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 future 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 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
The Group is exposed to price risk resulting from decline in the market values of the Group’s real estate development projects or increase in input prices. There can be no guarantee that the Group will be able to sell its development projects in future with prices that are similar or higher than the expected market value of these projects. The Group cannot ensure it is able to sell its development projects with expected prices could have an unfavourable impact on the Group’s statement of financial position and may have a material adverse effect on the Group’s business, financial condition, prospects and results of operations and execution of its strategy. At present it is not possible to assess the extent of any such potential changes.
The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group actively uses external and internal borrowings to finance its real estate development projects in Estonia and Latvia. A project’s external financing is either in the form of a bank loan or investor loan from minority interest holders denominated in Euro.
The interest rates of investor loans are usually fixed, the interest rates are not floating and do not depend on Euribor.
The Group’s bank loans have both fixed and floating interest rates based on Euribor. Bank loans have 0% floor clause as protection against negative Euribor meaning that in case of negative Euribor, Euribor is equalized to zero and the margin of such loans does not decrease. The management constantly monitors the Group’s exposure to interest rate risk which arises from loans with floating interest rates. Such risk is mainly related to the potential upward movement in Euribor as already warned by European Central Bank.
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 minimize credit risk, the Group is only dealing with creditworthy counterparties and deposits cash in banks well-recognized 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 notarized 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, analyzing different financing options on an ongoing basis and negotiating with financing parties over the course of financing.
Covid-19 risk
The impact of the coronavirus COVID-19 is being felt by all businesses around the world. Therefore, the continuing spread of the coronavirus COVID-19 may have an adverse long-term impact on markets where the Group operates. The velocity of change coming out of the pandemic is generating new forms of financial and operational risks arising from inflation, capacity constraints, and supply chain disruptions.
Capital risk
The core purpose of the Group’s capital risk management is to ensure the most optimal capital structure to support the sustainability of the Group’s business operations and shareholders’ interests.
The Group uses the debt-to-equity ratio to monitor capital structure. The debt-to-equity ratio is calculated as the ratio of net debt to total capital. The management considers the Group’s capital structure optimal.
Geopolitical risk
Russia’s military invasion and attack on Ukraine’s independence, which began on 24 February 2022, is affecting businesses around the world. Although the length, impact and outcome of the ongoing military conflict remain unclear, the effects of the sanctions and restrictions imposed against Russia are clearly felt, including the volatility of commodity prices and the availability of commodities, the rapid increase in energy prices, the increase in global inflation, the monetary policy of central banks, the deterioration of financing conditions and the cooling of the global economy.
Despite the fact that the Group does not have direct contact with the war zone and sanctioned suppliers, all the previously mentioned factors affect the daily activities of the Group. Despite the uncertainty caused by global uncertainty, the Group’s management closely monitors geopolitical developments when making development decisions.