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Risks Related to Operating Business

In the operating business, we identified the three amber risks (2022: four) explained below at the end of 2023.

The residential properties held in the Rental segment are subject to a regular valuation process. Details can be found in the notes to the consolidated financial statements in chapter [D28] Investment Properties. Changing overall conditions on the real estate and capital markets mean that future market developments, such as inflation and a further increase in interest rates, could reduce the value of the properties further. Lower property values would push up the company’s loan-to-value ratio (LTV), which could have a negative impact on its ability to raise capital. The balance sheet operating risk “future market development leads to a drop in property values,” which was already classed as an amber risk in 2022, was once again classified as an amber risk in 2023 with an expected amount of loss of € 2,400–6,000 million (2022: >€ 12,000 million) and an expected probability of occurrence of 5–39% (2022: 5–39%). In order to limit risk, Vonovia is committed to maintaining the current diversification of its portfolio.

The development in the supply of, and demand for, residential properties has a significant influence on the home prices that can be achieved and, as a result, a direct impact on both Adjusted EBITDA in the Recurring Sales segment and the success of Non Core sales. A decline in real estate prices was recorded in the 2023 fiscal year. A scenario in which interest rates were to remain permanently high and/or increase further could lead to buyers no longer being able to finance the home prices asked for on the market. This could reduce demand and result in lower home prices, which could represent a risk with an impact on profit and loss for the Recurring Sales segment. The amber operating risk with an impact on profit and loss “deteriorating residential property market situation with regard to apartment sales/buyer behavior” was assessed, at the end of the reporting period, as having an expected amount of loss of € 375–750 million (2022: € 375–750 million) and an expected probability of occurrence of 5–39% (2022: 5–39%). In order to limit and monitor risk, regular reporting on sales volumes and prices and regular monitoring of target prices and sales volume targets by the portfolio controlling team has been implemented alongside a process for identifying ideal prices.

As regards the sale of our development projects, we have identified a risk that the sale and letting of newly built apartments will become more difficult to achieve, particularly as a result of significantly increased construction costs and, as a result, considerably higher sale prices or rents. We have adjusted our plans for investments in new builds accordingly. The operating risk with an impact on profit and loss “Development sale risk,” which was classified as an amber risk in 2022, was downgraded in terms of its potential amount of loss to € 150-375 million at the end of 2023 as opposed to the original level of € 375–750 million The expected probability of occurrence was assessed as being 40–59% (2022: 40-59%). In order to be able to respond to market changes early on, in-depth market studies and analyses are prepared at regular intervals and are analyzed in connection with reports prepared by renowned real estate experts. Any market changes that are identified are taken into account when analyzing the real estate portfolio, meaning that they have a significant impact on sales planning.

Russia’s war of aggression on Ukraine once again had an impact on the energy and construction materials markets in 2023. Rising energy costs also translated into higher costs for construction materials and led to bottlenecks in the procurement of construction materials in a large number of places. This has resulted in deteriorating overall conditions for construction and modernization projects in our Development and Value-add segments, with negative knock-on effects on Adjusted EBITDA in the segments. We have adjusted our investment strategy accordingly and expect the increase in costs to slow as of 2024. The operating risk with an impact on profit and loss “Higher construction costs than planned due to increases in the price of construction materials & services, as well as supply bottlenecks,” which was classified as an amber risk in 2022, was downgraded to green in 2023 and evaluated as having an expected probability of occurrence of 5–39% (2022: 60–95%). The expected amount of loss was evaluated at € 40–150 million (2022: € 40–150 million). In order to limit this risk, Vonovia monitors the market systematically while simultaneously developing alternatives, e.g., revising specifications and using standardization to reduce material usage.  In addition, critical materials are secured early on and, where appropriate, stored where possible.