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Development of the Economic Environment

Two years after the beginning of the pandemic, Russia’s war against Ukraine is creating new challenges for the EU economy. The economic outlook for the European economy before the outbreak of the war foresaw a long and robust expansion phase. However, the European Commission now expects lower growth and higher inflation, particularly in 2022. In addition, the outlook could be further hampered by an escalation of the war, a sudden halt of the supply of energy, or a further slowdown of economic activity in the USA or China. According to the Federal Statistical Office (Destatis), the German economy started 2022 with slight GDP growth (GDP in first quarter of 2022 +0.2% compared with the previous quarter) despite the difficult global economic conditions. While GDP in Sweden decreased slightly during the same period (-0.8% compared with the previous quarter), OECD data shows that the increase in Austria was comparatively strong at 1.5% compared with the previous quarter. According to the OECD Economic Outlook (preliminary version) of June 2022, GDP growth of 1.9% in Germany, 2.2% in Sweden and 3.6% in Austria are expected in 2022.

Despite the war in Ukraine, the labor market continued to develop favorably in May. However, the large-scale registration of Ukrainian refugees had a strong influence on unemployment and underemployment in Germany in June. According to the German Federal Employment Agency (Bundesagentur für Arbeit), the unemployment rate based on the total civilian labor force in June 2022 fell by 0.5 percentage points year-on-year to 5.2% (not adjusted for seasonal work). The Ukrainian refugee migration is likely to have increased the unemployment rate by 0.3 percentage points. According to Statistics Sweden, the unemployment rate in Sweden in May 2022 was 8.5%, 1.3 percentage points lower than in the previous year. According to national calculations by the Austrian Public Employment Service (AMS), the unemployment rate in Austria in June 2022 was 5.5% and thus 1.5 percentage points lower than in the previous year. Based on respective national definitions, the average unemployment rate expected in 2022 is 5.1% for Germany (IfW Kiel), 7.6% in Sweden (National Institute of Economic Research) and 6.3% in Austria (WIFO).

Measured against the national Consumer Price Index (CPI), inflation increased further compared to the previous year and likely amounted to 7.6% in Germany, 8.7% in Sweden and 8.7% in Austria in June 2022. This development is being driven by considerably higher energy prices, which have risen in particular since the beginning of the war in Ukraine, but also by recent noticeable increases in food prices. The average inflation rates in 2022 are expected to be somewhat lower. Based on respective national definitions, the expected consumer price index increase is 7.4% in Germany (IfW Kiel), 6.8% in Sweden (National Institute of Economic Research) and 7.8% in Austria (WIFO).

In June, the European Central Bank (ECB) announced the first interest rate hike in more than ten years. The key interest rates for the main refinancing rate will increase by 50 basis points as of July 27, 2022. The ECB ceased to purchase bonds as of July 1, 2022. The high inflation rate also led the Swedish Riksbank to increase the policy rate, first in May 2022 to 0.25% and then to 0.75% at the beginning of July. In the second half of the year, the Riksbank will also purchase fewer bonds than initially decided. Further increases of key interest rates or the policy rate could ensue over the further course of the year. For example, in Germany Qualitypool, which is part of the Hypoport network, reports that the upward trajectory of the average best interest rates for construction financing since the beginning of the year has continued to the end of the month following a short break in early June.

The housing markets in Germany, Sweden and Austria have proven to be robust during the coronavirus pandemic. Rents continue to increase; empirica reports that, across Germany, quoted rents were 5.3% higher on average over all years of construction in the second quarter of 2022 (new construction 5.5%) than in the same quarter of the previous year. Further rent increases are likely in 2022. According to “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (“Hyresgästföreningen”), 81% of all rents for 2022 had been negotiated as of early April. The average rent increase until that point was 1.71%. Measured against the index for actual rental payments for primary residences as part of the consumer price index, rents in Austria have also seen an overall slight increase since the beginning of the year following a dip over the course of 2021.

Residential property ownership continued to become more expensive compared to the previous year. The empirica price index for condominiums in Germany (all years of construction) increased by 9.2% in the second quarter of 2022 compared to the same period of the previous year (new construction 10.5%). The experts at BayernLB expect a noticeable slowdown of the positive price momentum in Germany over the course of 2022. According to Svensk Mäklarstatistik, prices for tenant-owned apartments (Bostadsrätter) in Sweden increased by 2.0% in June 2022 compared with the same month of last year. However, the price development most recently recorded dips. The values of the current residential real estate price index of the Austrian central bank (OeNB) on the basis of new and used condominiums and single-family residences show an increase in Austria in the first quarter of 2022 of 12.3% compared to the previous year. According to estimates by Raiffeisen Research from March of this year, the second half of the year could show less momentum than the first. Not least due to the widening of the gap between purchase prices and rents, the empirica bubble index for Germany showed a moderate to high risk for 342 out of 400 administrative districts and self-governing cities in the first quarter of 2022. In addition to those factors having a negative impact on demand, however, factors that are helping to stabilize demand and prices are also currently at play, for example, immigration or the dwindling supply of new-build properties. The deviation of the trend for residential real estate prices in Austria from the development of the factors included in the OeNB’s fundamental price indicator has accelerated further, suggesting that the residential real estate market is increasingly overheating. Despite the recent dampers on prices, experts currently assess the risk of a real estate bubble in Sweden as being low.

The populations of Germany, Sweden and Austria grew in 2021. There is still a shortage of apartments in many large cities and urban areas. Meanwhile, construction activity declined in Germany. According to Destatis, only 293,393 apartments were completed in 2021 (2020: 306,376). The German federal government set itself the goal of building 400,000 new apartments per year in Germany. In the wake of Russia’s war against Ukraine, the German real estate industry expects up to 1.29 million refugees and short-term demand for up to 500,000 additional apartments. Boverket estimates that approximately 63,400 apartments have to be built per year in Sweden by 2030. In 2021, only around 53,000 apartments were completed. According to Bank Austria, residential construction activity in Austria has largely addressed the marked increase in the demand for homes in recent years. However, gaps are likely to be found primarily in the sector comprising low-cost rental apartments in metropolitan areas. In light of the aftermath of the COVID-19 pandemic and the impact of the war in Ukraine, the construction industries now face higher prices, disrupted supply chains and actual or looming material shortages. In addition, Germany and Austria are suffering from a shortage of skilled labor. DB Research most recently reported positive signs for Germany at the end of June in the form of dropping commodity prices and waning material and staff shortages.

The German residential investment market showed a conservative first half of 2022. According to CBRE, the transaction volume amounted to € 7.7 billion and was thus below the average for the first half-year of each of the last five years. While prime yields increased in the face of the interest rate turnaround, average yields for existing and newly built properties remained stable. According to Newsec, the volume in the residential investment market in Sweden in the first half of 2022 came to approximately SEK 34.9 billion and was thus 7.5% lower than in the previous year. According to EHL, the Austrian real estate investment market saw a transaction volume in the first half of the year of approximately € 2 billion. The share of institutional residential projects amounted to approximately 19% and was thus lower overall than in the same period of the previous year.

Housing policy developments in the first half of the year in Germany included the decision at the end of May to introduce a rent cap in Dresden and Leipzig, and changes to the Federal Funding for Efficient Buildings (BEG). After it once again became possible to apply for BEG renovation programs starting in February, BEG subsidies for new buildings were also reintroduced in April, with amended subsidy conditions. Furthermore, the German cabinet approved a draft bill for dividing CO2 costs between landlords and tenants. In Sweden, investment subsidies for rental apartments were discontinued at the turn of the year. Applications that are not granted this year depend on there being a political mandate for additional funds in 2023. In Austria, indicative and category-based rents were increased as of April 1, 2022. Moreover, in the first half of the year a revision of real estate law was announced that would make the person who hires an agent responsible for paying their service fee.

Adjusted EBITDA Development

The Adjusted EBITDA Development includes the gross profit from the development activities of “to sell” projects (income from sold development projects less production costs) and the gross profit from the development activities of “to hold” projects (fair value of the units developed for the company’s own portfolio less incurred production costs) less the operating expenses from the Development segment.

Adjusted EBITDA Deutsche Wohnen

The Adjusted EBITDA Deutsche Wohnen is calculated by deducting the operating expenses of the Deutsche Wohnen segment and the carrying amount of properties sold from the segment revenue of the Deutsche Wohnen Group.

Adjusted EBITDA Recurring Sales

The Adjusted EBITDA Recurring Sales compares the proceeds generated from the privatization business with the fair values of assets sold and also deducts the related costs of sale. In order to disclose profit and revenue in the period in which they are incurred and to report a sales margin, the fair value of properties sold, valued in accordance with IFRS 5, has to be adjusted to reflect realized/unrealized changes in value.

Adjusted EBITDA Rental

The Adjusted EBITDA Rental is calculated by deducting the operating expenses of the Rental segment and the expenses for maintenance in the Rental segment from the Group’s rental income.

Adjusted EBITDA Total

Adjusted EBITDA Total is the result before interest, taxes, depreciation and amortization (including income from other operational investments and intragroup profits) adjusted for effects that do not relate to the period, recur irregularly and that are atypical for business operation, and for net income from fair value adjustments to investment properties. These non-recurring items include the development of new fields of business and business processes, acquisition projects, expenses for refinancing and equity increases (where not treated as capital procurement costs), IPO preparation costs and expenses for pre-retirement part-time work arrangements and severance payments. The Adjusted EBITDA Total is derived from the sum of the Adjusted EBITDA Rental, Adjusted EBITDA Value-add, Adjusted EBITDA Recurring Sales, Adjusted EBITDA Development and Adjusted EBITDA Deutsche Wohnen.

Adjusted EBITDA Value-add

The Adjusted EBITDA Value-add is calculated by deducting operating expenses from the segment’s income.

COSO

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a private-sector U.S. organization. It was founded in 1985. In 1992, COSO published the COSO model, an SEC-recognized standard for internal controls. This provided a basis for the documentation, analysis and design of internal control systems. In 2004, the model was further developed and the COSO Enterprise Risk Management (ERM) Framework was published. Since then, it has been used to structure and develop risk management systems.

Covenants

Requirements specified in loan agreements or bond conditions containing future obligations of the borrower or the bond obligor to meet specific requirements or to refrain from undertaking certain activities.

EPRA Key Figures

For information on the EPRA key figures, we refer to the chapter on segment reporting according to EPRA.

EPRA NTA

The presentation of the NTA based on the EPRA definition aims to show the net asset value in a long-term business model. NTA stands for Net Tangible Assets. The equity attributable to Vonovia’s shareholders is adjusted by deferred taxes, real estate transfer tax and other purchasers’ costs in relation to the existing portfolio and the fair value of derivative financial instruments after taking deferred taxes into account. Stated goodwill and other intangible assets are also deducted.

European Public Real Estate Association (EPRA)

The European Public Real Estate Association (EPRA) is a non-profit organization that has its registered headquarters in Brussels and represents the interests of listed European real estate companies. Its mission is to raise awareness of European listed real estate companies as a potential investment destination that offers an alternative to conventional investments. EPRA is a registered trademark of the European Public Real Estate Association.

European Public Real Estate Association (EPRA)

The European Public Real Estate Association (EPRA) is a non-profit organization that has its registered headquarters in Brussels and represents the interests of listed European real estate companies. Its mission is to raise awareness of European listed real estate companies as a potential investment destination that offers an alternative to conventional investments. EPRA is a registered trademark of the European Public Real Estate Association.

Fair Value

Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Fair Value

Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Fair Value

Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Fair Value

Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

GAV

The Gross Asset Value (GAV) of the recognized real estate investments. This consists of the owner-occupied properties, the investment properties including development to hold, the assets held for sale and the development to sell area. In the latter, both residential properties for which a purchase contract has been signed and those with the intention to sell – i.e., a purchase contract has not yet been signed – are included.

GAV

The Gross Asset Value (GAV) of the recognized real estate investments. This consists of the owner-occupied properties, the investment properties including development to hold, the assets held for sale and the development to sell area. In the latter, both residential properties for which a purchase contract has been signed and those with the intention to sell – i.e., a purchase contract has not yet been signed – are included.

Group FFO

Group FFO reflects the recurring earnings from the operating business. In addition to the adjusted EBITDA for the Rental, Value-add, Recurring Sales and Development segments, Group FFO allows for recurring current net interest expenses from non-derivative financial instruments as well as current income taxes. This key figure is not determined on the basis of any specific international reporting standard but is to be regarded as a supplement to other performance indicators determined in accordance with IFRS.

Maintenance

Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.

Maintenance

Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.

Maintenance

Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.

Maintenance

Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

LTV Ratio (Loan-to-Value Ratio)

The LTV ratio shows the extent to which financial liabilities are covered. It shows the ratio of non-derivative financial liabilities pursuant to IFRS, less foreign exchange rate effects, cash and cash equivalents less advance payments received by Development (period-related), receivables from disposals, plus purchase prices for outstanding acquisitions to the total fair values of the real estate portfolio, fair values of the projects/land currently under construction as well as receivables from the sale of real estate inventories (period-related) plus the fair values of outstanding acquisitions and investments in other real estate companies.

Rental Income

Rental income refers to the current gross income for rented units as agreed in the corresponding lease agreements before the deduction of non-transferable ancillary costs. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

Rental Income

Rental income refers to the current gross income for rented units as agreed in the corresponding lease agreements before the deduction of non-transferable ancillary costs. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

Modernization Measures

Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.

Modernization Measures

Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.

Modernization Measures

Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.

Modernization Measures

Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.

Monthly In-place Rent

The monthly in-place rent is measured in euros per square meter and is the current gross rental income per month for rented units as agreed in the corresponding rent agreements at the end of the relevant month before deduction of non-transferable ancillary costs divided by the living area of the rented units. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

The in-place rent is often referred to as the “Nettokaltmiete” (net rent excl. ancillary costs such as heating, etc.). The monthly in-place rent (in € per square meter) on a like-forlike basis refers to the monthly in-place rent for the residential portfolio that was already held by Vonovia 12 months previously, i.e., portfolio changes during this period are not included in the calculation of the in-place rent on a like-forlike basis. If we also include the increase in rent due to new construction measures and measures to add extra stories, then we arrive at the organic increase in rent.

Monthly In-place Rent

The monthly in-place rent is measured in euros per square meter and is the current gross rental income per month for rented units as agreed in the corresponding rent agreements at the end of the relevant month before deduction of non-transferable ancillary costs divided by the living area of the rented units. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

The in-place rent is often referred to as the “Nettokaltmiete” (net rent excl. ancillary costs such as heating, etc.). The monthly in-place rent (in € per square meter) on a like-forlike basis refers to the monthly in-place rent for the residential portfolio that was already held by Vonovia 12 months previously, i.e., portfolio changes during this period are not included in the calculation of the in-place rent on a like-forlike basis. If we also include the increase in rent due to new construction measures and measures to add extra stories, then we arrive at the organic increase in rent.

Sustainability Performance Index (SPI)

Index to measure non-financial performance. Vonovia’s sustainable activities are geared towards the top sustainability topics that we have identified, which are bundled in the Sustainability Performance Index. The Customer Satisfaction Index (CSI) is included in the calculation of the Sustainability Performance Index. The CSI is determined at regular intervals in systematic customer surveys conducted by an external service provider and shows the effectiveness and sustainability of our services for the customer. Other indicators used in the Sustainability Performance Index are the carbon savings achieved annually in housing stock, the energy efficiency of new buildings, the share of accessible (partial) modernization measures in relation to newly let apartments, the increase in employee satisfaction and diversity in the company’s top management team.

Sustainability Performance Index (SPI)

Index to measure non-financial performance. Vonovia’s sustainable activities are geared towards the top sustainability topics that we have identified, which are bundled in the Sustainability Performance Index. The Customer Satisfaction Index (CSI) is included in the calculation of the Sustainability Performance Index. The CSI is determined at regular intervals in systematic customer surveys conducted by an external service provider and shows the effectiveness and sustainability of our services for the customer. Other indicators used in the Sustainability Performance Index are the carbon savings achieved annually in housing stock, the energy efficiency of new buildings, the share of accessible (partial) modernization measures in relation to newly let apartments, the increase in employee satisfaction and diversity in the company’s top management team.

Non-core Disposals

We also report on the Other segment, which is not relevant from a corporate management perspective, in our segment reporting. This includes the sale, only as and when the right opportunities present themselves, of entire buildings or land (Non-core Disposals) that are likely to have below-average development potential in terms of rent growth in the medium term and are located in areas that can be described as peripheral compared with Vonovia’s overall portfolio and in view of future acquisitions.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Recurring Sales

The Recurring Sales segment includes the regular and sustainable disposals of individual condominiums from our portfolio. It does not include the sale of entire buildings or land (Non-core Disposals). These properties are only sold as and when the right opportunities present themselves, meaning that the sales do not form part of our operating business within the narrower sense of the term. Therefore, these sales will be reported under “Other” in our segment reporting.

Fair Value Step-up

Fair value step-up is the difference between the income from selling a unit and its current fair value in relation to its fair value. It shows the percentage increase in value for the company on the sale of a unit before further costs of sale.

Fair Value Step-up

Fair value step-up is the difference between the income from selling a unit and its current fair value in relation to its fair value. It shows the percentage increase in value for the company on the sale of a unit before further costs of sale.

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).