Report to the shareholders

Dear shareholders,

The events that shaped the first half of the year 2015 were the successful completion of a further stage in the development of the Suurstoffi site in Risch Rotkreuz and the far-reaching decisions taken on the future direction of the Group.

Marked increase in net income

In the first half of 2015, Zug Estates posted an operating result before revaluation of CHF 18.6 million. This represents a year-on-year increase of 0.7%. At the same time, property income rose 4.3% to CHF 19.1 million. Sales in the hotel & catering business unit rose slightly compared with the previous year. The Group's operating expenses for the first half of the year were up 6.2% year-on-year, mainly due to higher maintenance expenditure and expenses associated with real estate transactions.

In the first half of 2015, the Group invested CHF 22.2 million in the further development of its sites. In addition, the book value of the investment properties increased by CHF 32.8 million net as a result of the revaluation. Consequently, income from the revaluation of investment properties (net) tripled compared to the previous year's figure of CHF 10.5 million. The main contributing factors here were the above-average quality of the locations and properties in the portfolio (high proportion of residential property), the continuous development and positioning of the Suurstoffi site as a preferred location for housing and business, and market-related factors.

As a result of the revaluation, EBIT and net income were well above the previous year's figures at CHF 49.5 million and CHF 39.4 million respectively. Net income excluding revaluation decreased by CHF 0.4 million to CHF 11.5 million (previous year: CHF 11.9 million) owing to the sale of a property and higher borrowing expenses. Without property transactions, net income excluding income from revaluation would have been slightly above the previous year's figure.

Far-reaching decisions on the future direction of the Group

In the first half of 2015, important decisions were taken on the further development of the Suurstoffi and Zug city center sites:

  • Zug Estates succeeded in further focusing its portfolio and on March 1, 2015 sold the industrial site in Oberentfelden (AG) at market value. On July 1, 2015, Zug Estates was also able to acquire the last plot on the Suurstoffi site ownend by third parties. In return, the Suurstoffi 3a-c will be sold.
  • On the Suurstoffi site, a third development phase was launched, comprising 170 rental apartments, student housing and cluster apartments, plus approx. 7 000 m2 of commercial space. The planning application was submitted in April, construction is due to start in autumn 2015, and occupancy is scheduled for the second half of 2017. The investment volume amounts to approximately CHF 110 million. Long-term leases have already been signed for more than half of the commercial space. In 2017 the market research company GfK will relocate to the Suurstoffi site with about 200 staff, further strengthening the business location.
  • Lucerne University of Applied Sciences and Arts (HSLU) will establish a major new campus at the Suurstoffi site. The construction of the HSLU Suurstoffi Rotkreuz campus will proceed in two stages. The newly created School of Information Technology will start operating in existing premises on the site in the autumn of 2016. In a second stage, parts of the finance division of the School of Business, together with the School of Information Technology, will move into a new building directly adjacent to the railway station. The new premises will provide space for about 1 350 students and 200 employees. In addition, 100 residential units for students will be created on the site. This will allow Zug Estates to proceed with the integrated planning of the western section of the Suurstoffi plot on which the final site of the Lucerne University of Applied Sciences and Arts is to be constructed by 2019, and make a start on the necessary adaptation of the development plan in cooperation with the local municipality.
  • In addition, the decision was taken to construct a 70-meter high-rise apartment building in the center of the Suurstoffi site. The high-rise project includes plans for some 90 apartments and about 2 500 m2 of office and commercial space on a condominium ownership basis. The study process has been completed and the planning application is due to be submitted in spring 2016. Construction is due to start in autumn 2016, with occupancy scheduled for winter 2018/19.
  • On the Zug City Center site, the decision taken on the Zug city tunnel in a local referendum held on June 14, 2015 clarified the position on an important precondition for the future development of the site.

Success in renting properties in line with the high degree of development momentum

The second development phase of the Suurstoffi site, consisting of nine apartment buildings comprising 145 rented apartments and 11 owner-occupied apartments, was completed on schedule and handed over to the occupants. All apartments have been let, increasing the proportion of residential property within the portfolio to about 30%.

The portfolio's 6.4% vacancy rate as of June 30, 2015 (reference date) includes approximately 4 000 m2 of commercial space earmarked for Lucerne University of Applied Sciences and Arts and leased from summer 2016. A further 2 000 m2 of office space that was vacant on the balance sheet date has since been leased. For the remaining commercial space, negotiations with prospective tenants are at an advanced stage. During the course of 2016, we therefore expect to be able to report largely full occupancy for the main commercial properties.

Confident outlook for the second half of 2015

In operating terms, we expect rental income in the real estate business unit to rise overall. However, the disposal of two properties and the lowering of the reference rate for apartment rents as of October 1, 2015 will reduce annual rental income by about CHF 1.9 million. The vacancy rate is expected to decline by the end of 2015. The carefully planned development of the Suurstoffi site will remain an important priority. In 2015, we expect overall investment in the real estate portfolio to total about CHF 50 million. In the hotel & catering segment, our assessment of the earnings outlook remains unchanged.

For the year as a whole, we expect a slight increase in operating income before depreciation and revaluation. The surplus from the revaluation of investment properties (net) will increase net profit.

Zug, August 2015

Hannes Wüest
Chairman of the Board of Directors
Tobias Achermann
Chief Executive Officer

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