Financial risk management

As a housing developer, Selvaag Bolig ASA is exposed to risks which could affect its business and financial position. Risk factors relate to land development, sales and the execution of housing projects, and can be broken down into market, operational and financial categories.

The group gives priority to work on managing and dealing with risk, and has established routines and control systems to limit and control risk exposure.

Market risk

Market risk relates primarily to changes in housing demand, which is the primary diver for the company’s revenues. To keep such risk under control, the group has internal requirements related to advance sales. Sixty per cent of homes in a project must have been sold before construction begins.

Operational risk

Operational risk primarily concerns the financial viability of partners, including construction contractors, and the development of building costs.

To ensure predictability and maintain control over costs in a project, Selvaag Bolig therefore primarily awards turnkey contracts to large, well-established construction companies with a sound financial position and documented work quality. A turnkey contract allocates all risk of pay and price increases to the contractor, so that costs are fixed before sales and construction start. Standardisation and detailed architectural plans also help to reduce the risk of errors and delays. In addition, extensive use is made of modules in many of the company’s construction projects. That reduces risk through increased standardisation, while building with modules also represents a cheaper form of production that on-site construction and thereby helps to reduce costs.

Financial risk

Interest rate risk
Loans with floating interest rates expose the group to the risk that changes will affect future cash flows. Interest charges are capitalised as part of the construction projects as the work progresses. Since much of the group’s interest-bearing debt relates to its level of activity, Selvaag Bolig has decided not to enter into any kind of interest hedging contracts for its loan portfolio.

Foreign exchange risk
Virtually all the group’s activities are based in Norway. However, it buys modules from abroad in euros. When purchase contracts are signed with foreign module suppliers, the exchange rate is locked in by ordering foreign currency at a fixed rate for future settlement based on the supplier’s payment plan. As a result, the group has limited exposure to foreign exchange risk and has accordingly decided not to enter into separate foreign exchange hedging contracts.

Credit risk
The group’s credit risk relates largely to the settlement of its accounts receivable, which primarily involve private customers as housebuyers. Buyers are required to pay a 10 per cent deposit in advance when a sale is agreed, and to document satisfactory financing for full settlement when ownership of the home is transferred on completion and delivery.

Liquidity risk
Conservative liquidity management means having sufficient liquid assets and available financing through lines of credit to meet the group’s obligations. Selvaag Bolig administers its liquidity actively, and manages liquidity risk by maintaining adequate cash in hand, having bank services and credit limits related primarily to the group overdraft facility, and by continuous monitoring of forecasts and actual cash flows.

Financing risk
Selvaag Bolig depends on access to capital in order to realise sites and build homes. Where external capital is concerned, the company has good and close relations with its principal banks, which are well-capitalised Nordic institutions. Although the banks have become more restrictive over lending, the company has secured access to the necessary financing for its projects. It also makes use of the bond market, and utilises other solutions for new land purchases by entering into agreements with landowners on options for future purchasing.