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 approved by the Board of Directors. Risk management has been incorporated into the company’s integrated management system and internal auditing. Risk management seeks to ensure that strategic and operational objectives can be achieved by identifying and assessing the most notable risks associated with VVO’s operations and defining 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 appointed up by the Board of Directors is responsible for evaluating the adequacy and appropriateness of risk management within the company. Responsibility for the practical implementation of risk management 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 the risk assessments carried out in connection with the strategy and annual planning processes, which involve identifying the most notable risks, evaluating their likelihood and potential impacts, and defining 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 apartments 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 repairs across all properties.
Major fluctuations in market interest rates and margins may have a negative impact on VVO's financial performance and delay the launch of new development and repairs. 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 risk relates to interest rate fluctuations affecting the company's loan portfolio, which is controlled with interest rate derivatives and by balancing the loan portfolio between variable and fixed rate loans. 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 hedging ratio is defined as the total of all market-based loans, loans converted into fixed rate loans, divided by the total of market-based loans. The target level is between 50 per cent and 80 per cent.
At the end of 2014, the hedging ratio was 78 (74) per cent. Some loans are tied to a fixed rate at withdrawal, most often for a five-year period. At the end of 2014, fixed-rate loans accounted for 28.5 (31.5) per cent of market-based loans. Interest rate derivatives are used to balance the effects of market interest rate fluctuations on the loan portfolio. Derivatives are only used for hedging purposes. VVO's longest hedges extend to 2028.
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 from non-profit corporations from cash from deregulated properties. The sufficiency of liquidity is monitored with regular liquidity forecasts.
The liquidity of investments is controlled with the help of the parent company’s EUR 200 million commercial paper programme. A total of EUR 65.0 (47.5) million of the facility associated with the programme was in use at the end of 2014. The liquidity of both the Group and the parent company remained good throughout the financial year.
The financial market has been adversely affected by the negative impact of the increased regulation of banks and lending, particularly with regard to the availability and cost of long-term financing. When it comes to property investments, the risk of refinancing increases as maturities get shorter. Thanks to VVO’s solid financial position and robust cash flow, the risks associated with availability of financing are not considered significant. These risks can be controlled as required by varying the volume of investments.
There are only minor risks associated with the diversity and adequacy of the guarantee portfolio.
VVO does not have any significant credit risk concentrations.
Investments and derivative agreements involve a counterparty risk to financing activities. This risk is managed with a diverse portfolio of financially stable counterparties and investments.
The Group’s cash flows are euro-denominated, and there is no currency risk.