16 Investment Properties

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 2019.

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. Furthermore, 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 revenues are calculated based on sales prices for comparable apartments (market approach) and are 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 applied. For the portfolio in Sweden, the result of the external appraiser Savills Sweden AB (partly in cooperation with Malmöbryggan Fastighetsekonomi AB) was applied to the interim balance sheet. The fair values of the portfolio in Sweden were also calculated using a DCF procedure.

Due to the market momentum recognized in the first half of 2020, Vonovia decided to perform a new valuation of 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 includes the lion’s share of the portfolio, accounting for more than two-thirds of the total fair value. The property assets in Germany and Austria are also 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 2019 is applied again, with updates to reflect capitalization.

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.

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 inheritable building rights granted was € 55,698.6 million as of June 30, 2020 (Dec. 31, 2019: € 53,316.4 million). This corresponds to a net initial yield for the developed land (overall portfolio including Austria and Sweden) of 3.0% (Dec. 31, 2019: 3.1%). For Germany, this results in an in-place-rent multiplier of 24.4 for the portfolio (Dec. 31, 2019: 23.5) and a fair value per m² of € 1,992 (Dec. 31, 2019: € 1,893 per m²). The in-place-rent multiplier for the Austrian portfolio comes to 25.3 (Dec. 31, 2019: 24.7) with a fair value per m² of € 1,496 (Dec. 31, 2019: € 1,455 per m²), while the in-place-rent multiplier for Sweden amounts to 17.2 (Dec. 31, 2019: 17.1) with a fair value per m² of € 1,938 (Dec. 31, 2019: € 1,899 per m²).

The inflation rate applied to the DCF procedure is 1.6%. Net income from fair value adjustments of investment properties amounted to € 1,812.3 million in the first half of 2020 (Dec. 31, 2019: € 4,131.5 million). For the Austrian portfolio, a sales strategy with an average selling price of € 2,151 per m² was assumed for 53.7% of the properties.

Explanatory information on the prior-year figures can be found in the 2019 Annual Report of Vonovia SE.

Sensitivity Analyses

The sensitivity analyses performed on Vonovia’s real estate portfolio show the impact of value drivers dependent on market developments. 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 deviations 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 an adequate development of supply, 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 cash flows, which is then reflected in adjusted discounting and capitalizing 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 housing stock, 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.