28 Investment Properties

Accounting Policies

The values as of December 31, 2022 include assets of € 663.7 million (December 31, 2021: € 2,180.9 million) that are measured at cost, as their fair value cannot be reliably calculated on a continuing basis. These relate to project developments for the company’s own portfolio, assets under construction, pre-construction expenses and land without buildings that may be intended for future sale. In particular in the current market environment, which is dominated by inflation and supply chain problems and, as a result, by very volatile costs for construction materials, as well as by a marked increase in interest rates and insignificant transaction activity, neither construction costs nor income from project developments can be reliably calculated on a continuing basis. Due to the existing inherent risks during the construction phase, development projects are generally recognized at cost until they are completed. In the context of business combinations, no assets measured at cost (December 31, 2021: € 1,439.3 million) were added in the 2022 fiscal year. There were further additions of € 386.7 million (December 31, 2021: € 372.4 million). In the fiscal year under review, impairment tests on the capitalized cost of project developments were performed throughout the year due to the tense market situation. These resulted in impairment losses of € 450.4 million which are part of net income from fair value adjustments of investment properties. As a result of resolutions passed by the Management Board in the fourth quarter of 2022 to now sell project developments that were originally intended for Vonovia’s own portfolio, € 1,450.1 million was reclassified to real estate inventories in the 2022 fiscal year.

The additions in the 2022 reporting year include € 607.1 million (2021: € 639.9 million) in production costs for new construction activities.

The total amount reported for investment properties as of December 31, 2022, 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 € 2,019.8 million (December 31, 2021: € 1,689.1 million). In this respect, we also refer to chapter [E43] Leases.

The majority of € 2,016.8 million is attributable to right-of-use assets from hereditary building rights (December 31, 2021: € 1,685.3 million). This includes right-of-use assets amounting to € 97.3 million (December 31, 2021: € 80.9 million) relating to the Spree-Bellevue (Spree-Schlange) property in Berlin, which comprises the leasehold land and the rented properties. The properties have been leased from the fund company 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 properties 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 € 3,168.1 million during the fiscal year (2021: € 2,571.9 million). Operating expenses directly relating to these properties amounted to € 433.3 million during the fiscal year (2021: € 317.6 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 forecast over a detailed period of ten years and discounted to the date of valuation as the net present value. 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 net rent excl. ancillary costs, current inclusive rent in Sweden, 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, 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, the Austrian statistical office, Statistik Austria, etc.). In Sweden, rents and rent increases are defined as part of negotiations with the Swedish tenants’ association (“Hyresgästföreningen”) and are reflected accordingly in the valuation model. The expected sales revenues in Austria 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. 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. In the Swedish valuation model, further expenses to be borne by the owner are also taken into account in the DCF model due to the inclusive rents that are a special feature of this market. 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.

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. 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. 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, as well as nursing care facilities. Project developments for subsequent management within its own portfolio are measured using the cost approach until the construction work is complete – subject to a review of the values applied if triggering events occur. Once the construction work is complete, measurement is 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, Sweden and Austria as of December 31, 2022, in its in-house valuation department on the basis of the methodology described above.

In addition to the internal valuation, Vonovia’s real estate portfolio was also valued by the independent property appraisers CBRE GmbH, Jones Lang LaSalle SE and Savills Sweden AB. The market value resulting from the external report is consistent with the internal valuation result.

The fair value for the nursing care properties was calculated by the independent expert W&P Immobilienberatung GmbH using a DCF method and are adjusted, where appropriate, based on findings from market observation and transactions.

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 and undeveloped land, inheritable building rights granted and nursing care facilities was € 94,694.5 million as of December 31, 2022 (December 31, 2021: € 97,845.3 million). This corresponds to a net initial yield for the real estate portfolio of 2.5% (total portfolio including Sweden and Austria; December 31, 2021: 2.5%). For Germany (Vonovia stand-alone and Deutsche Wohnen together), this results in an in-place rent multiplier of 29.2 (December 31, 2021: 29.7) and a fair value per m² of € 2,590 (December 31, 2021: € 2,547). The in-place rent multiplier and fair value for the Austrian portfolio come to 25.8 and € 1,742 per m² (December 31, 2021: 26.5 and € 1,674 per m²), with the figures for Sweden coming to 20.1 and € 2,248 per m² (December 31, 2021: 20.6 and € 2,475 per m²).

The material valuation parameters for the investment properties (Level 3) in the real estate portfolio are as follows as of December 31, 2022, broken down by regional markets:

The inflation rate applied to the valuation procedure comes to 2.1%. For the Austrian portfolio, a sales strategy with an average selling price of € 2,417 per m² was assumed for 49.5% of the portfolio.

Net income from the valuation of investment properties amounted to € -1,269.8 million in the 2022 fiscal year (December 31, 2021: € 7,393.8 million). The main input factors used for the valuation of nursing care properties are average market rent (2022: € 9.37/sqm; 2021: € 9.04/sqm), discount rates (2022: 4.8%; 2021: 4.4%) and maintenance costs (2022: € 12.32/sqm; 2021: € 11.60/sqm). A 5% reduction in the average market rent results in a -5% adjustment to the carrying amount of the nursing care facilities (previous year: -5%), an increase in the discount rate by 0.1pp produces a value adjustment of -2% (previous year: -2%) and a 10% increase in maintenance costs results in a value adjustment of -1% (previous year: -1%).

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 cash flows, which is then reflected in adjusted 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. Due to the effect that changes in inflation will have on future rent increases in Sweden, it has been assumed, for the purposes of calculating sensitivities, that one-third of any change in inflation will spill over into rental growth.

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.