Letter to shareholders
«With a strategic focus on integral site development, Zug Estates is well positioned for the future.»
Dear shareholders
We are operating in a market environment where we face a medium-range scenario of increasing supply-side liquidity, a gradual shift in demand, and pressure on prices in all real estate segments. The board of directors is thus focusing its attention on a circumspect strategy setup and a policy of transparent communication regarding medium-term corporate development.
Zug Estates has certain specific hallmarks that clearly place it outside the usual expectations for the sector, in particular the company’s site-centric strategic direction, a dividend policy characterized by restraint, and its cautious use of interest-bearing debt. This clear positioning has enabled Zug Estates to raise its profile in the eyes of investors in the short time since its listing and, in relative as well as absolute terms, to produce a top performance against the relevant benchmarks in 2015.
The following comments on our corporate focus are intended to give you an insight into the medium-term intentions and priorities of a still young – as measured in listed years – company.
Further growth
The dynamic expansion pursued to date is based on solid foundations. Growth is also one of our medium-term objectives and as such is widely taking concrete shape: investment projects in the construction and planning phases, amounting to more than CHF 400 million on the Suurstoffi site in Risch Rotkreuz alone, are timetabled for completion by 2020. Half of the envisaged investment volume is for service business space already largely secured with long-term agreements. Accounting for about a quarter of the available space each, rental apartments and condominium apartments are positioned in what is expected to be a market with strong demand in the future too.
This high level of development momentum is based on a broadly solid absorption rate and – even in a market environment that is becoming more liquid on the whole – exhibits controllable risk exposure. The latter parameter can also be more readily assessed on the basis of the development projects successfully realized to date than by looking at general market trends. This is not only true with regard to the Suurstoffi site; development work is also slated for the Zug City Center site over the medium to long-term. The necessary preparations have been successively initiated.
Strengthened market positioning
In addition to development momentum, another key feature of the Zug Estates strategic focus is to concentrate on large sites offering excellent accessibility. If the available development reserves are used, the Suurstoffi site in Risch Rotkreuz and the Metalli site in the center of Zug will each have an estimated market value of approx. CHF 1 billion – not factoring in potential consolidation acquisitions. The busy Metalli shopping center at a prime Zug address and the HSLU campus on the Suurstoffi site also ensure that the two portfolio components will maintain an attractive and enduring market positioning as business locations.
Zug Estates aims to further strengthen the market positioning of both its commercial space portfolio and its residential portfolio. The company’s efforts are underpinned by an integrated development model for the creation of fit-for-future environments that is ecologically sound (including zero-emissions), provides services for people living and working in the district, and is geared to an efficient style of management that uses the economies of scale offered by a consolidated portfolio.
Zug Estates believes that this strategy will enable it to adapt more efficiently to future challenges presented by demographic and structural developments, as opposed to focusing on a large number of geographically dispersed individual properties. This is why adding a third site to the portfolio is part of the medium- to long-term strategic focus.
Calculated risk
The risk exposure of a real estate investment is inherently complex and highly correlated for various reasons. These include specific demand and price developments in the markets for residential and commercial space, regulatory conditions – i. e. spatial planning, policy, taxation – and potential shifts in investment preferences or developments on the financial and capital markets. Capping interest-bearing debt at 40% of total assets keeps the systemic risk in check and, given the currently low borrowing costs, marks a conscious decision not to rely on an additional earnings driver. The development strategy outlined above can thus be financed at both sites without the need to increase the proportion of interest-bearing debt significantly above the present level. The 40% cap on the proportion of interest-bearing debt remains one of the strategic principles.
Balanced payout ratio
For this reason, the company’s dynamic growth is also to be financed by retaining part of the operating income as a further strategic principle of Zug Estates. The average return on equity of above 8% p. a. achieved since the listing justifies the use of self-generated funds to finance the Group’s own development projects and safeguards the interests of long-term investors in particular.
Another factor to consider is the entrepreneurial objective of continually improving the direct return in tandem with the company’s expansion. Accordingly, the board of directors has laid down a new dividend policy guideline for the future. In future, the payout to shareholders is to be in balanced proportion to re-investment: in place of the previous 30%–40% bandwidth, up to 50% of net income excluding income from revaluation is to be paid out.
The board of directors proposes to the general meeting of shareholders that the payout be increased by a further 10.8% to CHF 20.50. As in previous years, the payout will be made from the reserves from capital contributions and, as such, exempted from withholding tax.
Zug Estates is on solid ground. Thanks to its attractively located sites, segments broadly diversified in terms of use and its market-driven growth, the company is well equipped for the challenges ahead and should be able to assert itself in an uncertain market environment. Given our track record in recent years, and again in 2015, we are confident that we shall be able to increase the company’s value over the medium term and drive profitable growth.
I wish to thank our employees for their hard work during the past year.
I would also like to thank you, our shareholders, for the trust you place in Zug Estates and extend my best wishes to you.
Zug, March 2016
Hannes Wüest
Chairman of the board of directors