Economic Development of Vonovia SE

(Reporting on the basis of the German Commercial Code HGB)

Fundamental Information

In 2017, Vonovia SE moved its registered headquarters from Düsseldorf to Bochum. It is now entered in the commercial register of Bochum Local Court under HRB 16879. Vonovia was established as Deutsche Annington Immobilien GmbH on June 17, 1998, with its registered headquarters in Frankfurt am Main, to serve as an acquisition vehicle for the purchase of residential properties by financial investors. Following further successful acquisitions over the course of time, it now forms the Vonovia Group together with its subsidiaries and is Germany’s leading residential real estate management company. Vonovia SE performs the function of the management holding company within the Vonovia Group.

The description of the company’s net assets, financial position and results of operations is based largely on the reporting of the Vonovia Group. The net assets, financial position and results of operations of Vonovia SE as the management holding company are largely determined by the assets of the Group companies and their ability to make positive contributions to earnings and generate positive cash flows in the long run. The company’s risk profile is therefore largely the same as the Group’s.

The preceding reporting for the Group of Vonovia SE therefore also expresses the company’s position.

The Vonovia SE annual financial statements have been prepared in accordance with the provisions of the German Commercial Code (HGB) taking into account the supplementary regulations of the German Stock Corporation Act (AktG). As a listed company, it is classed as a large corporation.

The annual and consolidated financial statements as well as the combined management report are published in the Federal Gazette (Bundesanzeiger).

Development of Business in 2017

Takeover of the former conwert Immobilien Invest SE

On March 23, 2017, Vonovia successfully completed a voluntary public takeover offer for the shares in the former conwert Immobilien Invest SE (subsequently shortened to conwert), which has its registered headquarters in Vienna, Austria, with the acquisition of a majority stake. On August 29, 2017, Vonovia implemented what is known as a squeeze-out process under the Austrian Squeeze Out Act (Gesellschafter-Ausschlussgesetz) at an extraordinary Annual General Meeting held in Vienna, based on which all of the outstanding shares held by the remaining minority shareholders were transferred to Vonovia as the sole shareholder based on a cash settlement that was calculated in an expert opinion. This resulted in the shares no longer being listed on the Vienna Stock Exchange. The squeeze-out was entered in the Vienna commercial register with effect from October 25, 2017. The change in legal form, turning the company into a limited liability company (GmbH), was entered in the Vienna commercial register on December 23, 2017.

Merger With Gagfah S. A.

Pursuant to the resolution passed by the annual general meeting of Gagfah S. A. on June 27, 2017 and its entry in what was still, at that time, the commercial register of Düsseldorf on July 12, 2017, Gagfah S. A. was merged with Vonovia SE based on an expert measurement. This merger with Vonovia resulted in the transfer of all shares held by the former minority shareholders. In return, these shareholders received a settlement in the form of shares in Vonovia, as calculated by an expert. The merger was associated with merger gains totaling € 479.1 million.

Takeover offer for BUWOG AG

On December 18, 2017, Vonovia published notice of its intention to make a voluntary public takeover offer, in accordance with the Austrian Takeover Act (ÜbG), to the shareholders of BUWOG AG (subsequently: BUWOG), Vienna, Austria, for the acquisition of all shares in BUWOG. Vonovia and BUWOG, whose shares are listed under ISIN AT00BUWOG001 in the official trading segment (Prime Market) of Wiener Börse AG, on the regulated market (Prime Standard) of the Frankfurt Stock Exchange and on the Main Market of the Warsaw Stock Exchange, have signed what is known as a business combination agreement. Based on the takeover offer, all BUWOG shareholders will be offered € 29.05 in cash for each share in BUWOG.

The corresponding offer document was submitted to the Austrian Financial Market Authority on January 18, 2018. The public takeover offer was published on February 5, 2018. This means that the offer period for the first tender phase ends on March 12, 2018.

The stated goal of the BUWOG takeover is to consolidate the complementary real estate portfolios of both companies and merge Vonovia’s housing stock (around 350,000 apartments) with that of BUWOG (around 49,000 apartments). The integration of BUWOG is expected to allow synergy potential to be exploited, in particular by way of the joint administration and management of the German and Austrian housing units, the further modernization of the portfolio, the expansion of the value chain and the optimization of cost structures. The Vonovia and BUWOG portfolios are a good geographical fit for each other and also complement each other strategically. The successful takeover of conwert, in March 2017 allowed Vonovia not only to expand its real estate portfolio in Germany, but also to add properties in Austria to what had, to date, been a purely German portfolio for the first time. The takeover of BUWOG would therefore allow Vonovia to acquire not only a complementary real estate portfolio in Germany, but also an attractive real estate portfolio in Austria in order to merge these portfolios. The joint German and Austrian real estate portfolio of Vonovia and BUWOG would be strengthened considerably as a result of this merger.

Results of Operations, Net Assets and Financial Position

Results of Operations of Vonovia SE

The company regularly generates income from the charging of the services it provides, from income from investments in the form of dividend distributions from Group companies and from the transfer of profits. Profit-and-loss transfer agreements exist with, among other entities, the service companies, which themselves generate income by charging the real estate companies for the services they have provided. The income from investments collected is based on the net profit of the subsidiaries that is eligible for distribution, which is, in turn, calculated based on the accounting standards set out in the German Commercial Code. The main difference between these standards and the IFRS accounting principles lies in the fact that, under IFRS accounting, the fair value principle has more of an impact than the cost principle does under HGB accounting. In the consolidated financial statements under the IFRS, the properties are remeasured at periodic intervals. Under the HGB, the fixed assets are stated at amortized cost, taking scheduled depreciation into account. The capitalization regulations also vary.

Expenses relate largely to personnel expenses and administrative expenses associated with the management holding function, as well as to losses to be compensated for in connection with profit-and-loss transfer agreements.

The financial result is governed by the Group financing.

The 2017 fiscal year was characterized, among other things, by the takeover made to the shareholders of conwert and the subsequent integration work. By contrast, the 2016 fiscal year was influenced to a considerable degree by the public takeover offer made to the shareholders of Deutsche Wohnen SE.

The main factor impacting earnings in 2017, however, was the profit from the merger with Gagfah S. A. in the amount of € 479.1 million. In addition, the winding up of the co-investor structure associated with Gagfah had a positive impact on the result in the amount of € 21.4 million. Additional company law measures encumbered the result with € 56.0 million. The settlement of management services is lower than in 2016 because certain special effects had to be charged on to Group companies in the previous year.

The contribution of Deutsche Wohnen SE resulted in the flow of € 12.4 million in dividends to the company in the fiscal year. The company also received dividends in connection with the distribution made by conwert in the amount of € 45.5 million.

The net result from profit and loss transfer agreements fell by € 93.0 million from € 98.0 million to € 5.0 million due to negative non-recurring effects in the fiscal year as well as positive non-recurring effects from subsidiaries in the previous year.

Personnel expenses came to € 36.6 million in 2017, up on the prior-year figure of € 33.7 million due primarily to pension expenses. Purchased services are lower in 2017 in a year-on-year comparison due to the reorganization of the provision of personnel within the Vonovia Group.

Depreciation and amortization increased due to volume-related aspects.

Net financial expenses improved considerably due to the more advantageous base interest rate and the lower indebtedness at Vonovia Finance B. V., Amsterdam/The Netherlands.

Tax expenses rose by € 7.3 million to € 8.9 million largely due to trade tax effects.

Vonovia SE closed the 2017 fiscal year with net income of € 398,830,574.65

Income Statement

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Net Assets and Financial Position of Vonovia SE

The company’s non-current assets of € 11,421.6 million are naturally characterized by financial assets. The increase in 2017 is largely due to the acquisition of the shares in conwert in the amount of € 1,662.1 million and the merger with Gagfah S. A. at a fair value of € 1,252.9 million.

Vonovia SE only has appreciable cash flows from investing activities when acquisitions are made.

The intangible assets and property, plant and equipment increased due to IT investments.

Net current assets including net liquidity, however, are governed by the Group financing. The Group’s net lending/borrowing position led to charges of a total of € 1,143.3 million to Vonovia SE in 2017. The company was also hit by a change in the amount of € 1,212.7 million in the “net liquidity from cash and cash equivalents and bank liabilities,” which corresponds to an overall change in Vonovia SE’s net financial position of € 2,356.0 million. The increase in liabilities to financial institutions relates to the subsidized development loans taken out with the European Investment Bank (EIB) and the German government-owned development bank Kreditanstalt für Wiederaufbau (KfW), which Vonovia SE passed on to its subsidiaries. All in all, the change in the net financial position result primarily from the acquisition of the conwert Group and the assumption of its group financing, as well as the distribution of the cash component of the dividend.

Provisions fell by € 4.9 million, mainly due to the drop in other provisions, which more than compensated for the increase in pension and tax provisions.

Equity increased in 2017 due to the profit for the period as well as the non-cash capital increase as part of the conwert takeover and the merger with Gagfah S. A. On the contrary, equity dropped as a result of the cash dividend contribution.

For the 2017 fiscal year, a dividend distribution of € 640,333,090.32 is to be resolved at the Annual General Meeting to be held on May 9, 2018. This corresponds to € 1.32 per share.


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Employees of Vonovia SE

At the end of the 2017 fiscal year, an average of 198 people were employed by Vonovia SE (2016: 206 employees).

Opportunities and Risks for Vonovia SE

The likely development of Vonovia SE in the 2018 fiscal year depends to a considerable extent on the development of the Group as a whole and its opportunity and risk situation. This situation is set out in the Group’s opportunity and risk report, meaning that the statements set out there in regard to the opportunity and risk situation of the Group also apply to the annual financial statements of Vonovia SE, prepared in accordance with HGB, where the risks can have an impact on the valuation of long-term financial assets and on the amount of the results of subsidiaries collected/compensated for.

Forecast for Vonovia SE

Since the company’s net assets, financial position and results of operations are determined solely by the ability of the Group companies to make positive earnings contributions and generate positive cash flows in the long term, we refer at this point to the forecast report for the Group. The most important financial performance indicator for the annual financial statements of Vonovia SE is the annual result.

The company’s earnings for 2017 are well in the black and were influenced primarily by the profit from the merger of Gagfah S. A. and Vonovia SE. They were also, however, impacted by the other negative special effects referred to above. Leaving the merger gains out of the equation, the company’s earnings for the 2017 fiscal year are on a par with the 2016 level, as predicted.

The results for the 2018 fiscal year will in turn be characterized by the results of subsidiaries collected/compensated for on the basis of income from investments and profit-and-loss transfer agreements, income from services, personnel and administrative expenses and the financial result. As far as the 2018 fiscal year is concerned, we expect expenses to increase again due to the public takeover offer made to the shareholders of BUWOG and the resulting integration expenses. Earnings will also be encumbered by structuring measures under company law. By contrast, special effects seen in 2017 will cease to apply.

All in all, we expect the result for the 2018 fiscal year to again be on a par with the figure seen in 2017 without special effects.

It is still generally planned for Vonovia SE to distribute approx. 70% of the Group’s performance indicator, to the shareholders as a dividend, which would correspond to a dividend of € 1.32 per share for the 2017 fiscal year.

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.
The profit or loss for the period to reflect the adjusted profit or loss from sales; period adjustments from assets held for sale; specific effects that do not relate to the period, are non-recurring or do not relate to the objective of the company; the net income from fair value adjustments of investment properties; depreciation and amortization; deferred and prior-year current taxes (tax expenses/income); transaction costs; prepayment penalties and commitment interest; valuation effects on financial instruments; the unwinding of discounting for provisions, particularly provisions for pensions, and other prior-year interest expenses and income that are not of a long-term nature.