Innovation & Inspiration
backFinancial security has top priority
Published: 04. March 2024
The development portfolio generally offers significant potential for profits, but also for risks. It all comes down to how the development business is practised, and which business model a property developer chooses. CFO Stefan Hilber explains how HIAG guarantees financial security, which measures are important for reducing risks, and how aspects of sustainability are also reflected in the company’s financing.
What are HIAG’s biggest challenges in financing its business activities?
Stefan Hilber: Financing an individual project development directly is usually difficult and often expensive. For this reason, we take a portfolio financing approach in which we do not link financing directly to individual developments. As a listed company, we have a wide range of tools at our disposal. Another major challenge is to obtain good conditions for financing. Apart from the respective interest rate situation and the general situation on the property market, this is challenging in that the development portfolio is generally associated with high risks, although these risks are often overestimated. This risk assessment is then also reflected in the margins offered for bank financing and bonds.
How does HIAG meet this challenge?
It is up to us to create an understanding among analysts and investors of how the risk/return ratio changes over the life cycle of a project development, and how it behaves in the context of our business model and the project portfolio as a whole. The development portfolio is inherently more volatile. An existing, fully let residential building is comparatively easy to finance, is often associated with lower risks, and ensures a constant cash flow. A development project, on the other hand, requires major upfront investment before the first rental income can be generated or the property can be sold as a condominium. For a single-line property developer, the time mismatch between expenses and income can pose challenges. Our business model, on the other hand, is based on two other earnings pillars: a large portfolio of yielding properties with recurring, stable cash flows, and transaction proceeds from the sale of properties that are no longer in line with our strategy. This allows the inherent volatility of the development portfolio to be smoothed out. Thanks to our transparent and detailed communication, we are getting better and better at convincing our investors of our business model and the associated opportunities and risks, and obtaining good conditions for our financing. The syndicated loan of CHF 500 million in August last year is a good example of this.
When you talk about the volatility of the development portfolio, what exactly does that mean for HIAG?
The inherent volatility of the development portfolio also means a somewhat greater fluctuation in returns, although our integrated business model ensures a certain degree of stability. The large number of developments that are being driven forward at the same time also ensures a steady return on development. Wherever possible, the sites are also given over to temporary uses with corresponding yields, which supports overall profitability. Viewed in isolation, the return on investment is lower during the development phase, but correspondingly higher once the project has been successfully completed due to the added value that is created. The decisive factor for us is not the static but rather the dynamic view, and thus the average return, which we consider to be very good.
“It is up to us to create an understanding among analysts and investors of how the risk/return ratio changes over the life cycle of a project development.” Stefan Hilber, CFO
Essentially, we want to ensure the financial security of our business and achieve a steady improvement in our credit rating. This is important so that we can obtain favourable conditions, particularly on the bond market. We aim to achieve the most favourable overall financing costs possible, and try to maintain a balanced maturity profile. Our business is long-term, which favours a financing horizon of three to five years. Speculation on short-term changes in interest rates is therefore not an issue for us.
What does financial security mean and how can it be achieved?
In light of our project pipeline, the security of having the necessary capital at attractive conditions during the project realisation phase and the corresponding high volume of investment is crucial. We are set to invest more than half a billion francs in the medium term. This raises the legitimate question of how we finance this. We were able to achieve an important goal with the committed, syndicated, five-year loan of CHF 500 million, which we signed in summer 2023. We also engage in “capital recycling” by selling parts of individual condominium projects and selectively selling properties that no longer fit into our portfolio. This means that part of the investment flows back into the company and provides additional liquidity.
What was the syndicated loan concluded last year like?
The credit line amounts to CHF 500 million, and is being committed by the syndicate banks for five years. The line also provides for two increase options totalling CHF 200 million. This means that the amount of the syndicated loan is set in such a way that we have sufficient entrepreneurial flexibility. This also gives us the freedom to not have to refinance maturing bonds immediately with new bonds if the market is unfavourable at that time, and if financing is correspondingly expensive. The terms of the syndicated loan that we were able to negotiate are favourable. The fact that HIAG is listed on the stock exchange, and that we ensure a very high level of transparency in our reporting, has helped us in this respect. As an unlisted private company, a credit line like this would have cost us much more or would not have been possible at all. We were also able to agree terms that are more favourable than those of our previous mortgages and bonds. This shows that the syndicate banks believe in our business model and trust our risk management.
Site developments are generational projects. The financing instruments used by HIAG, on the other hand, have significantly shorter terms. How does that fit together?
As a rule, the financing instruments do indeed have a shorter term than the individual projects. However, the portfolio approach gives us enough time to restructure our financing if necessary. Financing individual site developments for ten to 15 years would simply be too expensive. As long as we have a good balance sheet and financing structure, refinancing with shorter terms is not problematic
“We were also able to agree terms that are more favourable than those of our previous mortgages and bonds. This shows that the syndicate banks believe in our business model and trust our risk management.” Stefan Hilber, CFO
We consider an average term of three to four years to be a good period in our business, in which we also sell properties and promotional projects. A rather shorter duration at present also makes sense in light of the fact that, following the significant rise in interest rates, they are currently expected to decline again. This is also reflected today, i.e. at the beginning of 2024, in an inverted yield curve. With a balanced maturity profile, we smooth out interest rates and avoid a large proportion of financing falling due at once in an unfavourable interest rate environment. We also use time windows to secure favourable interest rates over the long term. We utilised such a time window at the end of 2023, whereby we fixed the interest rate on some of our financing for several years at a rate that is significantly lower than the current short-term interest rates, which is a rare occurrence. However, we finance ourselves conservatively rather than speculating on interest rates.
By signing the syndicated loan, we have committed ourselves to keeping the proportion of mortgages below 10%. It currently stands at just 8%. Nevertheless, mortgages remain an important financing instrument to this limited extent. At the same time, we remain active on the capital market. This is because the conditions also depend in part on our reputation as an issuer. In general, we want to be well diversified so as not to become too dependent on one financing instrument. Overall, our aim is to get the most out of our financing in order to generate the best possible return for our shareholders.
As a family business with a history going back over 140 years, HIAG focuses its investment property portfolio on generating value over generations and has now drawn up a “Sustainable Building Manifesto”. How important is sustainability on the financing side?
With our development projects, we have a significant influence on sustainability and invest heavily in corresponding measures, as this is crucial for the value of the properties. In addition, commercial tenants in particular have become more aware of the issue or have to fulfil sustainable criteria themselves. However, we do not want to limit sustainability to forward-looking development projects and the responsible use of existing properties. Instead, we see sustainability as a culture that is practised along our entire value chain, and in future also in the financing of our business activities. All the more so as access to capital is increasingly dependent on the assessment of sustainability risks.
Sustainable financing has various different aspects – from the procurement of capital to the utilisation of funds and rental agreements. HIAG introduced a Green Financing Framework in mid-2023, the criteria for which were validated by an independent second opinion. If we issue “green” financing in this context, for example “green” bonds, we must utilise the capital raised in connection with properties. To this end, the properties must fulfil specific sustainability criteria, which are set out in an annual impact report and independently reviewed. The syndicated loan is also tied to sustainability. Funds under this framework are tied to three sustainability targets that are defined across the portfolio. The fact that our sustainable actions are now also reflected in our financing enables us to expand our circle of investors and obtain more favourable conditions.
Is the plan for HIAG’s entire financing structure to become sustainable?
My personal goal is to make HIAG’s financing completely sustainable. HIAG has sustainable action in its corporate DNA, which should also be reflected on the liabilities side of the balance sheet.
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