Risk Management
Risk management is part of the Group’s strategic planning and decision-making process. The Group is exposed to a number of risks and uncertainties related to, among other factors, the business and financial risks. The materialisation of any such risks could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. The Group’s risk management process is based on the premise that the Group’s success depends on constant monitoring, accurate assessment, and effective management of risks. The Group’s management monitors the management of these risks.
Strategic risk
The Group’s strategic risks are risks that can significantly impact the execution of its business strategies and ability to achieve the objectives. Such risks are impacted by changes in political environment and market demand as well as microeconomic developments. While the risks can have a negative impact on the Group’s business, they can also create new business opportunities. The Group carefully selects the new development projects and monitors the market trends in order to adjust its strategy when significant changes occur.
Market risk
Market risk is the risk arising from changes in the markets with which the Group is involved. The main market risks are price risk and interest rate risk. The Group is exposed to price risk, which arises from fluctuations in the market values of the Group’s real estate development projects or price increases due to changes in input costs. The Group cannot guarantee that it will be able to sell its projects in the future at prices similar to or higher than the expected market value of these development projects. If the Group faces difficulties in selling projects at the prices assumed in the business plans, it may have a negative impact on the Group’s operations, financial position, prospects, results, and the implementation of its strategy. To mitigate market risk, the Group’s management continuously monitors market developments and takes these into account when making development decisions.
Changes in interest rates affect the Group’s revenues and cash flows. The Group actively uses both external and internal resources to finance its real estate development projects in Estonia, Latvia, and Canada. External project financing is either through bank loans or investor loans provided by minority shareholders, which are denominated in euros.
Investor loan interest rates are typically fixed, meaning they are not floating (e.g., not linked to Euribor). The Group’s bank loans, on the other hand, have floating interest rates (depending on Euribor). The bank loans have a 0% floor against negative Euribor, meaning that in the event of negative Euribor, it will be set to zero, and the margin on such loans will not decrease. Management continuously monitors the Group’s exposure to interest rate risk, primarily arising from floating-rate bank loans linked to changes in Euribor. Several bank loan agreements contain a condition that a commitment fee must be paid on any unused loan balance. The commitment fee depends on the unused loan amount, thus directly affecting the Group’s actual interest rate.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations towards the Group under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities such as trade receivables from rental property and from its financing activities, including deposits with banks and other financial instruments.
In order to minimise credit risk, the Group is only dealing with creditworthy counterparties and deposits cash in banks well-recognised banks in Estonia and Latvia. If such rating is not available, the Group uses other publicly available financial information and its own trading records to rate its major customers.
The Group is in real estate development business and upon sale of completed property the Group enters into notarised agreement with the buyer. Since most of the transactions are ensured either with money deposited in the notary’s deposit account or a bank loan, the Group is not exposed to material credit risk from trade receivables.
Liquidity risk
The Group’s liquidity represents its ability to settle its liabilities to creditors on time. A careful management of liquidity and refinancing risks implies maintaining the availability of funding through an adequate amount of committed credit facilities. Due to the nature of the Group’s business activities, the Group actively uses external and internal funds to ensure that timely resources are always available to cover capital needs.
The Group manages liquidity risk by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. The Group mitigates refinancing risk by monitoring liquidity positions, analysing different financing options on an ongoing basis and negotiating with financing parties over the course of financing.
Capital risk
The Group’s liquidity represents its ability to settle its liabilities to creditors on time. Careful management of liquidity and refinancing risks implies maintaining the availability of funding through an adequate amount of committed credit facilities. Due to the nature of the Group’s business activities, the Group actively uses external and internal funds to ensure that timely resources are always available to cover capital needs.
The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. The Group mitigates refinancing risk by monitoring liquidity positions, analysing different financing options on an ongoing basis and negotiating with financing parties over the course of financing.
Currency risk
The Group’s activities are mainly carried out in the currency of the economic environment of the companies: in Estonia and Latvia in euros (EUR) and in Canada in Canadian dollars (CAD). The Group’s currency risk arises from the translation of the functional currency of the Canadian subsidiary into the Group’s functional and presentation currency. In order to mitigate currency risks, the Group concludes as many contracts as possible in euros. The majority of intra-group transactions are carried out in euros. The growth of business in Canada leads to the Group’s exposure to currency risks. The Group is not significantly exposed to currency risks, therefore, the Group has not used instruments to hedge currency risks.
Geopolitical risk
Russia’s military invasion and attack on Ukraine’s independence, which began on 24 February 2022, is affecting businesses around the world, and the length, impact and outcome of the ongoing military conflict remain unclear. The initial effects of the war have partially subsided: commodity prices have stabilised as a result of the development of new supply chains, and energy prices and inflation are also returning to previous levels. However, as a negative effect, economic growth has slowed down. Although the economic environment is stabilising, there is still the risk of an escalation of a military conflict, which can have a wide impact on the Group’s daily activities if the risk materialises.