Current Risk Assessment

Overall Assessment of the Risk Situation by the Management

A scheduled risk inventory was taken in both the first and second half of the 2018 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 2018. The resulting risk report was presented to the Management Board and the Audit Committee. There were no unscheduled ad hoc risk reports in 2018. The risk situation of the companies acquired in the 2018 fiscal year, BUWOG and Victoria Park, was reviewed as part of the risk inventory taken in the second half of the year and was incorporated into the reporting system.

A total of 141 individual risks were identified for Vonovia in the second half of 2018, 14 more than in 2017. The increase is largely due to the specific risks associated with the new business activities in Austria relating to project development for newly constructed residential properties (Development) as a result of the BUWOG acquisition. As far as the overall assessment of the risk situation is concerned, there was a slight year-on-year increase in the risk assessment for Vonovia in the 2018 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 2018, the Audit Committee approved the risk report submitted by the Management Board.

The following overview shows the top 10 risks in 2018:





Risk category


Net potential impact










Changes to the regulatory framework


Regulatory and legal risks





Recoverability of goodwill


Economic environment and market-related risks





Public image/reputation and customer satisfaction


Economic environment and market-related risks





Incorrect determination of the of our properties


Risks related to business





Incorrect acquisition decisions


Risks related to business





Unfavorable interest rate development


Financial risks





Unfavorable refinancing


Financial risks





Development risks


Risks related to business





Tax risks due to regulatory changes/operational tax risks


Regulatory and legal risks





Construction risks (e.g. fire protection, building materials, etc.)


Risks related to business










The number of risks within the top 10 risks with a high potential net impact came to three risks at the end of 2018, as in 2017. The number of risks with a material potential net impact came to five risks at the end of 2018, as in 2017. The number of risks with a moderate potential net impact came to two risks at the end of 2018, as in 2017.

Overall, Vonovia’s Management Board continues to see no risks to the Group’s survival.

Regulatory and Legal Risks

Risk 1: Vonovia keeps a very close eye on planned changes in the legal framework, particularly with regard to tenancy, construction and environmental law, so that it can react to any binding changes in a timely manner. Any changes in the legal environment that are relevant to our business activities, such as regulations regarding rental amounts/developments, provisions regarding as well as restrictions on modernization opportunities or provisions, that result in the incurrence of costs in the event of a property sale may be detrimental to Vonovia’s business activities.

Risk 9: Changes in the overall tax law environment relating to Vonovia’s operating business or its acquisition strategy, or the incorrect application/implementation of tax law regulations and provisions within the operating business could have an adverse impact on the development of the company’s results. This also includes the tax groups for income tax and VAT purposes established by Vonovia. The fulfillment of the individual tax group requirements is part of regular company tax audits. If these tax groups are not recognized in the last instance, this could result in a significant or high tax burden, plus interest.

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: The acquisitions made have resulted in considerable stated goodwill for Vonovia, 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. This means that it would have a direct impact on the net assets and results of operations, but no direct impact on the company’s liquidity. With regard to possible “triggering events,” we monitor interest rate and real estate value developments in particular, and perform an annual impairment test.

Risk 3: Reputation is an aspect that is crucially important to Vonovia. A poor image is not consistent with Vonovia’s mission statement and could hinder our business activities in local markets. This is why we are committed, at all times, to timely and open communication and direct dialog with all groups who have legitimate interests with regard to conflicts such as the affordability of living space or modernization or new construction projects in the neighborhoods in which our properties are located. We react to justified objections accordingly. 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.

Risks Related to Business

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

Risk 4: Vonovia applies the fair value measurement model. 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 . 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 2018 fiscal year, the appraisal of the German and Austrian properties was performed by CBRE GmbH, while the Swedish properties were assessed by Savills Sweden AB. The results of the internal appraisal have been reported for the portfolio in Germany, excl. BUWOG. The results of the external property appraiser deviate from the internal valuation result by less than 0.1%. The results of the external property appraiser have been applied to the balance sheet for the portfolio in Austria and Sweden, as well as for BUWOG’s portfolio in Germany. These results were reviewed by the in-house valuation department beforehand.

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 integration of BUWOG could result in additional project development risks for Vonovia due to the development business. Project development work is focusing on Berlin, Hamburg and Vienna. Real estate development activities are associated with significant risks as a matter of course. These risks are manifold. By way of example, incorrect market and competitive assessments, delays in the planning approval process, incorrect location and project development plans, contamination risks, requirements linked to preservation orders or environmental requirements, subcontractor default risks, warranty issues, construction defects or defective construction materials or structural components can give rise to further risks.

In projects involving the extensive use of general contractors and subcontractors, default scenarios can result in financial risks and legal liability. To counterbalance this, corresponding master agreements are signed with the general contractors and subcontractors, and the market and subcontractors are monitored continuously. Cost, performance and deadline checks are also performed on a regular basis for the development projects in order to identify risks in a timely manner and counteract their effects.

Risk 10: Insufficient information regarding the materials used in the construction of the residential properties or the implementation of new or updated structural regulations, e.g. fire protection measures, 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 performing inspections on its properties, conducting regular building safety checks taking all of the construction law provision into account, checking for any hazardous materials and 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, and as a standardized integration process.

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.

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) mean that there is still increased demand for bonds issued by continental European issuers. As a result, refinancing conditions and property valuations remain attractive.

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, on the financial system as a whole. We concur with a large number of analysts and market participants and expect receptive borrowing markets and attractive financing conditions to continue due to an economic outlook that remains attractive, albeit slightly less so than in the previous year, and based on the levels of liquidity that are still available. Given the global nature of the borrowing markets, we do not currently expect the ongoing Brexit negotiations to have any long-term impact in this regard either. With a level of debt that is consistently in the Pfandbrief-eligible range and their investment grade , Vonovia’s debt instruments will remain a sought-after investment even if liquidity levels drop.

An escalation in the potential trade wars could put a damper on the macroeconomic climate and the global growth outlook, possibly leading to negative repercussions on the capital markets. The reputation of German real estate stocks as a safe haven could be enhanced as a result of Brexit if investors opt to pull capital out of real estate stocks in the UK and seek alternative investment opportunities.

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 rating, the balanced maturity profile of the financial liabilities, the versatility of the financing instruments that we can use 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 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 [44] (Cash Flow Hedges and Stand-alone Interest Rate Swaps).

Other Risks

Vonovia could be affected by other risks that do not fall into the categories described above. By way of example, Vonovia could be exposed to risks resulting from residual pollution, including mining subsidence damage, soil conditions or wartime ordnance. Moreover, 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. These properties are predominantly located 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.

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.

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.
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.
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.
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.
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.