28 Investment Properties

Accounting Policies

The additions in 2021 include € 526.6 million (2020: € 435.5 million) in production costs for new construction activities.

The total amount reported for investment properties as of December 31, 2021 includes right-of-use assets from recognized hereditary building rights (including right-of-use assets arising from leased and sublet care homes since first-time consolidation of Deutsche Wohnen as of September 30, 2021) in the amount of € 1,689.1 million (2020: € 1,433.2 million). In this respect, we also refer to chapter [E43] Leases.

The majority of € 1,685.3 million is attributable to right-of-use assets from hereditary building rights (2020: € 1,431.9 million). This includes right-of-use assets of € 80.9 million (2020: € 76.3 million) relating to the Spree-Bellevue (Spree-Schlange) property in Berlin. The property has been leased from DB Immobilienfonds 11 Spree-Schlange von Quistorp KG until 2044. The lease agreement includes an obligation to pay compensation for loss of use as agreed by contract. At the end of 2028, each fund subscriber is entitled to return his share to the property fund at a fixed redemption price. If all of the fund investors make use of this option, Vonovia is obliged to acquire the property at a fixed purchase price after deduction of borrowings. If more than 75% of the shares are returned in this way, Vonovia has a call option for the purchase of all fund shares.

For the investment properties encumbered with land charges in favor of various lenders, see chapter [E41] Non-derivative Financial Liabilities.

Directly Attributable Operating Expenses

Rental income from investment properties amounted to € 2,571.9 million during the fiscal year (2020: € 2,288.5 million). Operating expenses directly relating to these properties amounted to € 317.6 million during the fiscal year (2020: € 260.4 million). These include expenses for maintenance, ancillary costs that cannot be passed on to the tenants, personnel expenses from the caretaker and craftsmen’s organizations, and income from the capitalized internal expenses. The capitalized internal expenses relate to the work performed by the Group’s own craftsmen’s organization and the management costs for major modernization projects.

Long-Term Leases

Vonovia as a lessor has concluded long-term leases on commercial properties. These are non-cancelable leases. The minimum future lease receipts from these leases are due as follows:

Fair Values

The value of the entire portfolio of residential properties was determined on the basis of the International Valuation Standard Committee’s definition of market value. Portfolio premiums and discounts, which can be observed when portfolios are sold in market transactions, were not included. Nor were time restrictions in the marketing of individual properties. Vonovia determines fair value in accordance with the requirements of IAS 40 in conjunction with IFRS 13.

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 property are forecasted over a detailed period and discounted to the date of valuation as the net present value. The detailed period for the German portfolio is ten years. Due to the particular market situation in Austria and in order to reflect the extensive Austrian rent restrictions, a sales scenario involving the recurring sales of apartments is assumed for a subportfolio. In order to present these sales in the correct accounting period, the detailed period for the Austrian DCF model has been extended to 100 years.

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 into account. In Austria, it also includes sales revenues from a subportfolio. The expected rental income is derived for each location from the latest rent indices and rent tables (including Value AG, IVD, 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, the Federal Statistical Office of Germany, Statistik Austria, etc.). The expected sales revenues are derived from historical sale prices as well as market data (e.g., WKÖ, EHL).

On the cost side, maintenance expenses and administrative costs are taken into account. In Germany, these are taken into account in accordance with the II. Berechnungsverordnung and inflated in the reporting period. The II. Berechnungsverordnung (BV) is the German Regulation on Calculations for Residential Buildings in accordance with the Second Housing Construction Law, which stipulates how economic viability calculations for homes are to be performed. These cost approaches are also transferred to the Austrian market. Further cost items are, for example, ground rents, non-allocable ancillary costs, rent losses and, in Austria, selling costs. Modernization measures carried out in the housing stocks are factored in by decreasing the current maintenance expenses and adjusting market rents.

On this basis, the forecast cash flows are calculated on an annual basis and discounted to the date of valuation as the net present value. In addition, the terminal value of properties in the German portfolio 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. The discount rate applied reflects the market situation, location, type of property, special property features (e.g. hereditary building rights, rent restrictions), the yield expectations of a potential investor and the risk associated with the forecast future cash flows of the property. The derived market value is therefore the result of this net present value and includes standard market transaction costs such as real estate transfer taxes, agent and notary costs. As the detailed period in the Austrian DCF model has been extended to 100 years in order to present the sales scenarios in the correct accounting period, no terminal value is applied here.

The commercial properties in the portfolio are mainly small commercial units for the supply of the local residential environment. Different cost approaches are used to those for residential properties, and discount rates were adjusted to reflect the market specifics.

The valuation is, in principle, performed on the basis of homogeneous valuation units. These meet the criteria of economically cohesive and comparable land and buildings. They include:

• Geographical location (identity of the microlocation and geographical proximity)
• Comparable types of use, building class, construction year class and condition of property
• Same property features such as rent restrictions, hereditary building rights and full or part ownership

The Vonovia portfolio also contains project developments, existing areas with construction potential and land areas with inheritable building rights granted. Project developments that are to be managed within Vonovia’s own portfolio are measured using the cost approach until the construction work is complete. Following completion of construction work, they are measured at fair value using the DCF procedure described above. Existing areas with construction potential are valued using a comparable method on the basis of the local standard land value evaluated. Deductions are taken into account in particular for the readiness for construction and potential use as well as for likelihood of development and the development situation. Inheritable building rights granted are valued in the same way as the property portfolio using a DCF method. The input parameters here are the duration and amount of ground rent and the value of the land.

The right-of-use assets from leasehold contracts are recognized at their fair value. The fair value of the leasehold contracts corresponds to the present value of the standard market leasehold fee payments up until the end of the term of the hereditary building right in question. These are calculated based on the current amount of the ground rent. In order to calculate the present value, the leasehold fee payments are discounted using a property-specific interest rate.

Vonovia determined the fair values of its real estate portfolio in Germany and Austria as of December 31, 2021 in its in-house valuation department on the basis of the methodology described above. Vonovia’s real estate portfolio, excluding Deutsche Wohnen, was also valued by the independent appraiser CBRE GmbH. The market value resulting from the external report deviates from the internal valuation result by 0.1%.

The Deutsche Wohnen real estate portfolio was also valued by the independent appraiser Jones Lang LaSalle SE. The market value resulting from this external report deviates from the internal valuation result by 0.6%.

For the portfolio in Sweden, the result of the external appraiser Savills Sweden AB was applied. The fair values for the Swedish portfolio were also calculated using a DCF method that is generally comparable to the procedure used by Vonovia, as explained above, but takes account of specific features of the Swedish real estate market. These include, by way of example, the reflection of the inclusive rents received (including costs for heating and water, among other things) and the explicit inclusion of expenses billed as ancillary expenses in Germany, for example, as operator costs on the owner’s side.

Deutsche Wohnen’s project developments were measured by Jones Lang LaSalle SE using the residual value method as of the cut-off date of September 30, 2021. These values were, as part of what was still the provisional purchase price allocation, reviewed and adopted and were updated to reflect the current reporting date.

For the care facility portfolio of Deutsche Wohnen as of the reporting date December 31, 2021 the result of the external appraiser W&P Immobilienberatung GmbH was applied.

The contractually fixed remuneration for the valuation report is not linked to the valuation results.

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, contract 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 € 97,845.3 million as of December 31, 2021 (Dec. 31, 2020: € 58,910.7 million). This corresponds to a net initial yield for the developed land of Vonovia, excluding Deutsche Wohnen, of 2.6% (total portfolio including Sweden and Austria; Dec. 31, 2020: 2.9%). For Germany, this results in an in-place-rent multiplier of 28.0 for the Vonovia portfolio excluding Deutsche Wohnen (Dec. 31, 2020: 25.4) and a fair value per m² of € 2,401 (Dec. 31, 2020: € 2,099). The in-place-rent multiplier and fair value for the Austrian portfolio come to 26.5 and € 1,674 per m² (Dec. 31, 2020: 25.5 and € 1,570 per m²), while the values for Sweden come to 20.6 and € 2,475 per m² (Dec. 31, 2020: 17.4 and € 2,090 per m²).

For the developed land in the subportfolio of Deutsche Wohnen real estate, the net initial yield stands at 2.1%, which represents a fair value of € 2,894 per m² and an in-place rent multiplier of 33.5.

The Act on Rent Controls in the Housing Sector in Berlin passed by the Berlin House of Representatives was declared unconstitutional and, as a result, null and void by the German Federal Constitutional Court on April 15, 2021. The development then observed in Berlin in the period leading up to December 31, 2021 has been included in the year-end valuation for 2021.

The material valuation parameters for the investment properties (Level 3) in the real estate portfolio are as follows as of December 31, 2021 broken down by regional markets/shown separately for the portfolio of Deutsche Wohnen:

The inflation rate applied to the valuation procedure comes to 1.6% (including Sweden). For the Austrian portfolio, a sales strategy with an average selling price of € 2,282 per m² was assumed for 52.0 % of the portfolio. The inflation rate applied to the valuation of the subportfolio of Deutsche Wohnen real estate comes to 1.5%.

Net income from the valuation of investment properties amounted to € 7,393.8 million in the 2021 fiscal year (Dec. 31, 2020: € 3,719.8 million).

Sensitivity Analyses

The sensitivity analyses performed on Vonovia’s real estate portfolio show the impact of value drivers dependent upon 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 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, then 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.