Current Risk Assessment

Overall Assessment of the Risk Situation by the Management

As part of the risk control system that has been implemented, a scheduled risk inventory was taken in both the first and second half of the 2017 fiscal year based on a risk scoring system in line with the internal risk guidelines. The risk scoring model used in the previous year was applied unchanged in 2017. The resulting risk report was presented to the Management Board and the Audit Committee. There were no unscheduled ad hoc risk reports in 2017.

A total of 127 individual risks were identified for Vonovia in the second half of 2017, 14 more than in 2016. As far as the overall assessment of the risk situation is concerned, however, there was no year-on-year change in the risk situation for Vonovia in the 2017 fiscal year. From today’s point of view, Vonovia’s Management Board has not identified any risks which the company cannot suitably combat or which may jeopardize the Group’s results of operations, net assets and/or financial position. Both our business model and our diversified capital market instruments ensure that we have the greatest possible degree of independence from economic fluctuations.

At its ordinary meeting for the fourth quarter of 2017, the Audit Committee approved the risk report submitted by the Management Board.

The following overview shows the top 10 risks in 2017:





Risk category


Net potential impact










Amendments to tenancy laws/regulatory framework


Regulatory and legal risks





Public image/reputation and customer satisfaction


Economic environment and market-related risks





Recoverability of Goodwill


Economic environment and market-related risks





Incorrect determination of the fair value of our properties


Risks related to business





Incorrect aquisition decisions


Risks related to business





Unfavorable interest rate development


Financial risks





Unfavorable refinancing


Financial risks





Deferred fire protection measures


Risks related to business





Risk affine management behavior


Risks related to business





Financial and legal liability for use of subcontractors


Risks related to business



The number of risks within the top 10 risks with a high potential net impact rose came to three risks at the end of 2017, as in 2016. The number of risks with a material potential net impact rose from four risks at the end of 2016 to five risks at the end of 2017. The number of risks with a moderate potential net impact fell from three risks at the end of 2016 to two risks at the end of 2017. Overall, Vonovia’s Management Board continues to see no risks to the Group’s survival. The main risk factors have been identified as changes in the legal framework, reputation/customer satisfaction and changes in interest rate developments.

Regulatory and Legal Risks

Risk 1: Vonovia closely follows planned amendments to laws, as our business activities are above all subject to tenancy and construction law, as well as tax and environmental law. Any adverse changes in the legal environment, such as regulations regarding rental amounts and developments, provisions regarding as well as restrictions on modernization opportunities or provisions (including taxes), that result in the incurrence of costs in the event of a property sale that may be detrimental to Vonovia’s business activities.

In order to be able to pick up on potential changes in the overall statutory framework early on, Vonovia is involved in active dialog with policymakers and other stakeholders. Vonovia is also represented in associations and monitors the legislative procedure and recent court decisions on a regular basis.

Economic Environment and Market-Related Risks

Risk 2: Vonovia’s reputation is of crucial importance for establishing business connections. A bad reputation may make it more difficult to let our residential units or lead to the termination of rental contracts. This is why we are committed, for example, to open communication and direct dialog with all groups who have legitimate interests with regard to conflicts, such as the affordability of living space or new construction projects, in the neighborhoods in which our properties are located. Furthermore, on the financing side, there is the risk that the raising of capital could be impaired. Vonovia takes reputation and customer satisfaction very seriously and counteracts this risk with a large number of measures. For example, customer satisfaction is measured on a quarterly basis and is monitored using the performance indicator in order to identify potential problems at an early stage. Improvements to the process workflows and quality initiatives increase customer satisfaction. Active public relations work helps to communicate the efforts made to improve customer satisfaction and enhance Vonovia’s reputation.

Risk 3: The acquisitions made have resulted in considerable stated goodwill, which may be associated with certain risks. The value of this stated goodwill depends largely on the development of market interest rates, average market and sector developments as well as the cash flow from the Group that can be generated in the future by the cash-generating units. Any impairment in this goodwill would be recognized in the income statement, meaning that it would have a direct impact on the company’s net assets and results of operations. With regard to possible triggering events, we monitor interest rate developments, in particular, and perform an annual impairment test.

Risks Related to Business

A whole range of risks arise for Vonovia in connection with the performance of its business activities.

Risk 4: The determination of the fair values of our housing stocks, for example, is subject to assumptions that may deviate from our current expectations. Should, for example, the estimate of the microlocation of the buildings and the quality of the macrolocation deteriorate or the current low interest rate level start to increase, the fair value of our entire real estate portfolio would decrease. As far as our investment properties are concerned, changes in value are recognized in the income statement as increases or decreases in value. This means that they have a direct impact on the company’s net assets, financial position and results of operations. We counter the associated risk of error with a separate department for internal determination of fair value. This department works in line with the standards that apply to professional property appraisers. Furthermore, our fair values are checked or calculated on neutral terms by professional, external and independent valuation companies that, in turn, work in line with professional rules and regulations. In the 2017 fiscal year, the assessment was once again performed by CBRE GmbH.

Risk 5: Risks can arise for Vonovia in connection with acquisition decisions. These risks can include, for example, excessive purchase prices, unexpected cases of liability, greater indebtedness, higher interest expenses, and challenges with respect to integrating acquisitions into the procedural landscape and achieving anticipated synergies. Furthermore, portfolios or real estate companies that can be acquired in the future may not develop as favorably as expected.

By applying complex, quality-assured investment models during the investment decision process, we counter the risk of uneconomic real estate acquisitions. These models not only take the purchase price and the financing cost into consideration but also regional scenarios for regular and the development of rents. We also use the in-depth market knowledge of our local regional managers to assess potential acquisition portfolios.

Vonovia’s response to the risk associated with procedural integration is a systematic, structured and tried and test integration process.

Risk 8: The insufficient information available regarding the implementation of fire protection measures that currently need to be taken could give rise to business risks, especially in connection with the acquisition of real estate portfolios. This is because a full appraisal and integration of larger real estate portfolios, in particular, requires time. Vonovia counters this risk by developing fire protection concepts for gradual implementation in large-scale projects, involving experts to optimize the structural measures and performing regular assessments on special buildings. Implementation is based on clearly defined instructions and responsibilities, as well as a standardized integration process.

Risk 9: In principle, there is the risk that the management may make incorrect, particularly risky decisions as a result of insufficient information or lack of knowledge of the facts. Vonovia counters this risk with clearly formulated instructions for action and rules governing powers and responsibilities. Responsibility for the business is decentralized to permit better local decision-making.

Risk 10: The extensive use of subcontractors for maintenance/modernization and construction work means that subcontractor defaults are a possibility, giving rise to financial risks and the risk of legal liability. To counterbalance this, corresponding master agreements with subcontractors are signed and the market and subcontractors are monitored continuously.

Financial Risks

Risk 6/7: The expansive monetary policy pursued by the European Central Bank (ECB) and the decision made by the United Kingdom (UK) to leave the European Union (EU) have resulted in increased demand for bonds issued by continental European issuers. As a result, the refinancing conditions and property valuations have continued to show positive development. The outcome and implications of the UK’s exit from the EU are impossible to forecast at the moment. In particular, however, the less favorable economic outlook could have a negative impact on both general credit demand and the quality of existing credit exposures. Both could encumber the banking sector and, as a result, the financial system as a whole.

To limit the financial risks, we continuously monitor the financial markets and are also in constant contact with many different market players. Furthermore, we continually evaluate all financing options available on the capital and banking markets. We expect to be able to refinance the necessary volumes by making use of all financing instruments in the future as well. This is based on our investment grade , the balanced maturity profile of the financial liabilities and our standing as a regular and reliable issuer on the capital market.

Our external loans are normally subject to loan conditions that are customary on the market () which, on the one hand, require adherence to defined key financial ratios but can also, for example, restrict the sale of properties or prescribe minimum selling prices. Vonovia also has to adhere to the conditions required to maintain the credit rating awarded by rating agencies, which also relate mainly to compliance with certain key financial ratios. As a result, adherence to the relevant conditions is monitored and reported on an ongoing basis.

Some of our borrowings are loans granted by promotional banks, which limit rent increases and thus our business options. Here, we pay strict attention to compliance with all covenants but use any scope available to us.

As part of the financial risks, we are also exposed to a liquidity risk. Our liquidity management is based on daily cash management of our bank accounts, a weekly financial flexibility status and rolling liquidity planning on a monthly basis, allowing for the relevant restrictions. The regular positive cash flows from our core business do not indicate any particular liquidity risk in the forecast period.

Overall, as of the reporting date, Vonovia SE has sufficient liquid funds and potential financing options to guarantee the Vonovia Group’s ability to pay at all times.

The liabilities with variable interest rates expose the Group to a cash-effective interest rate risk. The company uses derivative financial instruments in order to limit or eliminate these risks. The purpose of these financial instruments is to hedge interest rate risks in connection with existing loans and they may never be used for speculation. For a description of the derivative financial instruments, we refer to the notes to the consolidated financial statements, specifically note [40] (Cash Flow Hedges and Stand-alone Interest Rate Swaps).

Other Risks

Vonovia could also be exposed to risks from residual pollution, including mining subsidence damage, soil conditions, wartime ordnance and contaminants in building materials as well as possible building code violations or risks resulting from climate change. Vonovia is the owner and/or property manager of a large number of buildings in the Ruhr area which are situated in the area of near-surface mine workings where the overburden layers are only thin, predominantly in the Essen/Bochum/Dortmund region. These mine workings may represent risks of damage to the surface and/or structures (e. g., traffic routes, buildings, etc.). Vonovia counters this economic and liability risk by having inspections of all buildings in the area of near-surface mining works systematically conducted by external experts. On the basis of the inspection findings and the opinions of external experts, the properties classified as subject to risks are examined for mining damage, which is immediately rectified where necessary. Proof of stability and public safety is then confirmed in an expert opinion.

Vonovia generally performs regular checks on the building safety of the real estate portfolio, taking all of the building regulations into account and checking for any hazardous substances. We do not believe that climate change gives rise to any significant direct risks at the moment, e. g., caused by extreme weather conditions with heavy rain and the potential for floods.

At the time this report was drawn up, there were no risks in connection with future development that were identified as potentially posing a risk to the survival of Vonovia SE, a major company included in the scope of consolidation or the Group as a whole. Compared with the previous year, the estimated probability of occurrence and/or possible financial impact of some risk areas/some opportunity areas has increased slightly. Nevertheless, there are no fundamental changes to the risk or opportunity situation on the whole.

Modernization Measures
Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e. g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.
CSI (Customer Satisfaction Index)
The CSI is determined at regular intervals by means of systematic customer surveys and reflects how our services are perceived and accepted by our customers. The CSI is determined on the basis of points given by the customers for our properties and their neighborhood, customer service and commercial and technical support as well as maintenance and modernization management.
Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.
Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.
Requirements specified in loan agreements or bond conditions containing future obligations of the borrower or the bond obligor to meet specific requirements or to refrain from undertaking certain activities.