Interview René Zahnd
Interview René Zahnd
Swiss Prime Site ended the 2019 financial year with very positive results. Both segments performed in line with expectations. René Zahnd, CEO of Swiss Prime Site, explains why market prospects are still favourable, why the Company parted with Tertianum, when co-working works well, how to successfully enhance retail spaces and how important sustainability is for the Company as a whole.
René Zahnd: Sustainability is about being prepared for the future. Right now, we are at a turning point. Sustainable actions generate medium- and long-term added value. If you have read Larry Fink’s letter entitled «A Fundamental Reshaping of Finance», you’ll know that even companies like BlackRock, the world’s largest asset management company, are placing more emphasis on the issue than ever before. This is happening with good reason.
The real estate industry is investing in properties and buildings that typically have a life cycle of 50 to 100 years. We therefore need to focus on the medium and long term so that we can offer our customers the right solutions for the future. Having said that, there is already plenty of potential for making savings in grey and operational energy in the construction and operation of properties. The government has made it very clear that we need to be carbon neutral by 2050. Swiss Prime Site has set objectives across different levels to ensure that we fulfil this requirement. From encouraging e-mobility and installing photovoltaic systems on the roofs of our buildings, and real estate that has practically no emissions or can even act as its own power plant, through to a binding definition of a CO2 reduction pathway, we have introduced a range of measures that enable us to play our part. In addition, we created a Sustainability Board in 2019. This board looks at the issue in detail with the objective of embedding it in our business processes wherever possible.
Real estate has been a growth market for over twenty years. There has been speculation for almost a decade about whether a slump is coming. It’s not happened yet. This has been due to both the level of interest rates and the solid performance of the Swiss economy, making the current job market attractive to foreign companies and their workforce as well as to specialists. Even the low euro rate hasn’t made much of an impact on that. Thinking about the immediate future, I can’t see any signs of conditions changing dramatically. That is why I am confident.
We see digitalisation and new technologies as an opportunity for us to scrutinise and optimise our processes. When planning and realising projects, digitalisation helps us to be quicker and more efficient and precise. There are also areas such as management or the retail market in which digitalisation actually acts as a catalyst. It is therefore essential that our employees’ expertise is aligned with these new realities. However, in today’s world with its focus on sustainability, it is especially important that we maintain personal contact with our customers; this is something we mustn’t lose. An algorithm cannot replace this contact. This is why we offer such extensive training and development to our employees.
No, not at all. This is a good point at which to offer my sincere thanks to all Swiss Prime Site Group employees. It is thanks to their knowledge and dedication that the last few years have been so successful. The trust and excellent relationship we have with our customers have also been hugely important. Four years ago, I took over a top-performing company and have since further developed it with my colleagues on the Executive Board and Board of Directors.
Although it may not have seemed that way from the outside, it was a challenging year. We made some key strategic decisions. These included the decision to sell Tertianum, which we carried out at the end of 2019. In day-to-day business, we took major steps towards transforming Wincasa, developing the retail business at Jelmoli and our property portfolio and driving the growth of Swiss Prime Site Solutions. Together, we overcame the challenges, and can be proud of the results. However, as always, there is still a lot to do. Today’s business environment requires constant movement and flexibilit
When Swiss Prime Site acquired the residential and care services provider Tertianum in 2013, the company had fewer than 20 locations. Today, we have a network of more than 80 centres and residential homes spread across the whole of Switzerland. In 2019, Tertianum achieved an operating income of more than half a billion Swiss francs for the first time (CHF 519.6 million, +6.5%). EBIT was CHF 34.0 million (+23.6%) and at 6.5%, the EBIT margin drew level with international competitors. We turned Tertianum into the largest private Swiss provider of retirement and care services and successfully positioned it in the market.
I definitely believe that Capvis are the right new owners for Tertianum. The Swiss company understands our domestic market really well and can use its expertise to leverage significant synergies. The market responded very well to the news because the transaction makes sense and the financial aspects are right for Swiss Prime Site’s shareholders.
We were able to increase both the operating income (CHF 828.4 million, +4.8%) and the EBIT (CHF 55.5 million, +16.6%). We are very pleased with this growth. Regarding the EBIT of Tertianum and Wincasa, I am particularly proud that we were able to achieve the medium-term objective we set three years ago of reaching a combined EBIT of over CHF 50 million. And we did this a year before the target date of 2020.
Wincasa reported earnings from real estate services of CHF 148.1 million, an increase of 2.5% over the previous year. Despite significant investment in transforming the business model, EBIT was at a similar level to the previous year, at CHF 17.7 million. In a highly competitive market rife with discount wars, Jelmoli reported revenue from retail of CHF 127.8 million and an operating result of CHF -4.0 million. It is worth noting that investment in the Jelmoli airport project began in 2019 and will continue in 2020. Swiss Prime Site Solutions extended its contract with the Swiss Prime Investment Foundation ahead of schedule. This reflects our positive relationship with the customer and the success of their services. Earnings from asset management were up by 60.2% to CHF 13.5 million. At CHF 7.8 million, EBIT almost doubled.
In our core business, we were able to increase our operating income slightly compared to the previous year, to CHF 519.5 million (+2.0%). With revaluations of CHF 204.4 million, we tripled the value compared to 2018. In geographical terms, the increase is spread across our key markets in Geneva and Zurich, with Müllerstrasse in Zurich being a runaway success. We acquired this property as part of the swap deal connected to our share in Sihlcity and it formed a significant share of the revaluations in 2019. This is because we have been able to re-let the building on a long-term agreement. It also shows that revaluations are not only linked to the current interest rate, but can also be directly affected by management. With an EBIT of CHF 572.9 million, we clearly exceeded the previous year’s results by CHF 141.8 million or 32.9%. Excluding revaluations, results increased compared to the previous year (CHF 368.4 million, +1.6%).
«Thinking about the immediate future, I can’t see any signs of conditions changing dramatically. That is why I am confident.»
A bit of both. Firstly, there is currently significant demand for real estate in prime locations, resulting in some absurd asking prices and low yields. We are not prepared to buy something at any price. Fortunately, with our project pipeline of around CHF 2 billion, we do not have to. Secondly, we certainly did conclude a number of transactions over the year. These were smaller properties that didn’t fit in the portfolio anymore and could be sold at a profit and acquisitions that have the potential to be future development projects.
Retail is not all the same. Our portfolio currently comprises 26% retail floor space. Of this, around a quarter is Jelmoli, where we have significant influence over the spaces and can ensure that they perform well. Our two biggest tenants in this type of use are also the two largest retailers in Switzerland, focusing on food products, where online business has made fewer inroads. Furthermore, the majority of the retail spaces are in excellent locations. In 2018, for example, when OVS turned its back on the Swiss market, we re-let the spaces very quickly and at a better price.
Since 2015, we have reduced the proportion from 34% to 26%. Once the projects under construction are up and running, this will reduce the proportion of retail automatically and over time. I can see between 20% and 25% being a realistic assumption. In addition, we will develop existing retail spaces and improve them with additional offerings.
For example, in summer 2019, we welcomed a really interesting new tenant in Jelmoli – Pallas Kliniken. Even though Pallas Kliniken is not a retailer as such, it fits perfectly into the premium department store. They share the same customers and can offer them a fantastic, all-round service. This has enabled us to enhance the customer journey in Jelmoli and significantly increase the appeal of the store as a destination. Pallas Kliniken is also a new tenant which can benefit from the existing network within the building and vice versa.
We are really pleased to be able to announce that Nina Müller will be the new CEO of Jelmoli. She will take up her role in spring 2020. Jelmoli is performing well and she can look forward to leading the finest premium department store in Switzerland. With the challenges in the online market, opening the new locations at the airport in Zurich and updating the ERP system, there is much to be done.
Our strategy is shaped by our three- to five-year business scenarios. In spring 2019, we and the Board of Directors signed off the 2020–2022 period. The targets we have set ourselves are challenging but achievable.
Our decision to sell Tertianum and the successful completion of this process represent an important strategic step. The cash flow and results from the sale of Tertianum will help us to implement more of our project pipeline, grow our asset management and reduce debt, thereby fulfilling our shareholders’ and stakeholders’ expectations.
Market conditions for prime office and commercial real estate are intact. In particular, the rental market in our key regions of Zurich and Geneva is in a healthy and robust condition. The supply of high-quality space in the city of Zurich, for example, is at its lowest level since 2010.
In 2019, we reported a vacancy rate of 4.7%. This is slightly lower than the 4.8% reported in the previous year. Fundamentally, we are confident that we can keep the value under 5%. At the same time, it is important to recognise that a certain level of vacancies cannot be avoided and is basically also a good thing. It gives us the requisite flexibility to respond better to demands from existing customers or the market.
We have co-working in around a dozen of our properties. The proportion of the total rental yield in the portfolio continues to be low, at roughly 1%. It is quite possible that we may expand in this area. We can see from the market that this segment is fulfilling a need that previously wasn’t adequately covered.
We are currently working with a range of providers who have various models for the involvement of Swiss Prime Site. There are traditional packages as well as some which are unique, at least at present. For example, we were able to secure Tadah as a tenant for our YOND building, which offers co-working areas with integrated childcare facilities. This works particularly well in developments like YOND, with its own ecosystem comprising a range of tenants. We will definitely continue working in this area. And of course, we are still not excluding the possibility of managing the co-working areas ourselves. After all, why should we share these profits with third parties?
Certain advocates in the market may well see it like that. From our vantage point, however, this view clearly falls short of the mark, and is actually incorrect. A good office or commercial space should be in an excellent, highly frequented location, thereby fulfilling a key requirement for customers – accessibility. These two prerequisites are key in order to attract tenants. If a property has vacancies because it is outdated or the location is wrong, they won’t be filled by introducing co-working concepts
«Our decision to sell Tertianum and the successful completion of this process represent an important strategic step.»
Swiss Prime Site anticipates that operating results will improve across the 2020 financial year, before revaluations and deferred taxes. Profit from the sale of the Tertianum Group will contribute significantly to this. In addition, we anticipate that the vacancy rate will stay below 5%.