13 Investment Properties

The acquisition of 2,340 apartments in the greater Stockholm and Gothenburg regions by Vonovia from Akelius Residential Property was completed on April 1, 2019.

Fair Values

Vonovia determines fair value in accordance with the requirements of IAS 40 in conjunction with IFRS 13. We refer to the detailed information set out in the consolidated financial statements for 2018.

Vonovia values its portfolio using a method known as the discounted cash flow (DCF) method. Under the DCF methodology, the expected future income and costs of a property are forecast over a period of ten years and discounted to the date of valuation as the net present value. In addition, the terminal value of the property at the end of the ten-year period is determined using the expected stabilized net operating income and again discounted to the date of valuation as the net present value. In addition, the valuation of the portfolio in Austria is based on the assumption of sales strategies for the recurring sales of apartments for a subportfolio. Attainable income is recognized in line with the calculation procedure and reported in the appropriate period in the DCF model. In order to take the sales potential into account, the DCF detailed period is extended to 100 years for the Austrian portfolios and no terminal value is used. For the portfolio in Sweden, the result of the external appraiser Savills Sweden AB in cooperation with Malmöbryggan Fastighetsekonomi AB was applied to the interim balance sheet. The fair values of the Victoria Park portfolio were also calculated using a DCF procedure.

Due to the market momentum recognized across Germany in the first half of 2019, Vonovia decided to perform a new valuation on the 20 German locations that account for the largest fair value shares. The list of the locations to be valued was extended to include six additional German locations in which considerable changes in value had been observed, as well as Vienna and the portfolio in Sweden. The selection accounts for more than two-thirds of the total Vonovia fair value. The fair values for these revalued locations (excl. the Swedish portfolio) were calculated as of June 30, 2019 by the in-house valuation department on the basis of the methodology described above. The valuation for Vienna was performed by the in-house valuation department for the first time as of June 30, 2019. The property assets in Germany and Austria are additionally assessed by the independent property appraiser CBRE GmbH. The market value resulting from the external review deviates from the internal valuation result by less than 0.1%.

For the part of the portfolio that was not revalued, the valuation from the end of 2018 is applied again, with updates to reflect capitalization. The result of the valuation of the external appraiser CBRE GmbH is taken as a basis for the subportfolios of the BUWOG and Conwert portfolios that were not valued internally for the purposes of the annual financial statements.

The real estate portfolio of Vonovia is to be found in the items investment properties, property, plant and equipment (owner-occupied properties), real estate inventories, contractual assets and assets held for sale. The fair value of the portfolio comprising residential buildings, commercial properties, garages and parking spaces, project developments, as well as undeveloped land and any hereditary building rights granted was € 47,449.0 million as of June 30, 2019 (Dec. 31, 2018: € 44,239.9 million). This corresponds to a net initial yield for the developed land (overall portfolio including Austria and Sweden) of 3.2% (Dec. 31, 2018: 3.4%). For Germany, this results in an in-place-rent multiplier of 22.7 for the portfolio (Dec. 31, 2018: 21.5) and a fair value of € 1,789 per m² (Dec. 31, 2018: € 1,677). The in-place-rent multiplier for the Austrian portfolio comes to 24.1 (Dec. 31, 2018: 23.6) with a fair value of € 1,394 per m² (Dec. 31, 2018: € 1,346), while the in-place-rent multiplier for Sweden amounts to 16.0 (Dec. 31, 2018: 14.6) with a fair value of € 1,738 per m² (Dec. 31, 2018: € 1,563).

The material valuation parameters for the investment properties (level 3) in the real estate portfolio are as follows as of June 30, 2019, broken down by regional markets:

The inflation rate applied to the DCF procedure is 1.6%. Net income from the valuation of investment properties amounted to € 2,258.7 million in the first half of 2019 (Dec. 31, 2018: € 3,517.9 million). For the Austrian portfolio, a sales strategy with an average selling price of € 1,985 per m² was assumed for 51.7% of the properties.

Explanatory information on the prior-year figures can be found in the 2018 Annual Report of Vonovia SE.

Sensitivity Analyses

The sensitivity analyses performed on Vonovia’s real estate portfolio show the impact of the value drivers influenced by the market. Those influenced in particular are the market rents and their development, the amount of recognized administrative and maintenance expenses, cost increases, the vacancy rate and interest rates. The effect of possible fluctuations in these parameters is shown separately for each parameter according to regional market in the following.

Interactions between the parameters are possible but cannot be quantified owing to the complexity of the interrelationships. The vacancy and market rent parameters, for example, can influence each other. If rising demand for housing is not met by adequate supply developments, this can result in lower vacancy rates and, at the same time, rising market rents. If, however, the rising demand is compensated for by a high vacancy reserve in the location in question, then the market rent level does not necessarily change.

Changes in the demand for housing can also impact the risk associated with the expected payment flows, which is then reflected in adjusted amounts recognized for discounting and capitalized interest rates. The effects do not, however, necessarily have to have a favorable impact on each other, for example, if the changes in the demand for residential real estate are overshadowed by macroeconomic developments.

In addition, factors other than demand can have an impact on these parameters. Examples include changes in the portfolio, in seller and buyer behavior, political decisions and developments on the capital market.

The table below shows the percentage impact on values in the event of a change in the valuation parameters. The absolute impact on values is calculated by multiplying the percentage impact by the fair value of the investment properties.