21 Intangible Assets

Customer relationships and similar values

The brand name “BUWOG Group” for the development business was identified within the framework of the purchase price allocation for BUWOG as a material asset with indefinite useful life and recognized at a value of € 66.6 million.

Goodwill

Goodwill came to € 2,842.4 million as of December 31, 2018. Compared with December 31, 2017, goodwill has increased by € 228.9 million. The change is due, first, to an increase resulting from the acquisition of BUWOG in 2018 in the amount of € 713.6 million, the addition from the Victoria Park acquisition and associated currency effects of € 196.5 million in total. Second, the € 3,517.9 million increase in the value of the real estate portfolio in the 2018 fiscal year increased the carrying amount of the groups of cash-generating units (regions) affected by the valuation, which in turn led to impairment losses being recognized on the goodwill allocated to the regions in the amount of € 681.2 million.

The allocation of goodwill to the regional business areas and to the Value-add and Development segments was performed based on the two indicators that reflect the synergy effects expected to be generated as a result of the business combination: “direct planned synergies” and “fair values.”

In the fourth quarter, the mandatory annual impairment test was performed. As part of the impairment test and in accordance with IAS 36.19, first the value in use was calculated based on the Management Board-approved detailed plan with a planning period of five years. This was derived from the five-year plan at Group level approved by the Management Board and the Supervisory Board. With regard to the regional business areas of the Rental segment, the main drivers behind the results of the five-year plan are the increase in gross rental income by an average of 4.0% every year, as well as the planned vacancy rate on the level of 2018 at the end of the detailled planning period.

Developments in the Value-add segment are characterized primarily by the extension of existing business areas (craftsmen’s organization, multimedia, management of residential property, smart metering, etc.). On the other hand, there is an increase in operating expenses, taking into account the rate of inflation. The development in these values is in line with past experiences of business model development. The cash flows from the last detailed planning year were derived to calculate the perpetual annuity.

For the Development segment, which is still being set up, a six-year plan was derived from the five-year plan approved by the Management Board and the Supervisory Board at Group level to reflect a “steady state.” The main drivers of the results in the Development segment are the investment costs, the number of units sold and the sales margin that can be generated.

The growth rate for the CGUs of the rental segment was calculated regionally on the basis of actual rents and limited to 1% for the segment as a whole. A constant growth rate of 1% was assumed for the Value-add and Development segments.

The main parameters for calculating the value in use are the sustainable growth rate, the weighted average cost of capital (WACC) and the expected cash flows.

The weighted average cost of capital before tax is based on the risk-free interest rate calculated as a three-month average using the Svensson method, a market risk premium and a levered beta. The levered beta and the equity ratios used are determined on the basis of a peer comparison. In addition, country-specific cost surcharges were calculated for the Austria business area, the Sweden business area and the Development business area. The main parameters are shown in the following table:

Groups of Cash-generating Units

The results of the assessment confirm the value of the goodwill for the areas West, Central, Development, Sweden and the Value-add segment. Any need for impairment of € 681.2 million was calculated for the North, East, Southeast, South and Austria business areas. In these regions, the further increase in property values due to noticeable yield compression resulted in carrying amounts for the relevant group of CGUs that exceed the recoverable amount.

The impairment loss was recognized in the consolidated income statement under “depreciation and amortization.” The value in use for the North area amounts to € 6.4 billion, with a value of € 4.9 billion for the East area, € 3.7 billion for the Southeast area, € 6.1 billion for the South area and € 1.9 billion for the Austria area.

An increase in the cost of capital will result in the following need for impairment:

Any negative deviation of the values planned for the key assumptions would lead to a further impairment in the North, South and Southeast business areas. If the planned sustainable growth rate were to decline by 0.25 percentage points, the goodwill remaining would be written off entirely in the North, Central and South business areas, while impairment losses of up to € 350 million would be incurred in the Southeast business area.