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1
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 pubs/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 relating to
buildings rented 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
complaints, 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
fundamental to protect rental income, it has little impact on the price
at which a vacant property can be let, as that price depends on the
prevailing market conditions. Most 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 corresponding to six
months’ rent is generally requested from private sector tenants.
With a few exceptions, 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 recharge-
able to tenants is also requested. The level of rental defaults recorded
net of recoveries represents 0.065% of the total turnover over the
period 1996-2015. 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 signifi-
cantly 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 operator groups whose solvency is
analysed annually. The latter are let to large companies. The reletting
or reconversion scenarios at the end of the lease are cautiously
analysed and prepared in due time. The smaller buildings included in
the distribution 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, specialised outside companies are brought in by the Group.
The risk of buildings being destroyed by fire or other disas-
trous events is insured for a total reconstruction value of
1,639.06 million EUR
1
, compared with a fair value of the investment
properties of 1,408.73 million EUR at 31.12.2015, including the value of
the land. Cover has also been taken against vacancies resulting from
these events. Moreover, Cofinimmo has insurance for its public liability
as the building owner or project supervisor.
Details of the Group’s financial risk are provided in Note 24.
164
ANNUAL ACCOUNTS /
Notes to the consolidated accounts