Independent Auditor’s Report

To Vonovia SE, Bochum

Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report

Opinions

We have audited the consolidated financial statements of Vonovia SE, Bochum, and its subsidiaries (the Group), which comprise the consolidated statement of financial position as of December 31, 2019, and the consolidated income statement, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the combined management report of Vonovia SE for the financial year from January 1 to December 31, 2019. In accordance with German legal requirements, we have not audited the content of those components of the combined management report specified in the “Other Information” section of our auditor’s report.

In our opinion, on the basis of the knowledge obtained in the audit,

• the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315e (1) HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as of December 31, 2019, and of its financial performance for the financial year from January 1 to December 31, 2019, and
• the accompanying combined management report as a whole provides an appropriate view of the Group’s position. In all material respects, this combined management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our opinion on the management report does not cover the content of those components of the combined management report specified in the “Other Information” section of the auditor’s report.

Pursuant to Section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the combined management report.

Basis for the Opinions

We conducted our audit of the consolidated financial statements and of the combined management report in accordance with Section 317 HGB and EU Audit Regulation No 537/2014 (referred to subsequently as “EU Audit Regulation“) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). We performed the audit of the consolidated financial statements in supplementary compliance with the International Standards on Auditing (ISAs). Our responsibilities under those requirements, principles and standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report“ section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2)(f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the combined management report.

Key Audit Matters in the Audit of the Consolidated Financial Statements

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 financial year from January 1 to December 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters.

Measurement of Investment Properties

Please refer to notes 13 and 28 to the consolidated financial statements as well as the section on opportunities and risks in the combined management report.

The Financial Statement Risk

Investment properties in the amount of € 52.8 billion are reported in the consolidated financial statements of Vonovia as of December 31, 2019. Of this amount, € 44.1 billion is attributable to properties located in Germany, € 2.9 billion to properties located in Austria and € 5.8 billion to properties located in Sweden. Vonovia measures investment properties at fair value in accordance with IAS 40 in conjunction with IFRS 13. In the year under review, increases in fair value of € 4.1 billion were recognized in the consolidated income statement.

Vonovia determines the fair values using internal valuation models. Exceptions to this are the real estate portfolio of Victoria Park AB (publ) (hereinafter “Victoria Park”), Malmo, Sweden, and the real estate portfolio of Hembla AB (publ), Stockholm, Sweden (hereinafter “Hembla”), which was acquired in financial year 2019. The fair values for the real estate portfolio of the BUWOG Group and the properties of the conwert Group not located in Germany were determined using an internal method for the first time in financial year 2019.

The fair values are determined internally by means of a discounted cash flow (DCF) method based on homogeneous valuation units of aggregated commercially related and comparable land and buildings. Further, an independent valuer provides an appraisal, which is used to verify the internal measurements. For the Victoria Park and Hembla real estate portfolios, fair value is determined by independent valuers.

The measurement of investment properties is complex and incorporates numerous assumptions and parameters relevant to measurement that involve considerable estimation uncertainties and judgment. Even minor changes in the assumptions and parameters relevant to measurement may have a material effect on the resulting fair value. The most significant assumptions and parameters are market rents, including the expected trend in rental rates, the planned maintenance costs and discount/capitalization rates. When determining the trend of discount/capitalization rates, Vonovia also takes into account the difference in dynamic of movements in real estate prices compared to rental rates (yield compression).

Due to existing estimation uncertainties and judgments, there is the risk for the consolidated financial statements that the fair values of properties are not within a reasonable range.

Moreover, there is the risk for the consolidated financial statements that the disclosures on investment properties in the notes required pursuant to IAS 40 and IFRS 13 are incomplete and inadequate.

Our Audit Approach

With the involvement of our own property valuation experts, using partly control-based and partly substantive audit procedures, we assessed the accuracy and completeness of the property portfolio data used in the internal valuation models. In addition, we particularly assessed the internal valuation techniques with a view to compliance with IAS 40 in conjunction with IFRS 13, the homogeneity of defined valuation units and the appropriateness of the assumptions and parameters used for measurement. We also used external market data to assess the assumptions and parameters used for measurement, such as the discount/capitalization rates applied, market rents and expected trend in rental rates as well as planned maintenance costs.

Based on partially representative and partially selective, risk-oriented sampling of German and Austrian portfolio valuation units, we conducted on-site visits to assess the condition of the respective properties. We 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 valuers commissioned by Vonovia, who audited the valuation methods used for the appraisal with regard to compliance with IAS 40 in conjunction with IFRS 13, assessed the material assumptions and parameters for measurement, and compared the internal measurements with those of the respective external appraisal.

We also assessed the completeness and adequacy of disclosures on investment properties 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 assumptions and parameters used for valuation of the investment properties are appropriate. The disclosures on investment properties in the notes to the consolidated financial statements pursuant to IAS 40 and IFRS 13 are complete and appropriate.

Impairment Testing of Goodwill

Please refer to note 26 to the consolidated financial statements.

The Financial Statement Risk

Goodwill in the amount of € 1.5 billion is reported in the consolidated financial statements of Vonovia as of December 31, 2019. Goodwill is allocated pursuant to IAS 36 to groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. At Vonovia, these are the regional business areas in the Rental segment and the Value-add and Development segments.

Vonovia conducts annual impairment testing of recognized goodwill in the fourth quarter. As the value of the property portfolio increased during the year and the regional structure in Germany was revised as of July 1, 2019, Vonovia performed an additional impairment test in the second quarter.

For each group of cash-generating units, the carrying amount of the unit is compared with the recoverable amount of the unit. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use.

Vonovia determines value in use by applying a complex calculation model based on a DCF method. In this regard, determination of the discount rate (WACC) is the primary source of judgment apart from cash flow forecasts. As even minor changes in the cash flow forecasts and the WACC may have a material effect on the recoverable amount, the measurement of goodwill is associated with considerable estimation uncertainties.

In the Rental segment, yield compression (i.e., the difference in dynamic of real estate prices compared to rental rates) had a material effect on the value of goodwill, as the carrying amounts of investment properties (which rose faster relative to the projected cash flows) reduced the difference (headroom) between value in use and the carrying amounts of the groups of cash-generating units. In financial year 2019, the appreciation in value of the investment properties and the associated increase in the carrying amounts of all groups of cash-generating units in the Rental segment led to a reduction in headroom, but not to an impairment of goodwill.

The impairment test during the year resulted in impairment losses for five regional business areas totaling € 1,901.0 million. Furthermore, the revision of the regional structure in Germany led to a reallocation of the residual goodwill, which resulted in further impairment in three regional business areas of € 202.5 million.

There is the risk for the consolidated financial statements that an impairment loss is not recognized in the amount required. There is also the risk that the disclosures in the notes to the consolidated financial statements are not appropriate.

Our Audit Approach

With the involvement of our own valuation experts, we assessed the adequacy of Vonovia’s calculation model for the second and fourth quarter, among other things, and reconciled the expected future cash flows assigned to the model to the underlying detailed plan. For the impairment test performed as of the second quarter, this detailed plan was derived from the five-year plan adopted by the Management Board on November 27, 2018, and acknowledged by the Supervisory Board on December 5, 2018, while for the impairment test performed as of the fourth quarter, the detailed plan was derived from the five-year plan adopted by the Management Board on November 27, 2019, and acknowledged by the Supervisory Board on December 5, 2019. We assessed the plausibility of the planning assumptions based on sector-specific market expectations. We also assessed the quality of forecasts used for planning in the past by comparing the target figures with actual figures and analyzing the deviations.

As value in use for the regional business areas in the Rental segment is based to a considerable degree on cash flow forecasts beyond the detailed planning horizon (period of perpetuity), we particularly evaluated capitalized maintenance as well as the sustainable growth rates used for the period of perpetuity against the backdrop of regional differences in the various business areas and based on external market assessments.

With regard to the WACCs determined by Vonovia, we assessed the individual assumptions and parameters used in detail on the basis of available market data and also critically evaluated them as a whole compared to comparable companies in the real estate sector. Due to the material effect of even minor changes in WACC, we focused in particular on the sensitivity analyses conducted by Vonovia as another audit focus area and verified whether impairment losses could arise due to changes of individual WACC assumptions and parameters within an expected range.

We verified (recalculated) the values in use determined by Vonovia and compared them with the corresponding carrying amounts.

Finally, we assessed whether the disclosures in the notes regarding impairment of goodwill are appropriate. This also included an assessment of the appropriateness of disclosures in the notes on sensitivity in the event of reasonably possible changes in key assumptions and parameters used for measurement.

Our Observations

The calculation model used for impairment testing of goodwill is appropriate and in line with the accounting policies to be applied. The Company’s assumptions and parameters used for measurement are within an acceptable range. The disclosures in the notes on impairment-testing of goodwill are appropriate.

Identification and Measurement of Assets and Liabilities Acquired in the Course of Acquisition of Hembla

See notes 3 and 4 to the consolidated financial statements.

The Financial Statement Risk

In financial year 2019, Vonovia acquired 94.1% of the shares in Hembla, largely as part of a share purchase and a public tender offer. The consideration transferred on the date of acquisition was € 1,891.9 million. Taking into account acquired net assets of € 1,147.2 million, goodwill amounts to € 744.7 million.

The acquired identifiable assets and assumed liabilities are usually recognized at fair value pursuant to IFRS 3 on the date of acquisition (November 7, 2019). Vonovia consulted an independent expert for determining and measuring the identifiable assets acquired and liabilities assumed.

The identification and measurement of assets acquired and liabilities assumed is complex and based on assumptions of the Management Board that require judgment. When determining fair value, there is considerable scope for judgment with regard to the measurement of investment properties, which requires judgments and estimates by management.

There is the risk for the consolidated financial statements that the assets acquired and liabilities assumed are identified improperly or measured inaccurately. There is also the risk that the disclosures in the notes to the consolidated financial statements are not complete and accurate.

Our Audit Approach

By involving our valuation experts, we have also assessed the appropriateness of key assumptions and parameters as well as the identification and valuation methods used. To that end, we first gained an understanding of the acquisition by consulting the Management Board and relevant members of staff, both of Vonovia and Hembla, and by assessing the agreement for the share purchase and the public takeover offer. To gain further insights into the business activities as well as economic and legal environment of Hembla, we held discussions with the local auditor. In addition, we assessed the process of identification of assets acquired and liabilities assumed considering our sector knowledge for compliance with the requirements of IFRS 3.

We assessed the competence, professional skills and impartiality of the independent expert engaged by Vonovia. Our other audit procedures focused in particular on the identification of value determinants for the investment properties to be valued, mainly market rents and the expected trend in rental rates, the maintenance costs used and discount/capitalization rates, and also the complete recognition and measurement of non-derivative and derivative financial liabilities. We investigated the valuation methods used for their compliance with the accounting policies.

Finally, we assessed whether the disclosures in the notes regarding the acquisition of Hembla were complete and accurate.

Our Observations

The approach used for identifying and measuring the assets acquired and liabilities assumed is appropriate and in line with the accounting policies to be applied. The key assumptions and parameters are appropriate and they are properly presented in the notes to the consolidated financial statements.

Other Information

Management and the Supervisory Board are responsible for the other information. The other information comprises the following parts of the combined management report, whose content was not audited:

• the non-financial statement, which is included in a separate section of the combined management report, and
• the corporate governance statement referred to in the combined management report.

The other information also includes the other parts of the annual report.

The other information does not include the consolidated financial statements, the combined management report information audited for content and our auditor’s report thereon.

Our opinions on the consolidated financial statements and on the combined management report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information

• is materially inconsistent with the consolidated financial statements, with the information in the combined management report audited for content 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 Management and the Supervisory Board for the Consolidated Financial Statements and the Combined Management Report

Management is responsible for the preparation of consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they have determined 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, management is responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, management is responsible for the preparation of the combined management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a combined management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the combined management report.

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

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatements, whether due to fraud or error, and whether the combined management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the combined management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) and supplementary compliance with the ISAs will always detect a material misstatement. 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 and this combined management report.

We exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatements of the consolidated financial statements and of the combined management report, 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 opinions. 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 controls.
• Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of 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 systems.
• Evaluate the appropriateness of accounting policies used by management and the reasonableness of estimates made by management and related disclosures.
• Conclude on the appropriateness of management’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 the auditor’s report to the related disclosures in the consolidated financial statements and in the combined management report or, if such disclosures are inadequate, to modify our respective opinions. 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 be able 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 present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and on the combined management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.
• Evaluate the consistency of the combined management report with the consolidated financial statements, its conformity with [German] law, and the view of the Group’s position it provides.
• Perform audit procedures on the prospective information presented by management in the combined management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

We communicate with those charged with governance 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 those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with those charged with governance, 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 auditor’s report unless law or regulation precludes public disclosure about the matter.

Other Legal and Regulatory Requirements

Further Information Pursuant to Article 10 of the EU Audit Regulation

We were elected as group auditor at the annual general meeting on May 16, 2019. We were engaged by the Supervisory Board on January 20, 2020. We have been the group auditor of Vonovia SE without interruption since the Company’s IPO in financial year 2013.

We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the Audit Committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

German Public Auditor Responsible for the Engagement

The German Public Auditor responsible for the engagement is Martin C. Bornhofen.

Düsseldorf, February 28, 2020

KPMG AG
Wirtschaftsprüfungsgesellschaft
[Original German version signed by:]

[signature] Ufer
Wirtschaftsprüfer
[German Public Auditor]

[signature] Bornhofen
Wirtschaftsprüfer
[German Public Auditor]