ARCO VARA AS - NASDAQ OMX Baltic

find changes in customer preferences or other potential threats to the profitability of a project, the
Group tries to adjust the project outline to meet the changed market expectations. However, there can
be no assurance that the Group will be able to recognise such changes and adapt its existing
developments or planned developments in timely fashion to suit such changes in customer preferences.
If customer preferences in the markets where the Group operates cease to favour the Group’s
developments, this could have a adverse effect on the Group’s business, results of operations and
financial condition.
Damage to property
The property belonging to the Group or the Joint Ventures could suffer physical damage caused by
natural disasters, fire or other causes, resulting in losses which may not be fully compensated by
insurance. Although the Group and the Joint Ventures do maintain insurance in respect of natural
disasters, fire and other damage to its properties, the Group does not maintain separate funds nor does
it set aside reserves for these types of events. In addition, certain types of risks (such as certain natural
disasters and terrorist acts) may be uninsurable or the cost of insurance may be prohibitively high
when compared to risk. Should an uninsured loss or a loss in excess of insured limits occur, the Group
could lose capital invested in the affected property as well as anticipated future lease income or sale
proceeds from that property. Furthermore, the Group could be held liable to repair damage caused by
the event. The Group may also remain liable for any debt or other financial obligation related to that
property.
Dependence on subcontractors and supply and price of the construction materials
The Group has acquired and will acquire real estate upon which it develops and constructs properties,
or which have existing buildings that require renovation. The Group and Joint Ventures rely mainly on
third party constructors or subcontractors and to some extent on its own construction division for its
construction and development operations. If the Group or Joint Venture cannot enter into
subcontracting arrangements with third party service providers at acceptable terms or at all, the
Group / Joint Venture will incur additional costs which will have an adverse effect on its business. The
competition for the services of quality contractors and subcontractors may cause delays in
construction, therefore exposing the Group to a loss of its competitive advantage.
The Group mainly uses fixed price agreements in its construction operations, both with the customers
and subcontractors. When the Group is acting as a contractor it will be subject to risks relating to the
subcontractors’ financial solidity and ability to meet their obligations. In the development business,
the contractor’s or subcontractor’s failure to perform may result in legal action by the Group to rescind
the construction agreement or to enforce the contractor’s obligations, which may result in a delay of
the project. Furthermore, any delay in the completion of construction may result in an additional cost
which the Group may not be able to pass on to the purchaser of the property.
In addition, the Group’s development and construction operations may face fluctuations in the supply
and market price of some construction materials. The Group’s construction operations require various
bulk construction materials such as steel and cement. The availability of supply, and the market price
for construction materials have varied significantly in Estonia and Latvia in recent years. Due to the
recent growth in the construction industry, there have been shortages in the supply of construction
materials which in turn has increased prices. Management believes that the Group will confront
similar risks in Ukraine, Romania and Bulgaria or in any other country in which the real estate market
is rapidly growing.
If the completion of construction is delayed for any reason and the prices of construction materials
increase, the Group may need to incur additional costs. The Group’s construction division normally
has fixed-price agreements with its customers which limits the Group’s ability to pass on any of the
additional costs incurred as a result of the increase in the construction material prices.
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