Risk management report

As an international real estate group, S IMMO Group faces a host of opportunities and risks that impact operating activities, decision-making processes and strategic management. By identifying, analysing, managing and monitoring opportunities and risks, the Group strives to recognise potential in a timely manner as well as identify negative developments and potential risk factors in good time, understand their cause and minimise them as far as possible. Nevertheless, the occurrence of risks cannot be completely ruled out. S IMMO is engaged in the development, acquisition, leasing, operation, refurbishment and sale of real estate in Austria, Germany and CEE along the life cycle of long-term real estate investments. The portfolio contains commercially used properties (office, retail and hotel) and residential properties. Other activities of the Group therefore include:

Real estate project development

Operation of hotels and shopping centres

Refurbishment of portfolio properties

Asset management

Property management

In addition, S IMMO AG held shares in the Austrian listed ATX real estate companies CA Immobilien Anlagen AG and IMMOFINANZ AG in 2021. The shares in CA Immobilien Anlagen AG were included in the takeover bid of Starwood Capital Group in July 2021 at a price of EUR 37.00 per share and sold. At the end of January 2022, it was agreed with CPI Property Group that S IMMO AG would transfer all of its IMMOFINANZ shares as well as all those shares it may acquire through its partial offer for IMMOFINANZ shares at a price of EUR 23.00 per share to CPI Property Group as soon as the CPI offer has been cleared by the antitrust authorities. The sale of the shares was completed at the beginning of March 2022.

S IMMO performs the identification, management, assessment and handling of risks based on a standard risk catalogue in close consultation with risk owners in all segments and at the holding company level. On this basis, formalised, identical Group-wide documentation – interconnected with a quantitatively uniform assessment system – of the decisions regarding the risk appetite for each individual item of the standard risk catalogue is established, while the company’s risk positions are presented for each segment and at the holding company level using an aggregation function. The basis for risk identification lies with the local risk owners, thus ensuring comprehensive bottom-up information for the Management Board. At the Group level, a specialist unit for central risk management is in place. As the risk owner, the risk coordinator regularly reports to the full Management Board.

In addition to internal regulations and guidelines, risk management at S IMMO comprises ongoing reports in the context of regular meetings with the Management Board. Furthermore, there are control measures in place in the Group for the purpose of the early detection, management and monitoring of risks. Key decisions relevant to risk are made by the Management Board. Investment projects above a specific volume also require approval from the Supervisory Board.

The Supervisory Board is regularly informed about the current risk assessment, potential risks, and the Internal Control System in the course of the Audit Committee meetings that are held at least twice a year. The risk groups set out in this section have been and will be regularly analysed and assessed retrospectively for financial year 2021 and also with regard to business activities in 2022.

Naturally, the COVID-19 pandemic had an impact on the financial year 2021. While the increasing progress of the vaccination programmes led to a slight recovery, nevertheless some drastic measures such as lockdowns still had to be taken by local governments in the markets served by S IMMO in some cases. Restrictions and closures were imposed primarily in the hotel, hospitality and retail sectors. The result was a significant change in consumer and travel behaviour, which had a negative impact on the number of visitors and overnight stays and thus on revenue.

The financial year 2022 started with another wave of infections caused by the new Omicron variant. This virus variant is expected to cause milder illness, which together with vaccination could possibly lead to a foreseeable end of the pandemic or a transition to endemicity. However, it is difficult to predict how long the health crisis will last and how it will progress, and this entails corresponding uncertainties regarding the development of national economies and the real estate and capital markets. Russia’s invasion of Ukraine at the end of February and the duration of the war are also not foreseeable despite peace negotiations. Both uncertainties are outside the company’s sphere of influence and thus make reliable medium- to long-term planning almost impossible.

Whether there are long-term or persistent adverse effects depends on the duration of the current crisis as well as the trends towards working from home and e-commerce. S IMMO has a property portfolio in outstanding locations that has been built up in the context of a conservative and consistent investment policy. The management generally expects that it will ultimately be able to overcome the impacts of the pandemic and seize potential opportunities effectively with its diversified strategy. In this respect, as things stand, the company does not expect any lasting negative changes that would materially affect the Group’s long-term prospects.

Internal Control System

An Internal Control System (ICS) is in place for all key business processes. Aspects such as the reliability of financial reporting are monitored and controlled by this system. In conjunction with the Internal Audit department and in compliance with (stock exchange) regulations, the ICS constitutes S IMMO Group’s internal monitoring system. Core processes – in particular those relating to the Group’s financial reporting – are set out in the internal processes database. This includes a risk management matrix in which the processes, potential individual risks and assigned control steps are defined.

Key features of the accounting-specific ICS are:

Clear division of tasks between finance and accounting as well as other areas of responsibility (e.g. treasury)

Guidelines on the application of uniform accounting and valuation methods in the consolidated financial statements

Assessment of risks that could lead to a material misstatement of transactions (e.g. incorrect allocation to balance sheet or profit and loss items)

Appropriate control mechanisms in the automated preparation of the consolidated financial statements

Reports to internal recipients (Management Board and Supervisory Board) include quarterly, segment and liquidity reports as well as additional individual analyses as required

Within the preparation process for the consolidated financial statements, the respective accounting departments of the individual companies are required to prepare reporting packages by each reporting date on the basis of the Group-wide accounting manual and to send these to headquarters for further processing. The subsidiaries use external service providers to prepare the reporting packages on behalf of and under the responsibility of the respective management. In the context of the process-specific control activities, Group Accounting performs regular reviews of the completeness and accuracy of the reported data. Various deviation analyses are also performed in ongoing coordination with the Management Board. These include a review of the data of all Group companies at headquarters together with the specialist departments (e.g. Asset Management and Tax), with the involvement of the Accounting departments of the individual companies. When preparing the consolidated financial statements, Group Accounting uses a validated consolidation software package. The effectiveness of risk management is assessed each year on the basis of the critical self-assessment of the Group and on a voluntary basis by the Group’s auditor in line with the requirements of C Rule no. 83 of the Austrian Code of Corporate Governance (ÖCGK). The Management Board, Supervisory Board and Audit Committee are informed of the results of this audit.

Internal Audit

S IMMO AG’s Internal Audit department coordinates audits of significant business processes of the Group parent company and its Austrian and foreign subsidiaries with regard to their effectiveness, existing risks and control weaknesses as well as potential improvements in efficiency. The audits take place in cycles of several years and are based on the annual audit plan approved by the Management Board. In addition, special audits are commissioned as required. Only external experts are commissioned to perform the audits. The results of the audits are reported to the Management Board. The Audit Committee of the Supervisory Board is regularly informed regarding the audit plan and the results of the audits.

Explanations on individual risks

Corporate strategy risks

Strategic risks are closely related to S IMMO’s business strategy and could strongly influence it.

Business environment and industry risk

The development of an industry is heavily dependent on external factors such as the economy or the prevailing technological, political and legal situation. As the economic environment is constantly changing, the resulting risks are hard to forecast. A deterioration of the economic situation in a market can affect purchase and sale prices as well as the value of and return on a property. In addition, rent reductions, rental defaults or a termination of rental agreements by tenants may occur. S IMMO counters these risks by owning properties in different regions with various types of use. Careful asset management and constant monitoring also contribute to reducing the described risks.

Due to the current COVID-19 crisis and the war in Ukraine, economic forecasts and estimates regarding the future performance of the property markets are difficult. The pandemic continues to be challenging for hotel and retail properties. However, a recovery is increasingly foreseeable. An economic overview and an assessment of the property markets can be found in the economic report.

Investment risk

S IMMO faces risks in investments in property development projects as well as property purchases. These are often caused by factors beyond the Group’s control, for example delays in the completion of property projects or the subsequent deterioration of the local economic situation. Therefore, the Group’s strategy is oriented towards reducing potential investment risks through careful selection, planning and execution of property projects and purchases. There are set investment volume limits above which the approval of the Supervisory Board is required. Nevertheless, a residual amount of investment risk always remains with any investment, which can negatively influence cash flows and valuations.

The ongoing uncertainties regarding the duration and intensity of the COVID-19 crisis have an impact on the investment risk. Delays in the approval and construction process are expected in development projects, even though they have been manageable so far. With regard to investments in existing properties, the risk of potential tenant defaults or the need to support tenants is transferred to the buyer upon closing of the transaction.

Capital market risk

The capital market is very important to S IMMO in terms of raising equity and debt. Unstable capital markets or uncertainties due to the war in Ukraine can impair the Group’s financing options. Transparent and reliable information gives shareholders a well-founded decision-making basis and strengthens the capital market’s trust in the securities issued by S IMMO AG.

Property-specific risks

S IMMO is exposed to all risks associated with the purchase, development, operation and sale of properties.

Property portfolio risk

S IMMO counters property portfolio risk with a balanced portfolio mix. The portfolio contains offices, retail and residential properties as well as hotels. In geographical terms, the properties are divided between Germany, Austria and CEE. The Group focuses on capital cities and metropolises within the European Union. The value of a property depends largely on its location and intended use. Therefore, the attractiveness of the location or the potential use can significantly affect S IMMO’s financial situation. In general, diversification within the portfolio can cushion the risks of one market through positive developments in another market.

All of S IMMO’s markets have been and continue to be affected by the COVID-19 crisis. However, different types of use are impacted in different ways. As far as their finances allow, the local governments have put together various packages of measures to boost their respective economies. The diversified property portfolio has helped to reduce the negative effects of the COVID-19 crisis. In terms of types of use, hotels have been the hardest hit. In some cases, retail was also affected by the ordered closures. The office segment has been unaffected by the crisis and the residential asset class is actually benefiting from the current situation in part.

Letting and rental default risk

Letting risk is closely linked to the general economic situation in the various markets, and therefore involves associated uncertainty in terms of forecasting. In general, there is always a certain letting risk – also regarding contract extensions – due to the various political and economic developments in the individual markets. The competitive situation can also have an impact on the letting rate and contract extensions. There is constant competition between owners for prestigious, attractive tenants. Depending on the economic development in the various markets in which S IMMO operates, pressure can be exerted on rents. This might make it necessary to accept rents that are lower than originally forecast. In addition, S IMMO is exposed to rental default risk. If the Group is unable to extend expiring rental agreements at favourable terms or find suitable, creditworthy tenants who are willing to enter into a longer-term lease, this negatively impacts the market value of the properties concerned. There may also be lengthy vacancies. Particularly in times of economic and political uncertainty, S IMMO may be forced to accept rent reductions in order to maintain its letting rate. The credit rating of a tenant can deteriorate in the short or medium term, particularly during an economic downturn. In addition, there is the potential risk of tenants becoming insolvent or otherwise being unable to fulfil their payment obligations under the rental agreement.

The COVID-19 crisis also has impacts as far as these risks are concerned, albeit with regional differences and depending on the measures taken by the local governments. In Austria, for example, retail closed down during lockdowns, but parts of the sector received some state support as compensation. To date, the various closures and restrictions have mainly affected hotels and ground-floor spaces in the buildings (e.g. restaurants, cafés and fitness centres), some of which have suffered substantial declines in revenue due to extensive regulations on working from home. The office segment appears to be very stable so far.

Despite the currently challenging situation – take-up in particular is heavily dependent on viewing opportunities – S IMMO has managed to conclude rental agreements via various digital and virtual channels.

Property development risk

In the area of property development, risks may arise in connection with delays in receiving official approvals, construction delays, construction cost overruns, (construction) quality defects or letting. S IMMO counters these risks with regular cost, quality and deadline checks as well as deviation analyses.

The COVID-19 pandemic affects development risks, too. Delays in the approval and construction process are expected in development projects. These result, for instance, from infected employees at administrative bodies, or from various protective measures that may slow down construction. To date, delays of this kind have affected the projects of S IMMO to only a very limited extent.

Construction risk

On the one hand, construction risk is the risk of damage to newly constructed properties and portfolio properties, which S IMMO reduces through industry-standard construction contracts with experienced construction firms, warranty periods and guarantees. To limit risks in this area as much as possible, detailed inspections are arranged before the end of the warranty periods so that any damage can still be rectified at the construction firm’s expense. To safeguard against conventional damage to portfolio buildings, such as fire or water, S IMMO takes out insurance policies at standard market conditions. At the same time, repair costs rise with the age of portfolio buildings, as key systems need to be replaced after their useful life. With active asset management and ongoing repairs as well as sensible maintenance measures, S IMMO endeavours to avoid major negative effects.

Property valuation risk

Property valuation depends on various macroeconomic conditions – which are beyond the Group’s control – and on property-specific factors. In this respect, property valuation risk describes the risk of negative fluctuations in the value of the property portfolio. In addition to the expected rental income, the condition of the property and the letting level, property experts can also take into account other factors such as taxes on land and property, operating costs, third-party claims on the basis of environmental risks or risks associated with specific construction materials. Any change in the value of a property can have an impact on the Group’s net profit or loss and, as a further consequence, its equity and therefore also its share price and creditworthiness. The Group recognises investment properties at fair values, and generally has them valued once or twice a year by external experts.

So far, the COVID-19 pandemic has had only a minor effect on the company’s property values. The assessment of the residential and office properties is positive and stable. Consequently, returns are barely subject to upward variations. Investments in residential properties are perceived as secure, which is why returns are actually falling in this segment. To date, properties are also showing stable returns in the retail segment, as a catch-up effect is expected in the sector in the medium term. Hotel property values have decreased due to reduced travel activity. However, the diversification of S IMMO’s portfolio means that negative impacts on the portfolio have been limited thus far.

Financial risks

For S IMMO Group, the management of financial risks mainly involves the consideration of liquidity, interest rate, financing and exchange rate risks.

Liquidity risk

On the basis of continuous liquidity planning, the Finance department coordinates S IMMO Group’s cash flows in cooperation with the Project Development, Asset Management and Acquisition departments, checks them for plausibility and adjusts them in order to ensure liquidity. The Group has fluctuating holdings of cash and cash equivalents that are invested in accordance with the respective operational and strategic requirements and objectives. Furthermore, it conducts hedging transactions, especially to hedge against changes in interest rates and the associated fluctuations in its financing costs. These hedging transactions could prove to be inefficient or unsuitable for meeting the set targets, and could lead to losses that impact income. In addition, the Group is exposed to the risk of its contracting partners failing to fulfil their contractual obligations under the hedging or investment transactions (counterparty risk). S IMMO Group counters this risk by concluding investment and hedging transactions only with respectable banks with a sound credit rating. In the case of stricter equity and liquidity regulations for banks and resultant increased lending restrictions and reduced lending levels, there can be problems with refinancing. Despite its mainly long-term loan agreements, S IMMO may be affected primarily in the event of loan extensions and refinancing (see also financing risk). This risk may arise primarily when loan extensions or refinancing are delayed or are granted at a lower level than expected. If S IMMO were unable to utilise suitable and appropriate external borrowings for project developments and acquisitions or refinancing of expiring external borrowings on time or at all, this could significantly impair its ability to fulfil its obligations under project development contracts or in acquisition projects. There is also the risk of being unable to repay bonds. An inability to fulfil the obligations under existing (financing) agreements and partial debentures due to a lack of availability of free liquidity may lead to a significantly adverse impact on the Group’s net assets, financial position and earnings situation and negatively affect the Group’s credit rating.

Interest rate risk

The vast majority of S IMMO Group’s financing agreements provide for a variable interest rate based on the three-month EURIBOR as the reference interest rate, resulting in the risk of a changing interest rate level. The costs of interest payments increase if the respective reference interest rate rises. The ECB’s key interest rate has already been at a negative level for several years now. However, an increase in long-term interest rates has been observed since the end of 2021. It is currently unclear whether and when the European Central Bank will raise the key interest rate. In the short to medium term, forecasts continue to point to a negative three-month EURIBOR. S IMMO Group reduces interest rate risk on a long-term basis by hedging the interest rates of its variable-rate loans. As of 31 December 2021, 11% (31 December 2020: 15%) of loans were fixed-rate and 89% (31 December 2020: 85%) were variable-rate loans – almost exclusively pegged to the three-month EURIBOR. S IMMO generally hedges its variable-rate loans with the following derivative financial instruments: swaps and caps. At the end of the year, the entire variable rate financing portfolio was hedged. The extent to which the Group uses instruments of this kind depends on the assumptions and market expectations of the management and the responsible employees at S IMMO with regard to the future interest rate level as well as the development of borrowing levels. If these assumptions prove to be incorrect, this may lead to a significant rise in interest expenses. The stress tests, which include the existing bonds (for details, please see section 5.2.1. of the notes), show that S IMMO Group is exposed to interest rate changes to a limited extent. A three-month EURIBOR of 1.0% p.a. reduces the cost of funding by two basis points.

Financing risk

Market conditions for property financing are constantly changing. Even so, despite the COVID-19 crisis, S IMMO has not yet observed any lasting changes to or deteriorations in banks’ willingness to provide funds. Properties showing minimal or at least not sustained effects of the COVID-19 crisis on account of their asset class, location or tenant base – such as residential, office or retail properties – can still be financed at identical or similar terms as before the crisis. The attractiveness of various types of financing depends on several factors, some of which are beyond the Group’s control. In particular, these factors include market interest rates, tax-related aspects and the assessment of the value and realisation potential of properties that serve as collateral, as well as the assessment of the general economic situation and future economic performance by the financing partners. In times of highly volatile property markets, lenders may sometimes be unwilling to extend maturing loans under terms that are acceptable to S IMMO Group. This can lead in particular to higher margins, lower lending levels and the need to provide further collateral, and might also generally lead to a lack of refinancing options. If the Group is unable to generate liquidity or external funds to the required extent at the required time or to borrow under acceptable terms, its ability to fulfil its obligations under financing agreements could be impaired. S IMMO Group strives to reduce this risk by spreading its borrowing among different lenders (23 individual banks as of the reporting date of 31 December 2021). Borrowing is monitored on the basis of approvals on a staggered basis by the Management Board and Supervisory Board. As of 31 December 2021, non-current liabilities to banks had an average weighted residual term of 5.2 years. This long-term financing is standard industry practice. In addition, there is the risk that it may not be possible to comply with financial covenants (clauses in loan agreements regarding the permitted indebtedness and the debt service cover ratio) or other contractual terms, guarantees or conditions in financing agreements. This may limit flexibility in financing future business activities. Compliance with financial covenants is constantly monitored by S IMMO Group in close contact with lending financial institutions. Covenant infringements may constitute a default incident. The Group is committed to a balanced ratio between financing and the fair value of the property portfolio (loan-to-value ratio). As of 31 December 2021, the Group-wide loan-to-value ratio for secured financing stood at 30.7% (31 December 2020: 31.3%). In addition, the Group has unsecured financing (utilised credit lines and loans). The loan-to-value ratio for unsecured financing amounted to 9.8% (31 December 2020: 15.5%) of property assets. Despite close monitoring of financing instruments and the relevant parameters, it cannot be ruled out that S IMMO will be confronted with risks in the area of refinancing if the economy and the financing environment deteriorate sufficiently.

Exchange rate risk

S IMMO Group’s borrowings are entirely denominated in euros and rental agreements are linked mainly to the euro. Therefore, the direct exchange rate risk that would affect cash flows is regarded as low. A change in conditions for another currency could indirectly have an impact on the purchasing power of customers locally, which would have a medium-term effect on property valuations. In accounting terms, short-term, non-cash exchange rate effects could have an impact on the profit or loss statement.

Tax risks

As an international property group that currently has companies in eight European countries, S IMMO Group is exposed to a large number of different, constantly changing national tax systems. Changes in local taxation conditions (e.g. property-related taxes, sales taxes or income taxes) and uncertainty or different interpretations of the often complex tax regulations may lead to unplanned tax charges and therefore always constitute a risk to earnings. By working with local tax experts at all times, S IMMO attempts to identify possible consequences early on so that they can be reflected in decision-making, and in order to ensure that adequate accounting provisions are made for all risks known from tax audits or tax proceedings.

ESG risks

For S IMMO Group, the management of ESG risks encompasses various risks related to the ESG criteria of environment, social affairs and corporate governance. Legal and regulatory requirements such as the Sustainability and Diversity Improvement Act (NaDiVeG) and the EU Taxonomy Regulation require us to address specific sustainability risks in the areas of climate change, employees, respect for human rights, the fight against corruption and bribery, and others. The following section of the risk report describes significant risks in connection with the topics mentioned in the non-financial report as well as measures for identifying, assessing, avoiding and limiting these risks.

Environmental and climate risks

S IMMO is exposed to various environmental and climate risks that can arise both in its operations and in its property development activities. These risks can arise due to geographical circumstances, but also in particular in connection with advancing climate change. The latter can be divided into physical and transitory risks. The following information on climate risk management in this section is based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). The strategic monitoring of environmental and climate risks and the pursuit of potential opportunities are the responsibility of the Management Board member responsible for ESG and the ESG Committee of the Supervisory Board. Operational assessment and management are the joint responsibility of the Risk Management, Portfolio Management and Sustainability Management departments, which engage in a direct and active exchange of information on these issues.

The main risks not influenced by climate change include possible nuclear incidents and accidents in the geographical area of the company’s operations, as well as the risk of earthquakes, particularly in Croatia and Romania. Consideration of the risk of earthquakes is therefore incorporated into decisions made in the planning and structural calculations for development projects, the properties to be purchased and in the conclusion of adequate building and special insurance policies. Several stronger earthquakes in Croatia in 2020, in which S IMMO properties were only affected to a smaller extent, confirmed the decision for this mix of measures. Repairs to the buildings that were necessary due to earthquake damage were covered by insurance.

In construction activities, a potential risk emanates from the materials used. Changes in legislation and amendments to environmental or safety regulations must also be considered in this context, as these may necessitate the removal or replacement of materials. In order to reduce the impact of the company’s activities on the environment, building materials are replaced with environmentally compatible alternatives wherever possible in the course of maintenance and refurbishment measures. A considerable part of the property portfolio has already been awarded green building certificates, which also require a reduction in hazardous materials. S IMMO is striving to further increase the share of certified properties. In addition, there are risks to buildings, land and the environment due to possible contamination by harmful substances and munitions. With regard to construction activities, risks may arise for residents from temporary noise and dust pollution.

Against the backdrop of an assumed global warming of two degrees Celsius, the so-called “2-degree scenario”, and according to internal experts, the company is confronted with a number of potential climate risks, some of which are already significant at the present time and whose impact will increase further as global warming progresses.

In the area of acute physical risks, heat waves and heavy precipitation are considered significant in their own right, as they are expected to become increasingly frequent and more severe than in the past. In addition, floods and hail pose a direct risk of damage to real estate and resulting temporary restrictions on the usability of buildings. A similar outlook emerges for chronic physical risks: General temperature changes, heat stress, and changing precipitation patterns also cause the acute risks to become entrenched over the long term. In order to minimise the impact of these risks, S IMMO conducts precise site analyses for acquisitions and investments and obtains guarantee declarations where necessary.

Furthermore, the way in which businesses, policymakers and society deal with climate change gives rise to transitory risks for the company. More drastic taxation of greenhouse gas emissions and the associated technological need for investment in renewable energy generation, the improvement of energy efficiency, and the digitalisation and networking of buildings will become significant cost drivers. At the same time, this reduces significant market risks, primarily the loss of value of carbon-intensive buildings, the more difficult leasing of carbon-intensive buildings, and increased costs due to higher energy and commodity prices. In addition, the enhanced reporting requirements to be fulfilled reflect the preferences of shareholders and creditors for products and business models with a high ESG orientation.

Climate risks affect the company not only through climate change, but conversely there is also a risk that the company will further increase the greenhouse effect and thus further contribute to climate change. The construction and operation of buildings are fundamentally greenhouse gas intensive, which means that S IMMO has a special responsibility to increase energy efficiency and reduce greenhouse gas emissions. A recently introduced portfolio-wide and property-related monitoring system is designed to identify and implement potential optimisation measures on the basis of complete and detailed data. In parallel, attention is being paid to energy-efficient construction methods and the use of high-quality and ecologically compatible materials in current and future projects. More detailed information on the use of energy and emissions can be found in the non-financial report starting on page 97.

In addition to the risks, climate change also offers opportunities for S IMMO, for example through the need to increase its own resource efficiency, both in construction and in operations, with the trend towards a circular economy increasing the financial incentive for the reusability of materials and thus giving it a stronger economic basis. The increased use of local, renewable energy generation leads to a higher degree of autonomy for properties, with simultaneous emissions reductions. Broad and early implementation of such measures can also open up market opportunities with climate-conscious tenants and partner companies and ensure the resilience of the company in the longer term, and additional investments can be offset or even overcompensated by efficiency gains.

The climate risks and opportunities listed above have not yet had a significant impact on the resilience of the Group’s strategy or its fundamental business model. Nevertheless, due to their strategic consideration, they are explicitly included in S IMMO’s operational and financial planning in order to implement appropriate measures to minimise risks and take advantage of opportunities after proper assessment.

Climate risks are identified, assessed and managed across departments by Risk Management, Portfolio Management and Sustainability Management, with plans to expand the assessment to include, for example, scientific scenarios and greater geographical granularity. At the time of reporting, climate risk management is an integral part of the Group-wide risk management and the company’s greenhouse gas emissions are recorded in accordance with the classification into the three Scopes of the Greenhouse Gas Protocol (direct, indirect and other indirect emissions). Further key figures and targets are being developed.

Social risks

S IMMO is committed to the highest degree of compliance with all human rights. In addition to health and safety in the workplace and the right to fair pay and responsible treatment of employees, in the context of the Group this relates above all to the protection of minors, the prohibition of child labour, the right to equal opportunities and equal treatment, and the prohibition of discrimination.

All of S IMMO’s activities are conducted in accordance with the Universal Declaration of Human Rights, the UN Guiding Principles on Business and Human Rights, the eight core conventions of the International Labour Organization (ILO) and the OECD Guidelines for Multinational Enterprises. To this end, a central and confidential point of contact has been established for reporting suspected human rights violations, and mandatory training on this topic will expand the established risk minimisation control mechanisms in the coming calendar year.

In the course of the company’s activities, there may be individual cases of discrimination, sexual harassment, short-term undercutting of the appropriate wage level or exposure to increased physical risks. To counteract these and other risks, the company has developed a comprehensive human rights policy, which is available at www.simmoag.at/en/csr.

The company constantly addresses the challenges and potential risks that may arise in connection with its employees. It is therefore a matter of course for S IMMO to minimise possible negative effects on health. A current focus with regard to the protection of S IMMO’s employees is the handling of the COVID-19 pandemic. An internal COVID-19 working group adapts the protective measures depending on the circumstances in the office. The aim of the measures is to protect all employees from infection as well as to maintain the company’s ability to operate. In the worst case, infections within the company could have a negative impact on the continuity of various business activities. Through a mix of measures such as a company vaccination campaign, the reduction of office attendance times through remote working, the creation of individual offices, the possibility of regular free PCR tests and mask regulations, the risk of infection was actively minimised in 2021.

Switching to remote working minimises the risk of infection, but in return poses risks in terms of physical and mental health. A workstation that is not ergonomically adapted can cause physical pain, and on a psychological level, it may be difficult to separate work and private life. S IMMO endeavours to find individual solutions with all employees as necessary, to take into account any care obligations as best as possible and to ensure a good work-life balance in this context as well.

Another risk with regard to personnel is employee turnover. S IMMO has a lean organisation and flat structures. The departure of management and specialist staff could therefore have a negative impact on the company’s development, as it is hardly possible or very difficult to compensate for the expertise of good employees in the short term. The company therefore strives to be attractive as an employer in the long term and also offers its employees individual solutions to make everyday working life easier.

In addition, construction activities such as conversions, maintenance and renovation measures give rise to potential occupational safety risks, but at S IMMO AG these are limited to gen-eral construction coordination tasks. Poor quality and non-compliance with safety regulations by contractors can endanger the safety and health of workers. Construction activities in 2021 were affected by the pandemic to only a minor extent and were largely implemented as planned. Beyond the general construction coordination duties, compliance with occupational safety requirements is monitored separately at the contracted companies.

During the use of the building in the rental phase, personal injuries to tenants, visitors and passers-by may occur if S IMMO as the owner does not sufficiently fulfil its duties of care and maintenance. It is therefore ensured at all times that all responsibilities are taken into account through appropriate personnel and physical precautions at the properties. In addition, there is a risk of damage to S IMMO’s image as a landlord if tenants were to widely discredit S IMMO due to controversial actions.

Despite all due care and systemic and procedural precautions, there is a risk that cyberattacks and unauthorised disclosures may result in violations of the personal rights and privacy of individuals, particularly in the area of employee and tenant data. The company counters this risk with ongoing monitoring of the case law and, if necessary, with adjustments to its infrastructure and processes in order to minimise the number of breaches and resulting claims and, if necessary, to comply with them in a timely manner. A separate cross-departmental working group deals with current developments and issues relating to data security and protection several times a year.

Governance risks

Fundamental values such as transparency and fair and sustainable corporate governance are deeply rooted in S IMMO’s corporate structure. S IMMO has been committed to compliance with the Austrian Code of Corporate Governance since 2007 (for details, please refer to page 90).

The company’s Code of Conduct obliges executive bodies and employees to act in accordance with highest ethical standards. Employees who become aware of a proven or possible violation of the Code of Conduct must either report it immediately to the Compliance Officer of S IMMO AG or submit a corresponding report anonymously via the whistleblower system that is publicly accessible on the company’s website.

The risk of corruption is always present in day-to-day business. Some of the countries in which S IMMO operates have a poor ranking according to the Corruption Perceptions Index, among others, which can lead to violations of the law and subsequent fines in serious cases. In addition to the Code of Conduct, S IMMO has provided its executive bodies and employees with its own set of rules to prevent such conduct. The Guideline for the Prevention of Bribery, Acceptance of Advantages and Corruption, which is also published on the company’s website, regulates the structural and procedural measures to avoid even the appearance of bribery, acceptance of advantages and corruption. This binding guideline is designed to strengthen the awareness of each and every individual and to create awareness of the consequences of corruption and how to combat it. In the future, mandatory training sessions will be held annually on the contents of the Code of Conduct and the Guideline on the Prevention of Bribery, Acceptance of Advantages and Corruption.

When selecting its business partners and suppliers, S IMMO assumes its responsibility within the supply chain and attaches great importance to the contractual framework and regulations. Compliance with the high legal standards and regulations within the European Union is the minimum requirement. The company mostly works with renowned and recognised partners, and the cooperation is preceded by a corresponding selection process. This also minimises the financial risk of penalties or legal restrictions.

IT security is a key area of risk, particularly in light of the significant increase in the digitalisation of corporate processes. S IMMO defines IT risks as the danger that certain vulnerabilities in the systems, components, communication networks or software will occur and subsequently prevent the company or individuals from successfully implementing their tasks or processes in a timely manner. IT risks are directly related to the security of IT systems. Sources of risk include, for example, viruses, short- or long-term cyberattacks (including loss of customer data) on individual systems or the entire network, the theft of hardware, fires in data centres, power failures or hard disk crashes. S IMMO’s IT risk management is designed to identify potential IT risks at an early stage, implement necessary countermeasures and minimise potential threats. The measures taken include installing security-relevant updates on all servers and clients, regular vulnerability scans of servers, using up-to-date antivirus software, hosting servers in the IT service provider’s failsafe data centre, using BIOS passwords, encrypting employees’ hard drives, using encrypted work cell phones by default and active website filters, monitoring firewalls, and so on. In addition, a cyber AI security solution is deployed. Moreover, sensors of the cyber AI security solution have been installed on all clients. As a result, the IT infrastructure is monitored around the clock and in the event of a cyberattack, the company is informed by its own security team. For 2022, an IT security PEN test is planned, as well as the introduction of regular IT security training via S IMMO’s new training portal. Despite taking the greatest care and using the latest technology in the area of IT security, an IT failure or a cyberattack on S IMMO’s systems cannot be ruled out.

S IMMO is exposed to a variety of legal risks due to its business activities. These result, among other things, from legal disputes in connection with S IMMO’s operating activities (for example, disputes arising from property transactions or with construction companies or tenants) and regulatory risks. Provisions are made for ongoing legal disputes to the extent required by IFRS. As the outcome of (arbitration) court proceedings is generally difficult to predict, expenses in excess of the provisions may be incurred. Significant risks may also arise from changes in the legal situation, particularly as S IMMO operates in a highly regulated environment and in various jurisdictions. The clear interpretation of legal norms and contractual provisions may also be difficult in the context of the COVID-19 crisis due to the unusual factual and legal situation, which may lead to further litigation or the need for increased settlement.

The Group operates in a regulatory environment whose provisions – in particular those defined by market abuse, data protection and antitrust law – are and will continue to be applicable with very high penalty threats. The measures taken by the company may prove to be insufficient to prevent violations of legal provisions and may therefore result in the imposition of heavy fines.

Overall statement on risks

S IMMO AG’s business activities are subject to a large number of risks and are heavily dependent on the economic situation in the markets in which the Group operates. In general, the European Union experienced strong growth in 2021 compared to the previous year, but there was a renewed slowdown towards the end of the year compared to the previous quarter due to the Omicron infection wave. Many experts believe that the milder course of disease caused by the new mutation and the increasing vaccination coverage of the population could lead to an end of the pandemic.

Also the effects of the recently observed rising inflation rates on S IMMO’s business activities cannot be definitively assessed at this time. On the one hand, forecasts regarding the duration and extent – especially in connection with the war in Ukraine – are currently subject to considerable uncertainty, and on the other hand, it is still completely unclear what measures central banks and politicians will take in this context. As there may be at least indirect effects on almost all risk categories, S IMMO also monitors all risk categories with regard to different inflation trends.

The war in Ukraine with its negative economic consequences for the European Union also represents a major uncertainty factor. One fear is that there will be a further increase in energy prices and a negative impact on procurement and supply processes and thus on purchasing prices. Reliable forecasts are hardly feasible, which also makes short- and medium-term planning challenging. This is further aggravated by the fact that the uncertainties lie outside the company’s sphere of influence.

The past few months have shown that S IMMO AG’s portfolio, which is diversified by region and type of use, has proven its worth, even in the current crisis. Nevertheless, negative effects on consumer behaviour – due to local COVID measures in the markets served by S IMMO – and thus on the revenues of S IMMO’s tenants cannot be ruled out. As a consequence, this could have a negative impact on rental income. Negative effects could also arise in the case of valuation, rental or real estate portfolio risk. Economic developments always have an impact on capital markets. Fluctuations on the stock markets subsequently influence the market capitalisation of S IMMO AG as well as the valuation of its investments.

Another risk area relates to the liquidity and financing situation in the company. S IMMO AG is in a good financial position. Despite the COVID-19 crisis, there has fortunately been no sign of lasting changes to or deterioration in banks’ willingness to provide funds.

The company counters all risks with careful risk monitoring and a responsible risk policy. However, the occurrence of risks cannot be completely ruled out. Provisions are made for potential risks.

The management generally expects a further recovery in all types of use and regions in the coming months. The focus is on the company’s core business. At present, the company is benefiting from the attractive price level for residential properties in larger German cities. The company also sees tremendous value enhancement potential for the land purchases in the area around Berlin. In addition, interesting acquisition options are being examined on an ongoing basis in the CEE region.

Outlook

Significant events after the balance sheet date

In January 2022, S IMMO issued another green bond with a nominal value of EUR 50 million, a term of five years and a coupon of 1.25%.

At the end of January 2022, CPI Property Group and S IMMO agreed that the former would increase the offer price of its mandatory offer to IMMOFINANZ shareholders to EUR 23.00 (cum dividend). In return, S IMMO AG committed to transfer all of its shares in IMMOFINANZ, as well as all those shares it may acquire through its partial offer for IMMOFINANZ shares, to CPI Property Group. The sale of S IMMO’s stake in IMMOFINANZ to CPI Property Group was completed at the beginning of March 2022.

The outbreak of the war in Ukraine also fell into the first quarter of 2022. S IMMO does not own any properties in Ukraine nor in Russia and is therefore only indirectly affected by the current war. However, effects on S IMMO Group’s business activities cannot yet be conclusively assessed at the editorial deadline for this report.

At the time this report went to press, the effects of the COVID-19 pandemic and the related uncertainties in the markets in which S IMMO operates persist.

On 14 April 2022, S IMMO was informed by CPI Property Group that it would immediately request the convening of an extraordinary general meeting to resolve on the abolishment of the maximum voting rights (15%) enshrined in S IMMO’s articles of association. Following the legally effective abolition of the maximum voting right, CPI Property Group would acquire a controlling interest in S IMMO within the meaning of section 22 of the Austrian Takeover Act. In this case, CPI Property Group intends to make a mandatory offer. The price of the intended mandatory offer would be at least EUR 22.00 per S IMMO share cum dividend at the time of this announcement of intent, according to the ad hoc announcement of CPI Property Group dated 14 April 2022 pursuant to section 26 (1) of the Austrian Takeover Act.

Expected economic development

The economic recovery seen in 2021 was dampened by the new Omicron variant towards the end of the year. Nevertheless, the economic forecasts were reasonably optimistic before Russia’s attack on Ukraine at the end of February 2022, but consequently had to be corrected in March 2022. It can be assumed that the war in Ukraine will significantly slow down or stall the economic recovery in Europe. A further increase in energy prices and renewed delays in procurement and supply processes are to be expected, which will ultimately lead to higher purchase prices and push inflation up further. In its updated March forecast for Europe, the European Central Bank (ECB) expected real GDP growth to average 3.7% in 2022 (details can be found in the economic report on page 7).

The current situation in Ukraine is also having an impact on the capital markets. On the first day of Russia’s attack, the international exchanges suffered substantial losses in some cases. Due to the ongoing war, uncertainty remains on the international capital markets.

Expected developments on the real estate markets

Because the real estate industry is highly dependent on the economic developments in the given regions, it can be assumed that the war in Ukraine will also impact the real estate markets. A deterioration of the economic situation can lead to rent reductions, rent defaults, or lease terminations by tenants. S IMMO AG does not own any properties in Ukraine or in Russia, but indirect effects cannot be ruled out.

Along with the war in Ukraine, the COVID-19 pandemic also makes it difficult to make reliable medium- and long-term projections about the development of the real estate markets. In general, the pandemic is particularly challenging for the property use types of hotels and retail. However, a continuing recovery is expected for 2022, with the tourism sector in particular benefiting from increasing vaccination progress. The property use types of residential, office, and logistics will remain the focus of investors in 2022. Trends such as remote working and online shopping may continue to impact the real estate markets.

Expected business development

Flexibility and sustainability are the topics that are increasingly important in all asset classes in the real estate sector – the more flexibly a space can be used, the more sustainable a property is in terms of a low carbon footprint, the more attractive it is. In the retail segment, location is still decisive for the success of a property, while in the residential segment, people increasingly want to be close to nature, a development that has emerged in response to the COVID-19 pandemic. In case of office buildings, the trends are shorter and shorter lease terms and flexible use. As a major, experienced investor, S IMMO has the necessary knowledge and expertise to appropriately deal with the changing requirements.

The year 2022 will primarily be defined by the aftereffects of the COVID-19 pandemic. In general, a mounting recovery is expected in all property use types and regions. However, events are currently being overshadowed by the geopolitical situation in Ukraine, and it remains to be seen how the conflict will progress.

S IMMO sold its shares in CA Immobilien Anlagen AG in July 2021. At the beginning of 2022, the sale of the shares in IMMOFINANZ AG was contractually regulated and completed at the beginning of March 2022. Therefore, the company has a comfortable liquidity cushion and will fully concentrate on its core business: the letting and management of high-earnings properties in Germany, Austria and Central and Eastern Europe and the acquisition of properties with high value-enhancement potential. There are currently several attractive acquisitions in the pipeline.

Thus, all signs are pointing to growth. S IMMO reaffirmed its sustainable investment strategy with the issue of another green bond at the beginning of the year. Along with a maturity profile that is well distributed over the coming years, S IMMO has thus established a very solid starting position in terms of financing for the coming months.

Although the German market still offers attractive opportunities, the focus of the acquisition possibilities for 2022 is clearly on the CEE region. Potential acquisitions are currently being assessed in various markets and specific discussions are under way to strengthen the cash flow and FFO I through direct property investments.

Vienna, 14 April 2022

The Management Board

Bruno Ettenauer   Herwig Teufelsdorfer   Friedrich Wachernig