Fair Values
Major market developments and valuation parameters that have an impact on the fair values of Vonovia are assessed every quarter. In addition to the revaluations performed during the year, the entire portfolio was revalued at the end of 2019.
As in 2018, Vonovia’s portfolio has shown very positive development. The demand for apartments in metropolitan areas remains stronger than the supply, pushing rent levels up considerably. Rental growth is also being helped along by the extensive investments made in the energy-efficient modernization of our buildings and improvements to the fittings in our apartments. At the same time, the residential real estate market remains particularly dynamic. Since the return expectations of property buyers have dropped further, the increase in market values is ahead of rent developments (yield compression). The positive effects resulting from the increased demand, modernization and yield compression have resulted in a considerable 11.8% increase in the value of our property portfolio compared with the previous year, after adjustments for acquisitions and sales. In addition to the internal valuation, the property assets are also assessed by the independent property appraisers CBRE GmbH in Germany and Austria, Savills Sweden AB in cooperation with Malmöbryggan Fastighetsekonomi AB for Victoria Park’s portfolio and Savills Sweden AB for Hembla’s portfolio. The market value resulting from the CBRE expert opinion deviates from the internal valuation result by less than 0.1%. The result from the external valuation was adopted for the Swedish portfolio.
In June 2019, the Berlin State Government reached an agreement on a white paper for a rent freeze, the plan being to freeze rents in the city for a period of five years, with a small number of exceptions. A corresponding act was passed in January 2020 and entered into force in February 2020. It is disputed whether the law is constitutional. Several complaints have already been announced, including before the Federal Constitutional Court, and a judicial review can be expected. There is a risk that, depending on the constitutionality of the rent freeze in particular, future rental income or rental development could be reduced, with a knock-on effect on fair values. The potential implications can be estimated via the sensitivities shown in the notes to the consolidated financial statements. Likewise, it cannot be ruled out that a decline in the vacancy rate and fluctuation as well as lower return requirements of investors (yield compression) will have a compensatory effect on fair values. There is no evidence of any impact on fair values at present.
Regular Determination of the Fair Values Creates a Transparent Valuation of the Company’s Properties
Calculating and showing the fair values provides a control parameter inside the company and also helps to make the development of the value of our assets transparent to people outside the company.
The fair value of the portfolio of residential properties was determined, in accordance with IAS 40 and IFRS 13, on the basis of the International Valuation Standard Committee’s definition of market value.
Vonovia, in principle, measures its portfolio on the basis of the discounted cash flow (DCF) procedure. The Austrian portfolio was valued by the in-house valuation department for the first time in 2019. Under the DCF methodology, the expected future income and costs of a residential property are forecast and discounted to the date of valuation as the net present value. The income in the DCF model mainly comprises expected rental income (current in-place rent, market rents as well as their development) taking vacancy losses and also sales revenues for an Austrian subportfolio into account. The expected rental income is derived for each location from the latest rent indices and rent tables (including empirica, Immobilienverband Deutschland (IVD) and the Austrian Economic Chambers (WKÖ)) as well as from studies on spatial prosperity (Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), Prognos, empirica, Bertelsmannstiftung, the Austrian statistical office, Statistik Austria, etc.). The expected sales revenues are derived from historical sale prices as well as market data (e. g., the Austrian Economic Chambers (WKÖ)and EHL Wohnen GmbH). On the cost side, maintenance expenses and administrative costs are taken into account. Further cost items are, for example, ground rents, non-allocable ancillary costs, rent losses and, in Austria, selling costs. All cost items are inflated in the reporting period. Modernization measures carried out in the housing stocks are factored in by decreasing the current maintenance expenses and adjusting market rents. The commercial properties in the portfolio are mainly small commercial units for the supply of the local residential environment. Different cost approaches were used to those for residential properties, and the capitalized interest rates were adjusted to reflect the market specifics.
The recognition and valuation of investment properties are explained in detail in the notes to the consolidated financial statements (chapter [D28] Investment Properties).
The fair value of Vonovia’s real estate portfolio comprising residential buildings, commercial properties, garages and parking spaces as well as project developments, existing areas with construction potential and land areas with inheritable building rights granted was € 53,316.4 million as of December 31, 2019 (2018: € 44,239.9 million). The determination of fair values led overall to net income from fair value adjustments of investment properties of € 4,135.5 million (2018: € 3,517.9 million).