RISK MANAGEMENT
In 2005, Julius Tallberg Real Estate Corporation defined its risk management policy, according to which risk management is an integral part of strategic and operational planning, the decision-making process and the internal control system. The risk management policy will be updated in the spring of 2008, and, at the same time, a more detailed survey of risks will be carried out.
The company relates to risks conservatively and risk taking is kept within the limits defined in the business strategy. The aim is to constantly develop and balance the structure of the investment portfolio from different perspectives - bydiversifying properties according to their use, for example, by avoiding excessively large tenants, and by focusing on the Helsinki region.
The strategic principles of real estate investment have been defined, and a key considerationin assessing new projects or disposals is their impact on the company's strategic goals.
The company considers the currently most important risk areas to be the key employee risk and the general climate of uncertainty about the global economy, both of which may indirectly affect the company. These and other risk areas identified by the management, together with the measures taken by the management to counter them, are described below.
Strategic risks
Uncertainty about the global economy
The company's business may be significantly affected by a climate of uncertainty about the global economy. These concerns were reflected in the return requirements of investorsin the second half of 2007. With respect to the business of Julius Tallberg Real Estate Corporation, uncertainty about the global economy may affect the business of tenants and thereby the company's returns.
The company has attempted to manage these uncertainties by selling real estate assets that have been in the company's long-term investment portfolio, but for which it considers it has been offered a good price in view of the uncertain situation. Examples of such property sales carried out during 2006 and 2007 were the sales of the total stock of Kanavaranta 7 and Kauppakeskus Martinsilta.
Geographical location of real estate assets
Investing in properties in geographical locations where the company has less opportunity to influence or less market expertise may be a risk.
The company has focused its real estate investments in the Helsinki region where the company's expertise and the general predictability of the market is at an acceptable level. During 2007, the company sold its shares in Kiinteistö Oy Datacity, its only investment in Turku.
Real estate investments based on shared ownership
The company considers that, in real estate investments with shared ownership, there is a risk that the parties involved will have differing views on the development and potential of the property.
The company believes it has diminished this risk by purchasing the majority stake in SK Property Oy from CarVal Investors. In addition, the company exchanged its ownership share of 4,394 m2 of net floor area in Kiinteistö Oy Datacity in Turku for the shares of Kiinteistö Oy Rälssintie 10 located in Helsinki.
The company will continue to manage the risk related to shared ownership by investing only
in land and buildings that it owns exclusively.
Too many customers in the same field
An excessive dependence on customers of one type or in one field may be a risk. The company's policy is to obtain tenants from different business sectors so that, if a business recession in one sector causes a reduced need for premises, it will not decisively and suddenly affect the company's returns.
Development of Aviapolis district
The company has a major development underway at the Econia Business Park located in the Aviapolis district of the City of Vantaa. There is a strategic risk that the Aviapolis district will not develop as planned or that the growth rate will be slower than expected.
The company is managing this risk by constructing the building in stages, in accordance with the number of leases signed.
Operational risks
Key employee risk
Due to the company's small number of personnel (6 employees), the key employee risk is great. This risk was reduced by hiring two more persons in 2007. However, the key employee risk and the risks related to the replacement system are still significant. The company manages the key employee risk partially through overlapping job descriptions.
Risks related to the real estate acquisition and disposal process
There is a risk related to real estate investments if the company does not assess the future return potential correctly.
The company seeks to manage the risks related to major projects by using a specified process in which the projects (acquisitions/disposals) are examined by an investment committee before being presented to the board of directors. The investment committee comprises two directors and the operating management. Various indicators have been devised by which the management can simulate and monitor the impact of the investment on the more important key fi gures.
External service providers
Property maintenance involves operational risks such as the risks related to the quality of the work done by external service providers.
The company is investigating the options and potential of increasingly taking responsibility for property management and maintenance into its own hands.
Information systems
Even brief interruptions to the efficient working of information systems and data communications complicate the company's operation. Julius Tallberg Real Estate Corporation relies on the information management of the Tallberg Group, and contingency plans have been drawn up for information systems.
Financial risks
The possible fi nancial risks relate to liquidity, interest rate, and receivables- and creditrelated risks.
Liquidity
More information on the management of liquidity risks can be found in note 26 of the
Notes to the Financial Statements - 'Management of financial risks: Liquidity risk'.
Interest rate risks
The Group is susceptible to market risks mainly in the form of interest rate risks. More information on the management of interest rate risks can be found in note 26 of the Notes to the Financial Statements - 'Management of financial risks: Market risk - interest rate risk'.
Risks related to receivables and credit
The Group's policy determines the requirements for the investment policy and the creditworthiness of customers and counterparties of investment transactions and derivative contracts. More information on the management of risks related to receivables and credit can be found in note 26 of the Notes to the Financial Statements - 'Management of fi nancial risks: Credit risk'.
Damage and liability risks
The risks of damage or loss include risks related to fire and premises security and questions of management liability.
Almost without exception in its owned properties, the company has full value insurance and loss-of-rent insurance covering 12 months rental income. The managing director and board of directors have general liability insurance.
Operational risks are tracked by the board of directors and managing director of Julius Tallberg Real Estate Corporation. The purpose of risk management is to reduce the likelihood or threat of an unexpected loss. Risk management needs to cover all internal as well as external risks, whether quantifiable or non-quantifiable and whether within or outside the control of the company.
Tenant-specific risk has been diversified by expanding the company's real estate base and thereby increasing the number of leases.
Julius Tallberg Real Estate Corporation carries out an annual risk management process resulting in an updated risk map and action plan that are presented to the board of directors in the fall of each year.
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