As a housing developer, the group is exposed to risk related to land development, sales and the execution of construction projects. These factors can affect the group’s business activities and financial position. The board of Selvaag Bolig accordingly gives a high priority to dealing with and managing risk, and has established routines and control systems to limit overall risk exposure to an acceptable level.
Regular risk surveys contribute to raising awareness of and to dealing with the most significant risk conditions which could affect the business goals defined in the company’s strategy. The primary risk factors can be categorised as market, operational, financial and climate risk.
MARKET RISK
Housing demand is influenced by a large number of factors at both micro and macro level. It may be affected by substantial fluctuations in the general level of interest rates and/or significant changes in other financial variables to which potential housebuyers might be exposed. Changes in housing demand could furthermore affect Selvaag Bolig’s opportunities to sell homes at budgeted prices within the planned time frames. Were the pace of sales to be lower than expected because of changes in market conditions, planned developments could be postponed. The company accordingly has internal requirements related to advance sales, where the general rule is that construction does not begin until homes corresponding to 60 per cent of the value of each building stage in the respective projects, or of the overall project, have been sold.
OPERATIONAL RISK
Risk related to contractors
Selvaag Bolig draws on external construction companies and service providers in connection with developing and building new projects. As a result, it is exposed to the risk
of loss and additional project cost if a contractor/supplier finds itself in financial difficulties. To reduce this risk, the company mainly enters into construction contracts with large, well-established players who have a solid financial position and experience, and who can document quality work. In addition, standardised and detailed construction plans developed by Selvaag Bolig are used to reduce the risk of errors, misunderstandings and delays by the contractor.
Furthermore, Selvaag Bolig is exposed to increases in the level of prices for construction contracts and to cost overruns. For projects built on site, the company mainly enters into turnkey contracts. In this way, costs are fixed before sales and construction begin. In the event of high building costs, the company also has the expertise required to implement projects on the basis of sub-contracts managed by the construction client. Capacity and risk nevertheless mean that this is not the preferred approach on any scale.
Planning risk
Changes to operational parameters or planning decisions by the relevant public authorities could affect both the progress and the viability of Selvaag Bolig’s various projects, and might thereby limit opportunities to continue developing its properties. That could lead to delays and increased costs. In order to reduce this risk, the company performs a thorough analysis before buying land, and works systematically to keep in touch with regulators and works systematically during the whole life of the project.
FINANCIAL RISK
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 primarily required to pay a 10 per cent deposit in advance when a sale is agreed, and to document satisfactory financing for the property. Credit risk is regarded as low because payment must be made to the client account at the settlement agent before transfer of the residence.
Foreign exchange risk
Virtually all the group’s activities are based in Norway. Exposure to foreign exchange risk is therefore limited.
Interest rate risk (own financing, deposits)
Changes in interest rates affect the group’s borrowing costs and could affect the valuation of its assets. The company has opted not to enter into any form of hedging contract. Furthermore, interest rate levels affect the company’s return on free liquidity.
Financing risk (access to capital)
Selvaag Bolig depends on access to capital in order to acquire sites and realise projects. In order to finance construction, the company maintains good and close relations with its principal banks, which are well-capitalised Nordic institutions. Competition between the banks is perceived to be satisfactory, and the company has thereby been able to secure the financing required for its projects. Financing of land purchases is primarily channelled through the collaboration with Urban Property AS.
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 liquidity actively and pays special attention to maintaining adequate liquidity at all times. The company continuously monitors forecast and actual cash flows.
CLIMATE RISK
Climate risk consists of physical climate risk and transition risk. Physical risk is associated with increased extreme weather and ecosystem changes. Transition risk is associated with changes in regulations, technology and the market situation in connection with the transition to a low- emission society. The company has a relatively low exposure to physical climate risk. In this area, there are strict legal and regulatory requirements, and Selvaag Bolig's housing also has its own management systems that reduce risk.
Selvaag Bolig, on the other hand, is exposed to transition risk. As the real estate sector has significant greenhouse gas emissions, there are increased demands for transparency, non-financial reporting and emission cuts from especially financial stakeholders and authorities.