Business risk

Under business risks, we mean the inherent risks of working in our core business markets – the general construction and residential real estate development, which are the basis for profitable operations. The main source of the business risk in the construction service segment is the split responsibility for the design between the contracting entity and the general contractor, the accuracy of the construction budgeting, the terms of the procuring the materials and subcontractors. In real estate development segment, the risks related to detail planning and building permits as well as the forecasting of demand for properties of different quality and types are added to the risks incurred in construction.

The group takes risks prudently in order to increase revenue. The biggest business risks concern entering new markets and areas, managing existing inventory and investments, and fulfilling construction contracts. One of the peculiarities of construction and real estate business is the long-term, protracted performance of contracts, which makes the sector inert to changes in the overall economic environment. Therefore, both negative and positive changes in the overall economic environment will affect the financial situation with a delay of around 12-24 months.

We pay significant attention to the volatility of input prices in the construction sector, which can make budgeting of new projects and preparing projects at planned costs difficult, and lead to an additional risk in the execution of fixed-price construction contracts and price pressures on the profitability of projects. Therefore, we will closely monitor economic development as a whole and avoid taking excessive business risks at the tender stage.

One of the main sources of business risk for the group is residential real estate development due to the high value it. The real estate market is becoming increasingly selective and before starting each project, the risk assessment focuses on the project location, development volume, planning solutions and target group. Due to the selectivity of the real estate market, it is important to set the right target segment for new development projects and the appropriate selling price for the selected segment. To mitigate these business risks, we continuously analyse demand, supply, and transaction price statistics available from both our own and public sources.

Operating in several markets entails the need to know the economic environment of different countries and to pay attention to the cyclical nature of the economy and the legal, cultural and political differences of different countries. The Group’s goal is to grow in the markets where it already operates. When entering new markets, local practices and differences are thoroughly explored before final investment decisions are made to ensure that the environment is stable enough and that we have a competent team in place.

In regard to investments, the main risks are related to the real estate portfolio and the implementation of development projects. We manage real estate development projects as a comprehensive process, which includes all activities from the purchase of plots, procedures related to detailed spatial plans, design and construction to the sale of finished apartments and warranty services. The Group applies common principles for the implementation of real estate development projects to ensure that the best practices accumulated in the Group over the years are put to good use. We constantly analyse our stock of plots with development potential to make sure that there are enough properties in the portfolio for the kind of developments the market needs. Investments in new properties or projects worth up to 3 million euros are generally decided at the level of the subsidiary’s supervisory board, and larger purchases are additionally approved by the supervisory board of the Group.