Risk and risk management

Risk and risk management

Property ownership and management exposes operations to a number of internal and external risks, or uncertainty factors that could impact the Group’s ability to achieve its overall objectives for growth. Castellum’s risks are divided into six overall categories: business environment, strategic risks, operational risks, sustainability, people and financing. Castellum therefore works continually, in a structured manner, to identify and actively monitor financial and other risks that operations encounter or are faced with. The Group’s risk management involves a structured process of decision-making with the aim of establishing a balance between the desire to limit uncertainty or risk and the task of generating growth and shareholder value.

Risks, exposure and risk management

Castellum defines risk as an uncertainty factor that may affect the company’s ability to achieve its objectives. Risk management aims at balancing the desire to limit risk and achieving objectives. In order to assess the effect of identified risks, an internal risk rating is conducted in which each risk is assessed, from the perspectives of impact and probability. For more information about the method see method for risk assessment and sensitivity analysis further down on this page. This process determines if the risk should be further monitored (Monitor), if actions should be taken (Focus) or if it can be handled through standard review and management (Review).

To facilitate risk management, Castellum has chosen to classify risks into the following categories:

• Business environment — risks due to the influence of external factors and events
• Strategic risks — risks associated with reputation or the ownership of Castellum’s property portfolio
• Operational risks — risks associated with routine administration of Castellum’s property holdings
• Sustainability risks — risks associated with environment, corporate responsibility and/or liability risks
• People — risks associated with our employees and the people in and around our properties
• Financial risk — risks in Castellum’s financing and reporting

Methods for risk assessment and sensitivity analysis

Castellum analysis risks on annual basis. Risks are evaluated on impact and probability and mapped in a matrix. Impact are measured on a scale of 1-5 (Serious, Major, Medium, Minor and Insignificant). Probability are measured on a scale of 1-5 (Certain, Likely, Possible, Low and Unusual).

Each risk is evaluated on 3 year and 10 year scale, before and after possible measures implemented by Castellum. The purpose with evaluating risks in different scenarios over time and before and after mitigating measures, is to be able to follow the development over time of the risk’s impact and possibility as well as to be able to change the company’s respond to the risks when necessary. In the Annual report we report the priority we have set on each risk (To monitor, To focus on, To review). We also report if the focus on the risk has changed since last year (Scale: Reduced focus on risk area, Unchanged focus on risk area, Increased focus on risk area.) This is a kind of sensitivity analyse that analysis how our mitigating activities will affect the possibility for the risk as well as the impact on the organization if it occurs.

As example, Castellum has identified the following three risks as important long-term (3-5 years+) emerging risks that will impact our business in the future:

  • Operational environmental risks: Environmental risks directly related to Castellum activities can include physical environments, which affect people and properties, as well as prevailing prices for natural resources, in terms of materials and energy.
  • Climate change: Climate change implies a risk of property damage caused by weather conditions changing over time, higher water levels and changes in other physical environments that impact properties.
  • Financing: Property ownership is a capital-intensive business that requires a well-functioning credit market. Access to financing is fundamental for Castellum and for continued growth. Insufficient liquidity reserves could result in Castellum missing out on business opportunities.
Reduced Reduced focus on risk area since previous year
Unchanged Unchanged focus on risk area since previous year
Increased Increased focus on risk area since previous year
  • Risk category
  • Risk
  • Impact
  • Probability
  • Priority
  • Development

Business environment

External environment risks refer to risks due to the influence of external factors, mainly outside Castellum’s control, but to which Castellum has to relate. These risks can be divided into macroeconomic risks, crises changes in legislation and regulatory compliance.

  • Macroeconomic risks
  • 1. Macro – crisis

  • Business environment

    1. Macro – crisis

    Risk

    Macroeconomic risks are risks associated with a general reduction in demand in the economy, low inflation, deflation or situations which entail general difficulties in obtaining financing, or alternatively obtaining financing at higher credit margins.

    • Risk category
    • Macroeconomic risks
    • Impact
    • Serious
    • Probability
    • Low
    • Priority
    • Focus
    • Development
    • Increased

    Risk management

    • Business intelligence
    • Strong balance sheet and low loan-to-value ratio
    • Well-composed contract portfolio with a wide spread regarding notice period, industry, type of premises, contract size and geography
    • Deflation protection or a minimum upwardadjustment of leases
    • Multiple sources of financing
    • Frequent renegotiations and supply of new credit agreements
    • Property portfolio concentrated on growth areas
    • Natural macroeconomic hedging mechanism between higher/lower interest costs and rental income, but with some time delay

    Exposure

    A weak economy negatively impacts the demand for premises, leading to increased vacancies, falling market rents and loss of indexation for existing leases. In addition, the risk of payment problems — or even bankruptcies — among tenants increases, resulting in immediate negative effects on cash flow. Limited access to capital reduces Castellum’s opportunities to conduct operations. Ultimately, reduced demand in the economy leads to declining property values.
  • Impact Serious
  • Probability Low
  • Priority Focus
  • Development Increased
  • Crises
  • 2. Crises

  • Business environment

    2. Crises

    Risk

    Crises include all crisis events that emerge in the business environment that Castellum cannot influence and are difficult to foresee: events such as terrorist attacks, cyber attacks, extreme weather events and environmental disasters as well as information leaks.

    • Risk category
    • Crises
    • Impact
    • Medium
    • Probability
    • Possible
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Crisis plan
    • Succession planning for senior executives
    • Unlimited cover insurance, properties
    • Guidelines for information security, and create user understanding and awareness of information as an asset to be handled with care
    • Continuity plan IT

    Exposure

    The risk is generally low, but Castellum could be indirectly affected by events in its business environment.
  • Impact Medium
  • Probability Possible
  • Priority Monitor
  • Development Unchanged
  • Change in legislation
  • 3. Changes in legislation

  • Business environment

    3. Changes in legislation

    Risk

    Changes in legislation or ordinances, both national and international, can impact Castellum. Some examples are tax legislation, new regulations for banks, handling planning processes, and so on.

    • Risk category
    • Change in legislation
    • Impact
    • Medium
    • Probability
    • Certain
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Monitor developments regarding laws, regulations, praxis and so on within the areas most essential to Castellum
    • Actively participate as much as possible in debate
    • Prepare Castellum for new or amended regulations
    • Continual renegotiation of credit agreements
    • Broaden the financing base via more sources of financing and financiers

    Exposure

    Changes in legislation can impact future opportunities to invest, or alternately result in price increases, which lead to poorer yields moving foward. New banking legislation can impact access to financing and the price of borrowed capital, and could trigger credit covenants that would lead to increased financing costs. Changes in tax rates and tax legislation, such as proposals regarding interest deduction limitations, new regulations concerning tax depreciation and prohibitions on “bundling” of properties, may affect Castellum’s future tax expenses.
  • Impact Medium
  • Probability Certain
  • Priority Focus
  • Development Unchanged
  • 4. Regulatory compliance

  • Business environment

    4. Regulatory compliance

    Risk

    Inadequate compliance could lead to financial losses, supervisory sanctions, loss of reputation, and in the worst case to delisting. Some regulations, such as IFRS, are open to interpretation, which means that Castellum and regulatory supervisors may have different opinions.

    • Risk category
    • Change in legislation
    • Impact
    • Serious
    • Probability
    • Unusual
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • A corporate culture built on high ethical ideals
    • Strict internal control processes with quality assurance at several stages
    • Code of Conduct
    • Competent and responsible employees
    • Monitor the development of legislation, praxis, court orders etc.
    • Compliance function that reports directly to the Audit and Finance Committee
    • Whistleblower function

    Exposure

    Conducting Castellum’s operations responsibly is crucial for the Group’s long-term success. Our operations and our ability to continue creating value are based on relationships among employees, customers, partners, investors, authorities and so on. All our employees create a shared image of Castellum through our conduct and what we provide to the community around us.
  • Impact Serious
  • Probability Unusual
  • Priority Focus
  • Development Unchanged

Strategic risks

Strategic risks are risks associated with Castellum’s reputation or the ownership of Castellum’s property portfolio, which in turn can be divided into risks regarding the composition of the portfolio, reputation, digitalization, investments and corporate acquisitions as well as changes in property values.

  • Composition of the property portfolio
  • 5. Composition of the property portfolio

  • Strategic risks

    5. Composition of the property portfolio

    Risk

    The composition of the portfolio can be affected at two levels: unfavourable geographical distribution, which means that Castellum owns properties in the wrong submarket, community or location with regard to factors such as future growth and current strong urbanization trend; or that Castellum owns obsolete properties — a property portfolio that is not future-proof based on customer preferences, technical requirements, micro-location or flexibility in usage and contractual terms and conditions.

    • Risk category
    • Composition of the property portfolio
    • Impact
    • Major
    • Probability
    • Unusual
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Macro analysis: regular reviews of the submarkets’ conditions as regards economic growth, rental market, partnership climate, infrastructure investments and so on.
    • Annual review of the property portfolio regarding both geographic exposure and product types
    • Strategy documents established annually by the Board of Directors

    Exposure

    Castellum’s property portfolio is located in some twenty cities as well as in Copenhagen and Helsinki. Currently, all locations are assessed as having the right conditions for continued holding or investments. Additionally, major transactions have been carried out over the last few years for the purpose of creating better conditions for growth in the cash flow going forward. The Group’s property portfolio in the commercial property segment is divided into offices, public sector properties, and warehouse and logistics. All segments are linked to growth possibilities.
  • Impact Major
  • Probability Unusual
  • Priority Monitor
  • Development Unchanged
  • 6. Obsolete product/property

  • Strategic risks

    6. Obsolete product/property

    Risk

    A real estate portfolio that is not future-proof may become obsolete due to customer preferences, technical requirements, micro-location or to flexibility in usage and contractual terms and conditions. It entails a risk of increased vacancies and a decline in value as a result, or alternately large investment commitments.

    • Risk category
    • Composition of the property portfolio
    • Impact
    • Medium
    • Probability
    • Likely
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Follow the rental market and its trends/offering
    • "Trendspotting”
    • Be customer-centric, to understand not only theneeds of today but also those of tomorrow
    • Follow infrastructure investments
    • Participate actively in city/submarket development
    • Innovation lab that follows technological developments, focusing on megatrends
    • Routinely invest in the existing portfolio to “upgrade” and sell properties that are not deemed “right” going forward

    Exposure

    Castellum annually invests approximately SEK 4.5 billion, net, evenly distributed in a normal year between acquisitions, new constructions, expansions and reconstructions. Castellum also actively works on sales in order to reallocate capital to investment opportunities with better yields.
  • Impact Medium
  • Probability Likely
  • Priority Monitor
  • Development Unchanged
  • 7. Size – too big in a submarket/area

  • Strategic risks

    7. Size – too big in a submarket/area

    Risk

    Becoming too big in a submarket or city may result in the municipality or the business environment placing stricter demands on Castellum, for example requiring the company to take overall financial responsibility for an area regarding infrastructure and so on.

    • Risk category
    • Composition of the property portfolio
    • Impact
    • Minor
    • Probability
    • Unusual
    • Priority
    • Review
    • Development
    • Unchanged

    Risk management

    • Be among the top three property owners in each respective city
    • Follow market share, which is taken into account in the investment strategy established
    • Conduct annual analysis of the coming three-year period to identify available growth opportunities

    Exposure

    The property portfolio is concentrated in selected cities, all of which are regarded as stable with favourable conditions for long-term positive development.
  • Impact Minor
  • Probability Unusual
  • Priority Review
  • Development Unchanged
  • Reputation
  • 8. Brand

  • Strategic risks

    8. Brand

    Risk

    Insufficient preparation for managing sensitive issues, discontent and/or crisis risks an explosive situation, creating rumors and damaging confidence.

    • Risk category
    • Reputation
    • Impact
    • Major
    • Probability
    • Possible
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Open culture for creating the confidence to pass on information at an early stage
    • Monitoring social channels

    Exposure

    • Misdirected campaign that creates shock and upset risks ruining our reputation and confidence among customers, employees and other target groups.
  • Impact Major
  • Probability Possible
  • Priority Focus
  • Development Unchanged
  • 9. Digitalization

  • Strategic risks

    9. Digitalization

    Risk

    Trends in digitalization move quickly, creating new conditions for the property industry. New or innovative digital solutions replace old technology and working methods, making new service possible and changing customer demands. These trends also mean that new players enter the market. Players who do not adapt their operations to changing conditions could lose customers, suppliers and employees.

    • Risk category
    • Reputation
    • Impact
    • Medium
    • Probability
    • Possible
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Business intelligence with a focus on megatrends and their impact on changing behaviors in operations and people
    • Innovation lab that promotes business development
    • Connected technology in our properties to gather data and learn from it
    • Acquisition of United Spaces, a co-working company, in January 2019

    Exposure

    • Risk of inefficient working methods and/or lost customers and employees if innovation, new technology, digitalization and efficiency enhancements are not used. • Risk that new players take over parts of Castellum’s business, including customer contact.
  • Impact Medium
  • Probability Possible
  • Priority Monitor
  • Development Unchanged
  • Investments
  • 10. Investments

  • Strategic risks

    10. Investments

    Risk

    Erroneous investment strategy or alternately inability to execute the selected investment strategy, or inability to identify profitable investment projects. Investments can be in the form of new construction, expansions and reconstructions, or via acquisitions. Acquisitions of individual properties can be carried out directly as property acquisitions, or indirectly in corporate form. Acquisitions can also be large-scale, either in the form of regional portfolios or property categories, or in the form of strategic corporate acquisitions (i.e. the purchase of an existing organization).

    • Risk category
    • Investments
    • Impact
    • Major
    • Probability
    • Likely
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Annual review and evaluation of the chosen investment strategy
    • Investment decisions linked to the chosen investment strategy to ensure the correct decision
    • Several investment discussions in parallel
    • Three-year follow-up of investments made
    • Risk-based model to determine the share of developments that can start without customers
    • Structured decision-making process that analyzes market conditions and risks
    • Contract forms that limit risk
    • Leases signed prior to the production start are designed to limit the negative impact of unforeseen production delays, additional requirements, and so on
    • Quality assurance and monitoring of completed projects
    • Quality assured due diligence process regarding legal, financial and tax issues
    • Introduction program for new employees

    Exposure

    Investments with low yield and/or lack of growth potential mean that the growth target of 10% in income from property management is not reached. Additionally, the growth target requires making annual investments, which in a powerfully competitive property market entails increased risk that the chosen investment strategy cannot be carried out. Risks association with new construction, expansions and reconstructions relate to both the technological side in the form of production risks such as choice of supplier, form of contract, technical design and so on; and to the market side in the form of lease and vacancy risks as well as misjudgements regarding potential lease level and customer desires. In addition, there are risks in the form of negative environmental impact. Acquisitions via corporations also involve company-specific risks in the acquired companies — tax, disputes and environmental issues, for example. Takeover of personnel further entails employee integration.
  • Impact Major
  • Probability Likely
  • Priority Focus
  • Development Unchanged
  • 11. Strategic corporate acquisitions

  • Strategic risks

    11. Strategic corporate acquisitions

    Risk

    Strategic acquisitions can be carried out to obtain various advantages, but can also entail risks such as difficulties integrating operations and employees, drawing management’s attention away from other important business issues, a possibly new market the acquirer has limited or no experience with, expenditures for unknown or potential legal liabilities in the acquired company, and an overly expensive acquisition.

    • Risk category
    • Investments
    • Impact
    • Serious
    • Probability
    • Possible
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Due diligence
    • Thorough planning and structured processes for incorporating a new company
    • Identify in advance the skills and market awareness needed
    • Identify key people in advance
    • Access to the market’s best advisers

    Exposure

    Castellum has the efficient processes and skills (directly or indirectly via advisers) required for major strategic acquisitions.
  • Impact Serious
  • Probability Possible
  • Priority Focus
  • Development Unchanged
  • Changes in value
  • 12. Changes in value – real estate

  • Strategic risks

    12. Changes in value – real estate

    Risk

    Changes in value can occur either as a result of macroeconomic factors (see section on macroeconomic risks), microeconomic factors (usually the wrong submarket, city or location) or property-specific causes (often cash flow-related). In addition, there is also the risk of individual properties being incorrectly assessed. Whatever the reason, changes in value impact the Income Statement, Castellum’s financial position and the loan-to-value ratio.

    • Risk category
    • Changes in value
    • Impact
    • Serious
    • Probability
    • Certain
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Strong balance sheet
    • A large number of properties, a geographically diversified property portfolio and great variation in lease agreements result in lower volatility in property portfolio value
    • Routine analysis of the transaction market and quarterly reviews of the property portfolio valuation yield early warning signs
    • Internal quality assurance and internal control of internal valuations
    • Annual external valuation of at least 50% of the portfolio.

    Exposure

    Large negative changes in value can ultimately lead to breaking agreed terms and commitments in credit agreements, thus resulting in costlier borrowing, or in the worst-case scenario credits falling due for payment.
  • Impact Serious
  • Probability Certain
  • Priority Focus
  • Development Unchanged

Operational risks

Operational risks refer to risks connected with routine administration of Castellum’s real estate portfolio, which directly impacts income from property management. These can be categorized as rental income, dissatisfied customers/tenants, property costs and tax.

  • Rental income
  • 13. Rental income

  • Operational risks

    13. Rental income

    Risk

    Rental income is impacted by a number of factors, both external and internal. External factors may include falling market rents, loss of indexation and bankruptcy (see section on macroeconomic risks). Poor management can result in dissatisfied tenants, unnecessary vacancies and customer loss owing to a poorly adapted customer offering.

    • Risk category
    • Rental income
    • Impact
    • Medium
    • Probability
    • Unusual
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Properties in growth areas and a contract portfolio with a large number of agreements, not dependent on a single tenant or business sector, and a maturity structure spread over time
    • Proximity and attentiveness to customers
    • Experienced and competent management and leasing staff who prevent notices of termination through active renegotiations before contract expiry
    • Competitor analysis; measure customer satisfaction and follow up on net leasing
    • Strive for leases with an index clause with deflation protection and minimum adjustment

    Exposure

    For Castellum, reduced income can be derived from lower rental value, which is the potential rent that can be obtained from vacant premises, or alternately lower rental income, which is the actual rent received. Rental income is thus dependent on both the market rent of the property and on how Castellum handles vacancies. Reduced rental income ultimately leads to poorer cash flow and thus to a decline in the value of the real estate portfolio.
  • Impact Medium
  • Probability Unusual
  • Priority Monitor
  • Development Unchanged
  • 14. Dissatisfied customers/tenants

  • Operational risks

    14. Dissatisfied customers/tenants

    Risk

    Several tenants or customers are dissatisfied and leave the Group. The opportunity to attract new customers/tenants disappears, with large vacancies and decline in value as a result.

    • Risk category
    • Rental income
    • Impact
    • Serious
    • Probability
    • Low
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Be close and attentive to customers
    • Experienced and competent management and leasing staff
    • Annual measurement, Customer Satisfaction Index

    Exposure

    Castellum has a strong and clear customer focus, and it is important that the Group lives up to customer expectations. This is why a Customer Satisfaction Index measurement is conducted annually.
  • Impact Serious
  • Probability Low
  • Priority Focus
  • Development Unchanged
  • Property costs
  • 15. Property costs

  • Operational risks

    15. Property costs

    Risk

    Risks concerning property costs relate primarily to cost increases beyond what Castellum can be compensated for through contractual rents, indexation and supplementary charges for costs incurred. It can also refer to unforeseen costs and extensive renovation needs.

    • Risk category
    • Property costs
    • Impact
    • Insignificant
    • Probability
    • Possible
    • Priority
    • Review
    • Development
    • Unchanged

    Risk management

    • High percentage of cost re-invoicing
    • Compensation via minimum indexation
    • Continuous optimization of operations and efficiency enhancement
    • Demarcation list landlord/tenant
    • Preventing customer losses via background checks and “in-house” debt recovery
    • Long-term maintenance planning, in order to optimize maintenance costs over time

    Exposure

    The price of electricity is determined by supply and demand in an open, deregulated and partly international market. Other media costs are partly controlled by local monopolies, which creates uncertainty in future costs. The basis for calculating site leasehold fees may change in future renegotiations, and political decisions can change both tax rate and tax assessment value used for calculating property tax. Indirect costs for employees — such as payroll taxes and other obligations — could also be affected by political decisions.
  • Impact Insignificant
  • Probability Possible
  • Priority Review
  • Development Unchanged
  • Tax
  • 16. Tax

  • Operational risks

    16. Tax

    Risk

    Castellum failing to comply with existing regulations or to adapt to changing regulations regarding income tax and VAT. Additionally, tax is an important parameter in a calculation context.

    • Risk category
    • Tax
    • Impact
    • Insignificant
    • Probability
    • Possible
    • Priority
    • Review
    • Development
    • Unchanged

    Risk management

    • Strict internal control processes and external quality assurance of income tax returns, for example
    • Open claims regarding doubtful items
    • Routine training of employees
    • Closely following trends in legislation, praxis and court orders

    Exposure

    Incorrect tax management can lead to the wrong tax being paid, tax penalties and in some cases to remarks in the auditor’s report. Incorrect fiscal management in calculations can lead to overestimation of yield — which means insufficient actual yield — or underestimation of yield with the risk of a profitable investment not being made.
  • Impact Insignificant
  • Probability Possible
  • Priority Review
  • Development Unchanged

Sustainability risks

Sustainability risks refer to risks directly or indirectly associated with environmental risks, climate change a code of conduct and liability risks.

  • Sustainability
  • 17. Operational environmental risks

  • Sustainability risks

    17. Operational environmental risks

    Risk

    Environmental risks directly related to Castellum’s operations can include the physical environment that impacts people and properties, as well as prices for natural resources in the form of materials and energy. Castellum estimates that risks related to rising raw materials prices owing to potential resource shortages will increase over the long term. With new construction, expansions and reconstructions there is also a risk that the materials and methods being used could subsequently prove hazardous in the future. In addition, political decisions and general opinion on specific environmental issues could impact Castellum.

    • Risk category
    • Sustainability
    • Impact
    • Serious
    • Probability
    • Low
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Environmentally certify all new constructions
    • Develop green relationships with customers
    • Require more efficient use of resources
    • Prioritize environmental aspects in all parts of operations
    • Monitor developments in laws and ordinances

    Exposure

    Inadequate management of the work on environmental risks could affect Castellum’s brand, legal compliance, and direct costs. Castellum works with environmental certification and environmental inventory to reduce environmental and health risks. 33% of the real estate portfolio is certified and 86% has undergone environmental in square meters inventory. Efficient management focusing on decreased use of resources reduces the risk of high costs and environmental and health impacts, as well as providing customers with a healthy working environment. Since 2007, energy consumption has been reduced by 28% per square meter and carbon dioxide emissions by 85% per square meter.
  • Impact Serious
  • Probability Low
  • Priority Focus
  • Development Unchanged
  • 18. Risks attributable to climate change

  • Sustainability risks

    18. Risks attributable to climate change

    Risk

    Climate change poses a great risk to humanity from a global perspective. From a corporate perspective, climate change implies a risk of property damage caused by weather conditions changing over time, higher water levels and changes in other physical environments that impact properties. Castellum estimates these risks will potentially increase over the long run. This could mean increased need for investment in properties located in vulnerable areas, so that objects do not become obsolete. In addition, environmental policy decisions could impact Castellum, especially in the form of increased taxes or necessary investments.

    • Risk category
    • Sustainability
    • Impact
    • Medium
    • Probability
    • Possible
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • All investment issues are to be reviewed from a climate perspective in order to assess a property’s sensitivity to climate change
    • All new constructions environmentally classified
    • Prioritize environmental aspects in all parts of operations
    • Monitor developments in laws and ordinances

    Exposure

    Inadequate efforts in analyzing climate risks can lead to extensive unforeseen costs for Castellum in the form of emergency measures or obsolete properties. Castellum is currently reviewing every investment issue from a climate perspective; we also work with environmental certification to reduce climate risks.
  • Impact Medium
  • Probability Possible
  • Priority Monitor
  • Development Unchanged
  • 19. Violation of Code of Conduct

  • Sustainability risks

    19. Violation of Code of Conduct

    Risk

    For a major player in the construction and real estate industry, there are risks pertaining to working environment, corruption, and human rights. These risks can be found within the company, but also with suppliers and partners working on assignments for Castellum. This corporate responsibility risk can cause significant damage to Castellum’s operations and brand.

    • Risk category
    • Sustainability
    • Impact
    • Serious
    • Probability
    • Low
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • Mandatory training for Castellum employees on the internal code of conduct
    • Castellum’s Code of Conduct for suppliers to be incorporated into contracts
    • Compliance function works systematically with monitoring and management
    • Whistleblower function
    • Comply with standards and documentation requirements

    Exposure

    Risk of violations of code of conduct may exist internally as well as among engaged suppliers. Through properly integrated codes of conduct in the form of procurement requirements, mandatory training for all Castellum employees, an active compliance function and a whistleblower function, the risk of violation is considered low.
  • Impact Serious
  • Probability Low
  • Priority Focus
  • Development Unchanged
  • 20. Liability risks

  • Sustainability risks

    20. Liability risks

    Risk

    All ownership entails responsibility. For Castellum, the properties could be destroyed by fire, water, theft or other damage. Moreover, through negligence Castellum could cause personal injury or property damage and cause environmental damage for which it will be held liable.

    • Risk category
    • Sustainability
    • Impact
    • Major
    • Probability
    • Possible
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Preventive measures to minimize the risk of damage to property, persons or the environment
    • Unlimited cover insurance on all properties
    • Insurance coverage for liability and property damage
    • Environmental inventory of existing portfolio and when acquiring properties, in order to identify and address environmental and health risks

    Exposure

    Inadequate insurance coverage may result in unforeseen costs for Castellum. The obligation to pay compensation for damage caused can also arise for personal injury and damage to the property of another, as well as for remediation of environmental damage.
  • Impact Major
  • Probability Possible
  • Priority Monitor
  • Development Unchanged

People

Risks related to people affect both employees and people in Castellum’s environment.

  • People
  • 21. Employees

  • People

    21. Employees

    Risk

    Employees are one of our most important assets; their decisions and actions run our operations. The largest risk is failure to recruit, develop and retain employees and senior executives with the right skills, which may lead to underperformance at Castellum.

    • Risk category
    • People
    • Impact
    • Serious
    • Probability
    • Likely
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Castellum’s shared values
    • Open and transparent work environment
    • Skills and leadership development
    • Employee survey
    • Succession plan for key employees/senior executives
    • Market-based, competitive remuneration
    • Analysis of staff turnover

    Exposure

    Wrong employees in the wrong place, disgruntled employees, poor management and an organization that does not encourage open dialogue and development can lead to employees feeling unhappy, underperforming or quitting. In turn, dissatisfied employees and high employee turnover lead to increased costs, poorer customer relations and reduced internal efficiency, which results in impaired profitability.
  • Impact Serious
  • Probability Likely
  • Priority Monitor
  • Development Unchanged
  • 22. People

  • People

    22. People

    Risk

    Castellum works actively to minimize the risk of employees, hired outside staff or other people being injured physically or mentally in connection with its offices, developments or properties.

    • Risk category
    • People
    • Impact
    • Serious
    • Probability
    • Likely
    • Priority
    • Monitor
    • Development
    • Unchanged

    Risk management

    • Continual work in accordance with Castellum’s work environment handbook
    • Routine monitoring
    • Protection committee
    • Design and architecture with “people in focus” in order to ensure a good environment for tenants, visitors and employees
    • Provide attractive offices and environments where people feel happy and are encouraged to create good conditions for performance

    Exposure

    Castellum works actively to minimize the risk of employees, outside staff hired by us or other people being injured in a workplace-related accident or an accident related to deficient working conditions, work environment or work safety.
  • Impact Serious
  • Probability Likely
  • Priority Monitor
  • Development Unchanged

Financial risk

Castellum’s single greatest risk is not having access to financing. Conditions and rules in the credit market can change quickly, which impacts interest rate risk, financing costs and the opportunity to obtain and extend credits. Risks can be divided into financing risk, reporting and change in derivatives values.

  • Financing
  • 23. Financing

  • Financial risk

    23. Financing

    Risk

    Liquidity and financing risk: Financing is either not available or very disadvantageous at a given time. Chosen capital structure: Castellum breaching the 50% loan-to-value ratio or the covenant for 65% can impact market confidence in the company; • breaching the 65% loan-to-value ratio means certain agreements will fall due • breaching the 45% secured borrowing of the Group’s total assets means certain bond financing will fall due for payment Interest rate risk: the risk of earnings or cash flow impact as a result of changing market rates. Castellum could breach the established mandate of an interest coverage ratio of not less than 200% or corresponding covenants of a minimum of 150%.

    • Risk category
    • Financing
    • Impact
    • Serious
    • Probability
    • Possible
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • A finance policy that establishes risk mandates
    • Liquidity reserves/unutilized credit facility
    • Multiple sources of financing in various geographical markets (banks, capital markets including bonds and commercial paper)
    • Several lenders, moreover only counterparties with high credit ratings
    • Continuous renegotiation of credit agreements
    • Security through pledged mortgages
    • Strong balance sheet
    • An interest rate maturity structure spread across various tenors
    • Long-term credit agreements with fixed margins
    • Revolving credits to obtain maximum flexibility
    • Established calculation formulas
    • Reconciliation between internal and external valuations
    • Compliance function to ensure independence

    Exposure

    Property ownership is a capital-intensive business that requires a well-functioning credit market. Access to financing is fundamental for Castellum and for continued growth. Insufficient liquidity reserves could result in Castellum missing out on business opportunities. All lenders are not equally strong financially, however, which means there are counterparty risks in the system. Changes in capital structure might cause Castellum to breach the agreed key financial metrics of the loan conditions, which would lead to more expensive loans or to credit agreements maturing. Failure to ensure an appropriate capital structure could negatively impact capital market confidence in Castellum. The market interest rate is impacted by central bank monetary policy, expectations for financial trends — both national and international — and unexpected events.
  • Impact Serious
  • Probability Possible
  • Priority Focus
  • Development Unchanged
  • Reporting
  • 24. Reporting

  • Financial risk

    24. Reporting

    Risk

    The risk that an official report, in the form of interim or annual reports, does not provide a true and fair view of Castellum’s operations, earnings and financial position.

    • Risk category
    • Reporting
    • Impact
    • Serious
    • Probability
    • Unusual
    • Priority
    • Focus
    • Development
    • Unchanged

    Risk management

    • A corporate culture based on high ethical ideals and orderliness
    • Strict internal control processes with quality assurance at several stages
    • Skilled and experienced staff
    • Monitor trends in regulations in order to implement new changes in good time
    • Compliance function that reports directly to the Board’s Audit and Finance Committee
    • External audit, full-year and half-year

    Exposure

    A misleading report would give Castellum bad will and a poor reputation in the market. This could lead to uncertainty among investors, increased risk premium and ultimately to a negative exchange rate impact, creating economic losses for Castellum’s current owners. Other effects include investors making incorrect investment decisions, regulators imposing sanctions and ultimately the Castellum share being delisted.
  • Impact Serious
  • Probability Unusual
  • Priority Focus
  • Development Unchanged
  • Changes in value
  • 25. Change in derivatives values

  • Financial risk

    25. Change in derivatives values

    Risk

    Changes in value to Castellum’s interest rate derivatives or currency derivatives arise from changes in market interest rate or exchange rates.

    • Risk category
    • Changes in value
    • Impact
    • Medium
    • Probability
    • Likely
    • Priority
    • Monitor
    • Development
    • Increased

    Risk management

    • Finance policy that establishes which derivative instruments may be utilized for interest rate fixing and currency risk
    • Only marketable instruments in the market to be used, which is why listed prices can be obtained
    • Established calculation formulas
    • Reconciliation between internal and external valuations
    • Compliance function to ensure independence

    Exposure

    Changes in market interest rate and exchange rates impact the market value of the derivatives portfolio. Improper valuation of derivatives may provide an inaccurate picture of the Group’s financial position.
  • Impact Medium
  • Probability Likely
  • Priority Monitor
  • Development Increased