Independent Auditor’s Report

To Vonovia SE, Düsseldorf

Report on the Audit of the Consolidated Financial Statements

Opinion on the Consolidated Financial Statements

We have audited the consolidated financial statements of Vonovia SE, Düsseldorf, and its subsidiaries (the Group or Vonovia), which comprise the consolidated statement of financial position as at December 31, 2016, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the fiscal year from January 1, 2016, to December 31, 2016, and notes to the consolidated financial statements, including a summary of significant accounting policies.

Pursuant to Section 322 (3) sentence 1 half sentence 2 HGB (“Handelsgesetzbuch”: German Commercial Code), we state that, in our opinion, based on our knowledge obtained in the audit, the accompanying consolidated financial statements comply in all material respects with IFRS as adopted by the EU and the supplementary requirements of German commercial law pursuant to Section 315a (1) of the German Commercial Code [HGB], and give a true and fair view of the net assets and financial position of the Group as at December 31, 2016, as well as the results of operations for the fiscal year from January 1, 2016, to December 31, 2016, in accordance with these requirements.

Pursuant to Section 322 (3) sentence 1 half sentence 1 HGB, we state that our audit of the consolidated financial statements has not led to any reservations with respect to the propriety of the consolidated financial statements.

Basis for Opinion on the Consolidated Financial Statements

We conducted our audit in accordance with Section 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the German Institute of Public Auditors [IDW] as well as in supplementary compliance with International Standards on Auditing (ISA). Our responsibilities under those standards and additional guidelines are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements” section of our report. We are independent of the Group in accordance with the requirements of German commercial law and the rules of professional conduct, and we have fulfilled our other ethical responsibilities applicable in Germany in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the fiscal year from January 1, 2016 to December 31, 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters.

Measurement of investment properties

See notes 5, 8 and 21 to the consolidated financial statements and chapter of “opportunities and risks” in the Combined Management Report.

Financial Statement Risk

Investment properties of EUR 27.0 billion are reported in the consolidated financial statements of Vonovia as of December 31, 2016. Vonovia measures investment properties at in accordance with IAS 40 and IFRS 13. In 2016, an increase in fair value of EUR 3.2 billion was recognized in the consolidated income statement.

Vonovia determines the fair value of its investment properties with an internal valuation model. The fair value of all residential and commercial properties is determined as a discounted cash flow (DCF) for homogeneous valuation units of commercially related and comparable land and buildings. In addition, an independent valuation expert provides an appraisal, which is used to corroborate the internal valuations.

The valuation of the investment properties is based on several assumptions, which are subject to considerable estimation uncertainty and judgment. Even minor changes in these parameters may have a material effect on the resulting fair values. The most significant parameters in the reporting year were market rents and discount rates. Their volatility reflects the changing dynamic in real estate prices and rental rates (yield compression), which is the main driver for the rise in fair value as of December 31, 2016, compared to the prior year.

Due to the outlined estimation uncertainties and judgments, there is a risk for the consolidated financial statements that the fair values changes recognized in profit or loss are not within an acceptable range.

Moreover, IAS 40 and IFRS 13 require numerous note disclosures of which completeness and accuracy is to be assured.

Our Response

Our audit procedures include, in particular, an assessment of the internal valuation method used with a view to compliance with IAS 40 in conjunction with IFRS 13, the homogeneity of defined valuation units, the accuracy and completeness of data used for real estate portfolios, as well as appropriateness of the valuation parameters used, such as discount capitalization rates, market rents per square meter and planned maintenance costs per square meter.

We viewed and inspected a sample of valuation units, which were partially selected randomly and partially subjectively based on risk criteria, on site, and also verified the valuations conducted by Vonovia by comparing them with our own calculations based on the standardized capitalization model pursuant to the German Real Estate Appraisal Regulation [ImmoWertV].

We were satisfied with the qualification and objectivity of the external valuation expert commissioned by Vonovia, audited the valuation method used for the appraisal with regard to compliance with IAS 40 in conjunction with IFRS 13 and compared the external appraisal with the internal measurements (valuation).

We also audited the completeness and adequacy of disclosures required in the notes to the consolidated financial statements pursuant to IAS 40 and IFRS 13.

Our Observations

The valuation method implemented by Vonovia is appropriate and suitable for measuring fair value in compliance with IFRS. The measurements (appraisal) of the external valuer support the measurements of Vonovia. The fair value recognized for investment properties of EUR 27.0 billion is appropriate based on the assumptions made. The underlying assumptions reflect current market conditions.

The disclosures in the notes to the consolidated financial statements pursuant to IAS 40 and IFRS 13 are complete and accurate.

Presentation and measurement of non-derivative and derivative financial instruments

See notes 5, 15, 16, 22, 32, 33 and 37 to the consolidated financial statements

Financial Statement Risk

As of December 31, 2016, Vonovia held non-derivative financial liabilities at a total value of EUR 13.4 billion. In financial year 2016, new loans amounted to EUR 2.6 billion, while repayments totaled EUR 4.2 billion.

In addition, derivative financial assets of EUR 184.9 million and derivative financial liabilities of EUR 76.6 million were set up as of the reporting date. Part of the derivative financial liabilities refer to rights to adjust the value of non-controlling interests in GAGFAH S.A. As the price and volatility of GAGFAH shares is no longer determinable on liquid markets, Vonovia estimates these parameters relevant for valuation. The remaining derivative financial instruments refer to interest rate and currency hedging of existing non-derivative financial liabilities.

Some of the hedging instruments are designated for hedge accounting. Hedge accounting requires comprehensive documentation in compliance with accounting standards, which in addition to the designation of hedged items and hedging instruments in particular must include the prospective and retrospective measurement of hedge effectiveness based on the hypothetical derivative method.

The risk for the consolidated financial statements consists of judgment inherent in the measurement of the financial instruments as well as adequate presentation of financial instruments, taking into account their designation for hedge accounting.

In addition, IFRS 7 and IFRS 13 require extensive and detailed disclosures in the notes to the consolidated financial statements.

Our Response

For non-derivative financial instruments, we verified the subsequent foreign currency valuation of US dollar bonds based on the ECB fixing as of the reporting date. For new non-derivative financial liabilities, we verified the cut-off procedures for ancillary financing charges and the effective interest method by means of our own calculations.

We verified the calculation of net present values of derivatives with our own valuation model by calculating expected cash flows based on market interest rates and subsequently discounting them. We then assessed the credit risk of net present values based on credit default swaps, ratings and quoted liquid bonds and determined their fair value from a combination of net present value and credit risk, which served as a reference value for the fair value determined by Vonovia. We also took account of fair value measurement for determining the effectiveness of derivatives in hedge accounting. With regard to documentation of hedge accounting, we assessed whether it is in compliance with the requirements of IAS 39.

Furthermore, we assessed whether the parameters relevant for evaluating the rights to adjust the value of non-controlling interests in GAGFAH S.A. were properly determined and corroborated the evaluation based on our own Black Scholes calculation.

We audited quantitative information in particular for consistency with the audit evidence obtained for the recognition and measurement of financial instruments as well as completeness and adequacy of disclosures in the notes.

Our Observations

The non-derivative and derivative financial instruments are properly disclosed in the consolidated financial statements. The assumptions and parameters used for the measurement of non-derivative and derivative financial instruments are reasonable. The disclosures in the notes to the consolidated financial statements pursuant to IFRS 7 and IFRS 13 are complete and accurate.

Impairment testing of goodwill

See notes 5 and 19 to the consolidated financial statements and chapter of “opportunities and risks” in the Combined Management Report

Financial Statement Risk

Goodwill of EUR 2.7 billion is reported in the consolidated financial statements of Vonovia as of December 31, 2016. Goodwill is allocated pursuant to IAS 36 to groups of cash-generating units that are expected to benefit from synergies of prior business combinations in which goodwill arose.

Vonovia tests existing goodwill for impairment on an annual basis as of the closing date (December 31). For each group of cash-generating units, the carrying amount (including the goodwill) is compared with the recoverable amount. The recoverable amount is the higher of its fair value less costs to sell and its value in use. Vonovia determines the value in use by means of the discounted cash flow method. As the value in use of all groups of cash-generating units exceeded the carrying amount of the unit as of December 31, 2016, it was not necessary to also determine the fair value less costs to sell.

When determining value in use, determination of the discount rate (WACC) is the primary source of judgment together with cash flow forecasts. As even minor changes in WACC may have a material effect on the recoverable amount, the measurement of goodwill is affected with considerable estimation uncertainties.

In the operating segment “Rental”, the increasing yield compression observed in financial year 2016 (i.e. the difference in dynamic of real estate prices compared to rental rates) had a material effect on the recoverability of goodwill. Specifically, the fair value of the investment properties outgrew the expected values based on cash flow projections. As a consequence, the headroom, i.e. the difference between value in use and the carrying amount of the groups of cash-generating units, decreased.

In addition, extensive disclosures in the notes are required according to IAS 36.

Our Response

In addition to auditing the adequacy of the calculation model and the validations performed by Vonovia, our audit procedures included, in particular, a comparison of expected future cash flows with the five-year plan adopted by the executive board as well as checking the planning data for plausibility based on sector-specific market expectations.

As for all groups of cash-generating units defined by Vonovia in the property management segment, value in use is based to a considerable degree on cash flow forecasts beyond the five-year planning horizon (period of perpetuity), we critically evaluated in particular the reinvestment rate per square meter of living space as well as sustainable growth rate used for the period of perpetuity.

With regard to the WACC determined by Vonovia, we audited the individual parameters used in detail and also critically evaluated the WACC as a whole. Due to the material effect of even minor changes in WACC, we focused in particular on the sensitivity analyses conducted by Vonovia and verified whether impairment losses would arise with the change of individual WACC parameters within an expected range.

We also audited the completeness and adequacy of disclosures required in the notes to the consolidated financial statements pursuant to IAS 36.

Our Observations

We agree with the conclusion of Vonovia’s impairment testing that no impairment loss had to be recognized in financial year 2016. The WACC used by Vonovia was properly determined. The other parameters used are in line with sector-specific market expectations. The disclosures in the notes to the consolidated financial statements pursuant to IAS 36, including those on sensitivities, are complete and accurate.

Other Information in the Annual Report

The Executive Board of Vonovia SE is responsible for the other information. The other information comprises the Annual Report, except for the consolidated financial statements, the Combined Management Report of Vonovia SE and our auditor’s report thereon.

Our audit opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Executive Board and the Supervisory Board for the Consolidated Financial Statements

The Executive Board of Vonovia SE is responsible for the preparation of consolidated financial statements which comply with IFRS as adopted by the EU and the supplementary requirements of German commercial law pursuant to Section 315a (1) HGB, and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. Furthermore, the Executive Board is responsible for such internal control as the Executive Board determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Executive Board is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Executive Board either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion on the consolidated financial statements. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the German Institute of Public Auditors [IDW] as well as in supplementary compliance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Section 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the German Institute of Public Auditors [IDW] as well as in supplementary compliance with ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Executive Board.
  • Conclude on the appropriateness of the Executive Board’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or the Combined Management Report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the net assets and financial position as well as the results of operations of the Group in accordance with IFRS as adopted by the EU and the supplementary requirements of German commercial law pursuant to Section 315a (1) HGB.
  • Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Supervisory Board, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report on the audit of the consolidated financial statements unless law or regulation precludes public disclosure about the matter.

Other Legal and Regulatory Requirements

Report on the Audit of the Combined Management Report

Opinion on the Combined Management Report

We have audited the Combined Management Report of Vonovia SE, Düsseldorf, for the financial year from January 1, 2016 to December 31, 2016.

In our opinion, based on our knowledge obtained in the audit, the accompanying Combined Management Report as a whole provides a suitable view of the Group’s position. In all material respects, the Combined Management Report is consistent with the consolidated financial statements, complies with the German statutory requirements and suitably presents the opportunities and risks of future development.

Our audit has not led to any reservations with respect to the propriety of the Combined Management Report.

Basis for Opinion on the Combined Management Report

We conducted our audit in accordance with Section 317 (2) HGB and German generally accepted standards for the audit of management reports promulgated by the German Institute of Public Auditors [IDW]. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of the Executive Board and the Supervisory Board for the Combined Management Report

The Executive Board of Vonovia SE is responsible for the preparation of the Combined Management Report, which as a whole provides a suitable view of the Group’s position, is consistent with the consolidated financial statements, complies with the German statutory requirements and suitably presents the opportunities and risks of future development. Furthermore, the Executive Board is responsible for such arrangements and measures (systems) as the Executive Board determines are necessary to enable the preparation of the Combined Management Report in compliance with the requirements of German commercial law applicable pursuant to Section 315a (1) HGB and for providing sufficient and appropriate evidence for the statements in the Combined Management Report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the Combined Management Report.

Auditor’s Responsibilities for the Audit of the Combined Management Report

Our objectives are to obtain reasonable assurance whether the Combined Management Report as a whole provides a suitable view of the Group’s position, as well as, in all material respects, is consistent with the consolidated financial statements and our knowledge obtained in the audit, complies with the German statutory requirements, and suitably presents the opportunities and risks of future development and to issue an auditor’s report that includes our opinion on the Combined Management Report.

As part of an audit, we examine the Combined Management Report in accordance with Section 317 (2) HGB and German generally accepted standards for the audit of management reports promulgated by the IDW, we draw attention to the following:

  • The audit of the Combined Management Report is integrated into the audit of the consolidated financial statements.
  • We obtain an understanding of the arrangements and measures (systems) relevant to the audit of the Combined Management Report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these arrangements and measures (systems).
  • We perform audit procedures on the prospective information presented by the Executive Board in the Combined Management Report. Based on sufficient and appropriate audit evidence, we hereby, in particular, trace the significant assumptions used by the Executive Board as a basis for the prospective information and assess the reasonableness of these assumptions as well as the appropriate derivation of the prospective information from these assumptions. We are not issuing a separate opinion on the prospective information or the underlying assumptions. There is a significant, unavoidable risk that future events will deviate significantly from the prospective information.
  • We are also not issuing a separate opinion on individual disclosures in the Combined Management Report; our opinion covers the Combined Management Report as a whole.

Responsible Auditor

The engagement partner on the audit resulting in this independent auditor’s report is Martin Bornhofen.

Essen, March 3, 2017

KPMG AG

Wirtschaftsprüfungsgesellschaft

Ufer
Wirtschaftsprüfer
[German Public Auditor]

Bornhofen
Wirtschaftsprüfer
[German Public Auditor]

Fair Value
Valuation pursuant to IAS 40 in conjunction with IFRS 13. The estimated value of an asset. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.