ARC Fund Risk management framework

The Fund Manager uses a Risk Management Framework to appropriately identify, measure, manage, monitor, and report on risks. The Fund manager also sets the risk indicators, risk limits, and risk appetite for the defined risks. Fraud risks are in separable connected to risk management and are therefore integrated in the framework. The risk management performance of the ARC Fund is assessed on at least a quarterly basis and more frequently in case of significant events. The findings of the assessment are included in the quarterly Investor report's Risk Management Dashboard. The Director Finance and Risk is responsible for the risk reporting to all relevant stakeholders.

Identified risks of the ARC Fund

Sales / rental risk: the risk that a home or a property cannot be sold / rented out within the envisaged period at the targeted sales / rental price.
Operational risk: the risk resulting from inadequate or failed operational processes and/or systems.
Funding risk: the risk of funding shortages and mismatches between funding and commitments because the ARC Fund:
1. is unable to timely fund its commitments with new or existing equity and/or debt commitments at the desired conditions and/or from divestment proceeds;
2. is in breach of its contractual obligations for its debt funding, which results in defaults and mandatory repayments; or
3. incurs short-term liquidity shortages due to the insufficient coordination (by timing and amount) of cash inflows and outflows.
Portfolio risk: the risk that the portfolio policy and operational results are not in line with the Portfolio Plan and as a result targeted returns are not achieved.
Counterparty risk: the risk that a counterparty fails to fulfil contractual or other agreed upon obligations. The main counterparties for the ARC Fund are Investors, banks, developers, appraisers, property managers, tenants, and buyers.
Political risk: the risk that policy changes and regulations by (local) authorities or governmental bodies affect the strategic objectives and business of the ARC Fund.
Climate risk: the risk that the ARC Fund is not adequately adapting to constraints resulting from climate change and/or fails to adequately report on its actions to address climate change.
Governance risk: the risk that a conflict of interest is not adequately addressed by means of governance as well as checks and balances and/or the risk that the ARC Fund is inadequately equipped to operate in the event of a conflict of interest.
Compliance risk: the risk that the ARC Fund and its operation are in breach of legislation and regulations, which may jeopardise the Fund’s AIF status.

Risk appetite and evaluation 2022

The ARC Fund invests in income-producing real estate investments in the Dutch residential sector. The generated returns from rental income are relatively stable and the ARC Fund acquires new projects on a turnkey basis, without incurring development risk. The ARC Fund uses modest levels of leverage to enhance returns. In line with its INREV core fund risk profile, the ARC Fund has a relatively low risk profile and correspondingly low risk appetite.

During 2022, the risk indicators and risk limits for the risk categories as defined by the Fund Manager were closely monitored. Four quarterly risk meetings were held to discuss development of risk indicators together with Director Finance & Risk, the Portfolio Manager and RCO. The potential negative impact of COVID-19 on the ARC Fund subsided and the potential negative economic impact of the Ukraine war received special attention. So far, the negative impact of the deterioration of the economic environment has been limited.

Sales/Rental Risk

The sales/rental risk is elevated due to the rising interest costs and the decline in investment market activity.

Political risk

Anticipated (local) legislation, designed to interfere in the residential investment market, may impact the ARC Fund’s ability to execute its strategy. The Dutch government and local authorities have announced new rent regulation which may impact the rent generating capacity of the ARC Fund going forward. The announced regulation is planned to take effect on 1 January 2024, subject to finalising the legislation process in 2023.

Counterparty risk

The counterparty risk remains elevated due to the increasingly uncertain economic outlook and rising construction costs, as well as equipment and material shortages.

Funding risk

In 2022, the ARC Fund made use of its committed debt facility, equity commitments and sales proceeds to fund its project pipeline and redeem participations. During 2022, an additional EUR 100 million of debt commitments and EUR 120 million of equity commitments were secured in order to meet future funding needs. The existing revolving credit facility was refinanced, which addresses refinancing risk up to the maturity of the existing term loans in December 2025 (EUR 125 million) and January 2026 (EUR 500 million). The modification of the fund structure converted the formal end date of 17 January 2026 into an evergreen structure with a first liquidity review date on 1 January 2029.

Hence, the availability of undrawn debt commitments increased. The available equity commitments decreased as capital calls exceeded the new equity commitments. However, the overall funding position increased during 2022.

Various scenarios for liquidity – covering the expected realisation time of the acquisition pipeline and going beyond the current Portfolio Plan horizon of 2024 – were calculated and monitored. No liquidity constraints occurred in 2022 or are expected in 2023. The ARC Fund plans to secure new equity and debt funding in 2023, subject to market conditions, to fund and grow its pipeline in the coming years.

Compliance risk

Due to the fiscally transparent status of the fund, the ARC Fund is not able to incur any form of development risk as part of the acquisition of new projects for its pipeline. Therefore, the ARC Fund acquires its projects on a fixed-price, turn-key basis. In certain situations, the ARC Fund is able to secure a fixed-price, turn-key project subject to final permits and planning prior to start of construction. In these cases, the ARC Fund will obtain a put-option with a longstop date from the third party developer, in order to be able to unwind the transaction in the event that permits or planning might not be obtained within an agreed time frame.

Overall risk performance

None of the risk limits set by the Fund Manager for the defined risk categories were exceeded. Management has performed its risk assessment and concluded that there are no indications of possible fraud.

Updated risk management framework

The ARC Fund’s Risk Management Framework is a dynamic framework. The Fund Manager assesses, monitors, and reviews the risk management function, policy, framework, and its risk appetite, indicators, and limits on an annual basis and reports on these matters to the Advisory Board and Investors of the ARC Fund.

If necessary, the Fund Manager adjusts previously described risk categories in close consultation with the RCO and its stakeholders. In the fourth quarter of 2022, the Fund Manager presented the updated Risk Management Dashboard to the Advisory Board for annual evaluation.

Figure 20 plots the risk categories on an impact/ probability axis.