Monitoring risks is embedded in the daily activities of the responsible line manager and is an integral part of the planning and control cycle. Bouwinvest monitors all the defined risks via key risk indicators, supported by the performance reporting and business incidents reporting processes. Each quarter, the Executive Board of Directors is provided with a risk report, including the risk indicators indicated above and actions necessary to limit or mitigate risk, if there is a deviation between the outcome and the pre-determined norm.
Risks in the portfolio are monitored closely and the following events and risks were noteworthy in 2019.
Market concentration risk
In line with its strategy and approved by its shareholders, the Fund has a concentrated portfolio across assets (one assets > 20% NAV; two more assets under construction > 15%) and across geographies (The Hague, Amsterdam both > 35% of NAV). The delivery of Central Park (Utrecht) will reduce this concentration in future. The single tenant concentration is higher than anticipated due to extension of the contract for Hourglass to the entire building, which also exposes an asset to valuation risk when contracts are close to expiry. It is worth noting that the assets in Amsterdam have shown very strong valuation performance, confirming the Fund’s strategy.
Occupancy rate risk
Strong demand (especially in the G4 cities) supports lower vacancy levels, but asset WTC Rotterdam remains the exception (< 60% occupancy rate). Delivery of renovated floors and sale of a part of the building to Hotel Fund in 2020 will increase the occupancy rate for this asset, while the delivery of Move and The Garage in 2019 and Hourglass in early 2020 has improved the Fund's overall occupancy rate.
Most of the Fund's tenants are considered to have a low debtor's risk. The top five tenants accounted for a total of 38.3% of the passing rent in 2019 (2018: 43.2%), with only the Dutch government - as the largest tenant - exceeding the Fund’s investment guidelines.
The conflict with the builder around the redevelopment of Move and The Garage in Amsterdam, which resulted in the Fund taking over the redevelopment, was finally settled late 2019 without further consequences for the Fund.
In 2019, Bouwinvest explained to the Dutch Tax Authorities how the development of the buildings Move and The Garage has evolved since inception. We provided insight into how we calculated the taxable result related to the redevelopment, i.e. the transfer pricing, how the provisions for cost overruns were determined and allocated and which factors drove the increase in market value during the redevelopment. We expect the Dutch Tax Authorities to take the view that the taxable result on the redevelopment of these assets should be calculated differently. In 2020, we will try to reach a settlement with the Dutch Tax Authorities on this.