Annual report 2013
Annual report 2013
VVO’s proactive approach to risk management is aimed at ensuring that operations run smoothly and that key objectives can be achieved.
Risk management at VVO is based on the risk management policy adopted by the Board of Directors. Risk management has been incorporated into the company’s integrated management system and internal auditing. The aim of risk management is to ensure that strategic and operational objectives can be achieved by identifying and assessing the most notable risks associated with VVO’s operations and by agreeing on means to manage them.
Risk management is ultimately the responsibility of the company’s Board of Directors, which lays down the objectives of risk management and monitors the most notable risks. The Audit Committee set up by the Board of Directors is responsible for evaluating the adequacy and appropriateness of risk management in the company. Responsibility for the practical implementation of risk management in the organisation rests with the company’s operational management. Regular, quarterly reports of the most notable risks are produced for the Audit Committee and the Board of Directors.
Risk management is based on risk assessments carried out in connection with the annual strategic planning process, which involve identifying the most notable risks, evaluating their likelihood and potential impacts, and agreeing on means to manage them. VVO’s most notable risks have been grouped under strategic and operational risks on one hand and under financial and liability risks on the other.
The most notable risks associated with customer management relate to a potential drop in the financial occupancy rate and an increase in resident turnover. Factors affecting these risks include economic fluctuations and shifts in demand both nationally and locally. The financial and operational occupancy rate of rental homes, resident turnover, number of applicants and changes in these figures are monitored by region on a monthly basis. VVO strives to increase occupancy rates and to reduce resident turnover by boosting the rental business, repairing units and properties, and strengthening relationships with customers. VVO’s collaboration with residents plays an important role in improving customer relations.
Ensuring that the value of VVO’s housing stock continues to rise requires investments in urban growth areas, measures to ensure that units are fit to rent and systematic renovations across all properties.
Major fluctuations in market interest rates and margins may have a negative impact on the financial performance of VVO and slow down investments in new development and renovations. The interest rate risk associated with market-based loans is controlled by interest rate swaps and hedging. The interest rate of state-subsidised loans is tied to the Finnish consumer price index, which can cause considerable fluctuations in annual interest costs. The company’s investment activity may also be affected by access to finance. Investments with long economic lives also require long-term financing, and the risk of refinancing increases with shorter maturities. The risk associated with access to finance is controlled by securing new sources of finance.
The most notable risks associated with properties are liability risks such as water damage and fire. Liability risks are managed with appropriate preventive safety measures and by insuring properties against damage. VVO Group regularly reviews its insurance policies as part of overall risk management. The main insurance policies are property, liability, loss of profits, accident, travel and vehicle insurance.
The most notable interest rate risk relates to interest rate fluctuations affecting the loan portfolio, which is controlled with interest rate derivatives and by balancing between variable and fixed rates. The types of loan with the highest interest rate risk are market-based loans and interest-subsidy loans. Loans granted by the state involve an inflation-based interest rate risk.
The interest rate risk associated with market-based loans is controlled by interest rate swaps and hedging. The degree of hedging is defined as the percentage of all market-based loans of loans that are considered fixed-rate loans, loans that are converted into fixed-rate loans with interest hedging agreements, and loans that are hedged in other ways. The target level is between 50 per cent and 80 per cent.
At the end of 2013, the degree of hedging was 74 (80) per cent. Some loans are tied to a fixed rate at withdrawal, most often for a five-year fixed-rate term. At the end of 2013, these kinds of loans accounted for 31.5 (26.6) per cent of market-based loans. The use of interest rate derivatives is aimed at balancing the effects of market interest rate fluctuations on the loan portfolio. This is only done for hedging purposes. VVO's longest hedging extends to 2026. Interest rate derivatives accounted for 62.7 (72.0) per cent of variable-rate loans.
The interest rate of state-subsidised loans is tied to the Finnish consumer price index, which can cause considerable fluctuations in annual interest costs. Some loans have an interest rate ceiling that reduces the interest rate risk resulting from inflation. Interest rate costs are taken into consideration when determining rent levels.
Cash flow from the rental business is stable. Liquidity is controlled by separating cash flow from non-profit corporations from cash flow from deregulated properties. The adequacy of finance arrangements is monitored by means of liquidity prognoses, and reports are produced at regular intervals.
The liquidity of investments is controlled with the help of the parent company’s EUR 80 million commercial paper programme. A total of EUR 47.5 (EUR 36.5) million of the facility associated with the programme was in use at the end of 2013. In addition, the company had access to a total of EUR 20.0 (EUR 20.0) million through non-binding credit facilities. At the end of the financial year, none of these was being used. The liquidity of the Group and the parent company remained good throughout the financial year.
Functioning of the financial market is troubled by fears of the negative impact of increased regulation of banks and lending, particularly with regard to the availability and cost of long-term financing. In terms of property investments, the risk of refinancing increases with shorter maturities. Thanks to VVO’s strong financial position and robust cash flow, the risk associated with access to finance is not considered significant. This risk can be controlled as required by varying the volume of investments.
Risks associated with the diversity and adequacy of the guarantee portfolio are low.
The Group’s cash flows are euro-denominated, and there is no currency risk.