnover in the office segment. The Property

Management team is responsible for swiftly resolving tenant com-

plaints while the letting 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 funda-

mental to protect rental income, it has little impact on the price at

which a vacant property can be let, as that depends on the prevail-

ing 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.

With some exceptions, rents are payable in advance, on a monthly,

quarterly or yearly basis. A quarterly provision covering prop-

erty 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 0.049% of the total turnover

over the period 1996-2014. An important deterioration in the general

economic situation is likely to magnify losses on lease receivables,

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

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

unexpected 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 scenarios at the end of the lease are cautiously ana-

lysed 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 super-

vised 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, specialised 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 €1,571.68 million

compared to a fair value of the investment properties of €1,345.11mil-

lion at 31.12.2014, including the value of the land. Cover has also been

taken against vacancies 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 24.