Risk factors in property investing

Letting and vacancy risk

There is a possibility that one or more tenancy agreements will not be renewed. In the case of residential property, tenants can also terminate their tenancy agreement. In that case a new tenant has to be found. This may take some time. During such a period no rental income is generated. There is a risk that a new tenancy agreement will include a lower rent than the current tenancy agreements. If rental income is lower than expected, this is at the expense of the direct investment return.

Rent review risk

Rental income can also decline during the term of a tenancy agreement.

Counterparty and debtor risk

There is a risk that a party with which the fund works will not meet its obligations on time. One example is a tenant who does not fully meet their obligation to pay the rent. Tenants' ability to meet their payments is partly determined by their financial position.

Concentration risk

Where investments are concentrated, both the value development of the property portfolio and the return depend on a limited number of factors. Because of this concentration, the fund is sensitive to developments in the local property and rental market.

Risk of uninsurable damage

One risk is the loss of the property due to external factors, such as fire, explosion, terrorist attack or natural disaster. Under buildings and liability insurance, certain risks, such as damage resulting from natural disasters or terrorist attacks, are not insured. If a loss event occurs that is not insured, this will lead to unforeseen costs, which will have a negative effect on the return.

Leverage risk

In funds where the property is partly financed with borrowed capital, changes in the value of the property have an amplified effect on the value of the bonds. As long as the interest costs are lower than the operating result, there is positive leverage. If the financing interest rate rises or the income from the property decreases, this leverage effect can diminish or even reverse.

Zeker Wonen Fonds III does not use bank leverage financing. The property purchases are fully financed with bond capital.

Enforcement risk

If a fund does not meet its obligations arising from a financing arrangement, there is a risk that the lender will take recovery measures, including enforcing the mortgage right established on the properties. This means the lender will sell these properties and use the proceeds to repay its debt.

Refinancing risk

There is a risk that, when the financing expires, a fund will not succeed in arranging alternative financing. In that case, the funds required for repayment can only be obtained through an issue, from the operating result or by selling part of the property.

Interest rate risk

In funds where the property is partly financed with borrowed capital, there is a risk that, when new financing is arranged, the interest costs will be higher than the level expected in advance. This has a negative impact on the direct investment return.

Tradability risk

If a bondholder wishes to sell their bonds during the term, this is only possible if there is another investor who wishes to buy the bonds. There is a risk that there will be insufficient demand for bonds, as a result of which a bondholder cannot sell their bonds, or cannot sell them at a reasonable price.

Payment risk

There is a risk that the fund cannot meet its payment obligations to bondholders, in full or on time, such as the interest payment or the repayment at the end of the term.

Liquidity risk

The fund generally builds up a liquidity reserve. There is a risk that the liquidity reserve will prove insufficient. Reduced liquidity may result in lower or no distributions to bondholders.

Cost risk

There is a risk that costs will be higher than the level at which they were estimated. For example, maintenance costs for the property may be higher, or a new tenant may demand financial incentives or changes to the property's level of facilities.

Legal and regulatory risk

A fund is subject to tax laws and regulations. Local legislation on, for example, the environment, zoning plans, tenant protection, tax rules and financial supervision laws and regulations affects the profitability of the fund.

Tax risk

Changes in tax laws and regulations in the Netherlands may change the tax and financial position of the fund and/or affect its profitability. This may have a negative effect on both the profitability and the value development of the bonds.