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 2020.
As in 2019, Vonovia’s portfolio has shown very positive development. The demand for apartments in metropolitan areas remains stronger than the supply, reflected in the moderate rise in rent levels. 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 dynamic – despite the coronavirus pandemic. Developments were positive in Berlin as well, in spite of the rent freeze. 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 9.4% increase in the value of our property portfolio compared with the previous year, after adjustments for acquisitions and sales and excluding currency effects. In addition to the internal valuation, the property assets are also assessed by the independent property appraiser CBRE GmbH in Germany and Austria and Savills Sweden AB in cooperation with Malmöbryggan Fastighetsekonomi AB for the portfolio in Sweden. 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.
We are currently observing stable demand for rental apartments and no negative impact on market values as a result of the coronavirus pandemic. Potential effects on future price developments will depend to a considerable degree on how the pandemic progresses and the associated economic conditions, and are impossible to reliably predict at present. Residential real estate could become more significant as a relatively secure form of investment. The demand for residential real estate could, however, also change depending on the duration and extent of a possible recession. Vonovia is keeping a close eye on market developments.
At the end of January 2020, the Berlin House of Representatives passed the Act on Rent Controls in the Housing Sector in Berlin (referred to in short as “rent freeze”). This came into force in February 2020. It remains disputed whether the law is constitutional. Assuming that the rent freeze is found to be constitutional, future rental income or rental development will have to be reduced for the period leading up to, and including, 2025. This could have a negative impact on fair values. Likewise, it cannot be ruled out that declining vacancy rates and fluctuation as well as lower return requirements of investors (yield compression) will subsequently have a compensatory effect on fair values. The potential implications can be estimated via the sensitivities shown in the notes to this report. 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) method. Under the DCF methodology, the expected future income and costs of a residential property are forecasted 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 Value AG, 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, Value AG, Bertelsmannstiftung, Statistics Austria, etc.). The expected sales revenues are derived from historical sale prices as well as market data (e.g., the Austrian Economic Chamber (WKÖ, EHL). 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 € 58,910.7 million as of December 31, 2020 (2019: € 53,316.4 million). The determination of fair values led overall to net income from fair value adjustments of investment properties of € 3,719.8 million (2019: € 4,131.5 million).