CEO Martin Durchschlag and CFO Laurent Spindler in an interview with Medard Meier
What were the most outstanding events of 2017 for you?
Martin Durchschlag: The long-term rental contracts that we were able to sign with a wide range of companies, such as Stadler Rail, Media Markt and Dachser. These contracts run for several years, or as in the case of Stadler Rail, even for several decades, more precisely until 2081. We are particularly pleased with the highly dynamic redevelopment in Meyrin. An IT cluster is forming there, centred around Hewlett Packard Enterprise and HP Inc. We also invested very heavily in the expansion of cloud infrastructure.
Laurent Spindler: I would particularly like to mention that we exceeded our property income targets, and with an increase of 4.8%. Even without acquisitions, we are well above the previous year. I also want to emphasise that our vacancy rate dropped to 14%. At the Lorzenpark property in Cham alone, we were able to reduce vacancies from 33% to 12%.
Did you achieve this improvement by lowering rents?
LS: No, in general we have not observed any reductions in rental rates for new leases. But negotiations are intense and take a long time.
MD: We invest a great deal to make our sites even more attractive for companies. We want our tenants to be won over by the overall package, not by the price. In 2017, we were able to reap the benefits of this approach at many sites.
Are you satisfied overall with the results?
MD: The pre-tax result is the best that we’ve had since the IPO, although the income contribution of HIAG Data is clearly negative. Various factors contributed to this, such as the sale of the paper machines in Biberist, the new acquisition in Meyrin and successful redevelopments that will be reflected in higher property income in the long term.
LS: In terms of financing, we reached another milestone with the third bond. Our average financing costs are now under 1%. This financing, which is now made up of about 70% in bond capital, has created a loan-to-value basis that gives us a lot of room to manoeuvre and expand our portfolio.
MD: We have noticed a real up-turn in site redevelopment. Biberist is HIAG Data’s anchor site. The high performance network that is serviced and operated there covers all of Switzerland, and stretches from Amsterdam to Milan. The Camembert site in Geneva has been experiencing a flood of interest with 300’000 visitors since the opening of “Village du Soir” in October 2016. Over 4’000 people flock to the “Village du Soir” every weekend.
LS: The redevelopment approach is also reflected in corporate communication. Our Annual Report 2016 won first place in the design category for both the online and print versions. For the third time in a row, HIAG earned the European Public Real Estate Association’s (EPRA) Silver Award, which underscores the quality and transparency of our reporting.
Were there any disappointments?
MD: The strategic decision of ABB to shift capacities to Baden left us with a higher vacancy rate at the Kleindöttigen / Klingnau site, but we have already started bringing it back down. The long-term arrangement with Brugg Rohrsysteme for 20 years brings new momentum to the neighbourhood, which we intend to use to reposition the site.
Have you felt the overall market trend that has generally led to higher vacancies throughout Switzerland?
MD: We haven’t felt it very much. What we have noticed is the large amount of capital that is still flowing into the market and into redevelopment. Speculative developments do not always meet local demand, which inevitably leads to higher vacancies. Overall, we consider demand to be very solid. Companies are still planning for the long term, which is reflected in long-term contracts. The market is convinced that the central banks’ interest rates will not rise sharply because of the high level of public debt, but will remain low for some time to come.
LS: Should interest rates rise sustainably, we would be able to cushion the impact of this with our very healthy balance sheet structure. In addition, the term structure of the bonds helps us keep the financing side under control.
How has the market for acquisitions developed?
MD: It has been surprisingly positive! In Meyrin, we were able to make a purchase in line with our chosen strategy. The property is well rented and should be developed further within 10 years, to the great satisfaction of the canton of Geneva. We generally don’t set acquisition objectives in order to avoid putting ourselves under false pressure. We are active, exploring opportunities and sometimes really looking, but only in a very targeted way. But we cannot and do not want to force purchases.
LS: There are currently about 50 projects in our pipeline that we can develop in the medium and long term. So we are really not under any pressure to make additional acquisitions. That means that we can be very choosy. We do buy, but only if it fits into the overall strategy.
What’s your pipeline’s investment potential?
MD: Two billion Swiss francs over a period of 15 years.
HIAG has the ambition of always being different from the competition. How do you set yourself apart?
MD: First and foremost, through sustainability as a daily practice, because it generates quality of life that can be felt – through the property and its surroundings.
LS: Take our six power plants, for example, which HIAG historically owns and deliberately operates. The sites where they are located have their own electricity. Whatever exceeds the site’s own needs is sold.
MD: Using locally generated energy locally means less burden on the network infrastructure. We are also thinking about how we could use the property itself in a practical way as a battery – as micro-storage, as a charging station for electric vehicles and so on. It is a broad experimental field that we would like to make use of.
LS: In Meyrin, for example, we planted an orchard and produce our own honey at the site. You can watch the honeycombs fill up gram by gram via a webcam. Our goal is to give sustainability a complete new feel in multiple ways. The way we deal with old building substance in new developments can contribute to site quality. “Grey energy” plays an important role in this. Although these aspects have a very long-term impact, many sustainability labels do not take them into account. This impact counts for us.
MD: Digitalisation is also an important differentiating factor. It determines how we can use real estate and sites. Groundbreaking developments are cropping up in this field, some of which remain visionary. But we have to deal with them intensively today, since they can become reality very quickly. Digital access with a high level of availability and security, for example, is already an important location factor for companies today.
With our highly available network outside the public internet, we are building a bridge between real estate, tenants and global clouds. Business-critical processes are far too sensitive to be exposed to the classic cyber risks of the internet. The secure, high-performance, point-to-point connection is an important infrastructure element that we will be offering all our tenants and also third parties this year in conjunction with our cloud infrastructure.
Is this offer a unique selling point for your sites?
MD: What we are implementing with HIAG Data still has no equivalent even internationally in terms of security, availability and performance. We are monitoring the development closely along with our partners, Microsoft and Hewlett Packard Enterprise. That is also the reason why we are receiving so much support from both companies in terms of technology and marketing, because they are ultimately co-selling their own products. HIAG Data is based on a completely different business model from our traditional business. That is why we built a separate organisation that presses ahead with its development independently. The speed is quite different from the real estate industry.
How much has been invested so far?
MD: About 40 million Swiss francs have been invested. That includes the fibre optic network, the development of the platform technology, the Biberist hub and the infrastructure that we have developed at two third-party data centres in Winterthur and Zurich. This roughly corresponds to our schedule.
Hardly any money has been earned yet. When do you expect a break-even point?
MD: The main thing for us is to have a cash break-even in view by a certain deadline. We will be able to earn a return on the investments made so far during the current year on an annualised basis. That will clear the way for other investments. In return for rapid growth, we accept that HIAG Data’s contribution to the result will be negative for the time being.
There will also be questions related to corporate culture. How do you deal with them?
MD: It is not a different corporate culture, but a different business model on which HIAG Data is based. This comes with a very different speed and market focus. That is why we are building a separate organisation for HIAG Data with its own executive board, which we expanded by five members in 2017. At the same time, we have brought in Jvo Grundler, General Counsel, as a new member of the Board of Directors. He is working closely with us in this new business, which we would like to also expand abroad.
Will HIAG Data then be hived off?
MD: For the time being, it is a company that is under construction. If the expansion continues abroad as planned, the question will arise as to whether HIAG is still the best owner. But that is the future. This year is about successfully positioning Cloud 4.0 on the market and developing performance packages that we can offer our tenants at all our sites. Both organisations, HIAG Data and the real estate organisation, are involved in this with equal enthusiasm.
With developments in and around the real estate market in mind, many of which can be summarised under the buzz word “digitalisation”, we have also adapted our organisation in the real estate sector. We have defined matrix responsibilities for certain functions at the sites and assigned them to individual members of the executive board. We are constantly working to become even better at developing and selling our projects.
What are the overall objectives for 2018?
MD: The focus in 2018 will be on the further development of the portfolio and the interplay we mentioned between the real estate sector and HIAG Data. All in all, we are relying on income from internal growth.
LS: We are achieving this by further improving the vacancy rate and by completing projects that will enter the construction phase in 2018.
MD: At HIAG Data, we are looking forward to the launch of the Network Centric Multicloud 4.0, which we will present to the market of Swiss cloud service providers in March.