4 Summary of significant accounting policies

Legal and tax structure for the financial statements

Vesteda Residential Fund FGR is a contractual investment fund (beleggingsfonds) as defined in section 1:1 of the Dutch Financial Supervision Act (AFS). Vesteda Residential Fund is licensed by AFM and as a result Vesteda Investment Management BV appointed Intertrust Depositary Services B.V. to act as depositary for the Fund and has concluded a depositary services agreement with the depositary for the benefit of the Fund and the participants in accordance with article 4:37f AFS. The depositary is responsible for the supervision of certain aspects of the Fund’s business in accordance with the applicable law and the depositary services agreement.

It is an unlisted fund for the joint account of the participants. As such, the economic title to the fund assets is held by the participants pro rata to their participation rights. The purpose of the Fund is to make investments, and in particular (but not limited to) to invest capital, indirectly or directly, in property mainly designated for residential purposes located in the Netherlands, for the account and at the risk of the participants. The strategy of the Fund is further set out in the investment guidelines which form part of the Fund’s Terms and Conditions.

The Terms and Conditions of Vesteda Residential Fund FGR govern the Fund and they can only be amended by a resolution of the participants.

Participants’ rights and obligations in respect of the manager, Vesteda Project Development BV and Vesteda Finance BV, are exercised through Stichting Administratiekantoor Vesteda (StAK Vesteda). Participants are granted a power of attorney to attend and exercise voting rights in the general meeting of shareholders of these three companies by StAK Vesteda at their request.

Vesteda Investment Management BV (the manager)

The participants have entrusted the manager, Vesteda Investment Management BV, with the management and operation of the Fund. The manager carries out its task in the sole interest of the participants and within the boundaries described in the Fund’s Terms and Conditions. The manager, in its capacity as manager (beheerder) and operator of the Fund, is subject to supervision of the Dutch Financial Markets Authority (Autoriteit Financiële Markten) and the Dutch Central Bank (De Nederlandsche Bank). The manager obtained a license to act as a manager of an alternative investment fund in accordance with article 2:67 of the AFS on 17 February 2014. The participation rights can only be acquired by professional investors as defined in section 1:1 of the AFS.

Vesteda Finance BV and Vesteda Project Development BV

Vesteda Finance BV will undertake Vesteda’s unsecured financing activities on behalf of the Fund. Vesteda Project Development BV holds the remaining development projects in the pipeline.

Custodians Vesteda Funds

At present, Vesteda has five custodian companies. The custodians are the legal owners of the property of the Fund, while the Fund is the beneficial owner. It is possible to reallocate individual properties to the various custodians for financing purposes in a tax neutral manner, making it possible to finance the Fund flexibly, if desired, by allocating collateral to one of the custodians.

Vesteda Residential Fund FGR is a mutual fund, which is not a legal entity under the laws of the Netherlands.

Accounting policies

Rental income

Rental income from operating leases is recognized when it becomes receivable. Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis.

Service charges

Service charges comprise service charges income which are charged at tenants and service charges which are non-recoverable.

Property operating expenses

Operating expenses comprise costs directly attributable to a specific property. These costs are mainly maintenance costs, property tax and other levies, insurance premiums, management and letting fees and service costs not chargeable to tenants.

Other income

Other income is recognized when realized.

Net rental income

Net rental income is the rental income plus other income less property operating expenses.

Result on projects in progress

Profit is recognized in proportion to the amount of the project that has been completed.

Result on property sales

A property (or property under construction) is regarded as sold when the significant risks and returns have been transferred to the buyer, which is normally upon the unconditional exchange of contracts. For conditional exchanges, sales are recognized only when all the significant conditions are contented. The result on property sales is the proceeds from sales (less any facilitation costs) less the most recent carrying value of the properties sold, established each quarter.

The strategy of Vesteda is to achieve higher returns by selling individual units, rather than the sale of a total property, if this would result in a higher return. Vesteda is valuing its investment property per complex instead of per individual unit. As indicated in note 17, potential revenues from selling individual units are taken into account in the valuation. In determining the book value of an individual unit, the last determined valuation by an external valuer of the property as a whole is allocated to the number of units in the property. In this allocation the size of the specific unit and specific characteristics of the unit, such as floor level, corner unit, garden, balcony, etc, are taken into account.  In this allocation the sales revenues from selling individual units (so called vacant values) in the Discounted Counted Cash flow model of the external appraiser is not taken into account. The allocation criteria per property is set at the moment the first unit is sold.

Management expenses

Any expenses that cannot be allocated directly to the various properties are regarded as management expenses.

Financial results

Interest income and expense is recognized as it accrues using the effective interest method. Financial results also includes amortization of financing costs and the cost of the unwind transaction derivatives.

Realised result

The realized result is the sum of the net rental income and result on property sales and projects in progress less management expenses and financial result.

Unrealised result

The unrealized result is made up of unrealized gains and losses related directly to property investments.

Corporate income tax

Entities within the Vesteda Companies which are subject to corporate income tax, have no difference between accounting and taxable income. As such, taxation on income is calculated by applying the standard rate of tax to the taxable amount. If such a taxable amount is negative, Vesteda only recognises a benefit if there is a possibility to carry back the loss to years where taxes have been paid and if a refund is expected. The Vesteda Companies recognise deferred tax assets in relation to losses carry forward to the extent that it is probable that taxable profits will be available. The Fund itself is exempt from corporate income taxes.

Intangible fixed assets

Intangible fixed assets are recognised at cost less straight-line depreciation and any impairment. Depreciation is based on the estimated useful contribution of the assets concerned, which is three years.

Investment property

Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and initial leasing commissions to bring the property to the condition necessary for operational purpose. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.

Subsequent to initial recognition, investment property is stated at fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction, where parties traded in an informed, diligent way and without compulsion. Gains or losses arising from changes in the fair values are included in the statement of comprehensive income in the year in which they arise.

A property interest that is held under an operating lease is classified and accounted for as investment property if the property interest would otherwise meet the definition of an investment property.

The determination of the fair value for investment property is based on the income approach in line with IFRS 13. Considering the limited public data available, the complexity of real estate asset valuations, as well as the fact that appraisers use in their valuations the rents and property operating expenses of Vesteda’s assets, Vesteda believes it appropriate to classify its investment property under Level 3. In addition, unobservable inputs, including appraisers’ assumptions on discount rates, dates, rates, inflation and exit yields, are used by appraisers to determine the fair value of Vesteda’s investment property.

Investment property under construction

Investment property under construction, subsequent to initial recognition, is also stated at fair value.

Equal to investment property, the basis for the fair value determination including the necessary estimates involved is the valuation by independent real estate valuation experts using recognised valuation techniques.

For the method of determination of fair value reference is made to investment property.

Development risks (such as construction and letting risks) are taken into consideration when determining the fair value of investment properties under construction.

Investment property is derecognised when it has been sold or permanently withdrawn from use and no future economic benefit is expected from its property sales. Any gains or losses on the withdrawal or sales of investment property are recognised in the statement of comprehensive income in the year of withdrawal or sale.

Property, plant and equipment

The former head office in Maastricht is recognised at fair value, reappraised annually by an external appraiser. Any revaluation losses in excess of the positive revaluation reserve in group equity is recognised directly in the statement of comprehensive income.

Straight-line depreciation is applied, based on an estimated useful life, over the depreciable amount, being the carrying amount less residual value.

Other property, plant and equipment are recognised at cost less straight-line depreciation and any impairment.

Depreciation is based on the estimated useful life of the assets concerned, which is between three and ten years.

An asset is derecognised upon disposal or when no future economic benefits are expected from its use or disposal.

Any gain or loss arising on derecognition of the asset is included in the statement of comprehensive income.

Financial assets

  • Associates; if significant influence is exercised on the commercial and financial policy of participating interest, those interests are accounted for using the equity method based on net asset value.

  • Other participating interests are recognised at fair value through profit or loss.

  • Loans receivable are recognized at amortised cost. Where necessary, there is a write-down for doubtful debts.

Leases – Vesteda Companies as lessee

Financial lease payments are apportioned between the finance charges and the reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the statement of comprehensive income as they arise.

Other leases are classified as operating leases, unless they are leases of investment property (see investment property above). Operating lease payments are recognized as an expense in the statement of comprehensive income on a straight-line basis over the lease term, except for contingent rental payments which are expensed when they arise.

Inventory property

Property acquired or constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation, is held as inventory and is measured at the lower of cost and net realisable value.
Costs include:

  • Freehold and leasehold rights for land.

  • Amounts paid to contractors for construction.

  • Borrowing costs, planning and design costs, costs of site preparation, professional fees for legal services, property transfer taxes, construction overheads and other related costs.

Non-refundable commissions paid to sales or marketing agents on the sale of real estate units are expensed when paid.

Net realisable value is the estimated selling price in the ordinary course of business, based on market prices at the reporting date and discounted for the time value of money if material, less the estimated costs of sale.

The cost of inventory recognised in profit or loss on sales is determined by reference to the specific costs incurred on the property sold and an allocation of any non-specific costs based on the relative size of the property sold.

Receivables

Receivables are recognised at amortised cost, which is generally in line with face value, less a provision for doubtful debts.

Cash and cash equivalents

Cash is cash on hand and at bank. Cash is recognised at face value.

Financial liabilities

Loans are initially recognised at cost, which is the fair value of the amount received, less transaction costs. After initial recognition, loans are subsequently measured at amortised cost using the effective interest method. Interest expense is attributed to the period to which it relates and recognised through the statement of comprehensive income. Financing costs are recognised at cost less straight-line depreciation. Depreciation is parallel to the maturity of the inherent loans.

Derivatives

The Vesteda Companies use derivatives such as interest rate swaps to hedge changes in interest rates. The derivatives are used to hedge the risk of uncertain future cash flows. In the financial statements, they relate to the revolving credit facility and the mortgage loans.

Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

At the inception of the hedge relationship, the Vesteda Companies formally designate and document the hedge relationship to which the Vesteda Companies wish to apply hedge accounting together with the risk management objective and the strategy for undertaking the hedge.

The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s cash flows attributable to the hedged risk.

Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

The determination of the fair value for derivatives is based on the discounted cash flow approach in line with IFRS 13.

Fair value hierarchy Level 2 is applied. The risk free interest rate as used for the valuation of the derivative portfolio can be observed in the market.

Provisions

Provisions are recognised if Vesteda has an obligation from a past event and it is probable that the obligation will have to be settled and a reliable estimate can be made of the amount of the obligation. The amount of a provision is set using the best estimate of the amount that will be required to settle the obligations and losses at the reporting date.

Pensions

Vesteda has arranged for its pension obligations through joining Stichting Pensioenfonds ABP (ABP). The ABP pension arrangement is a multi-employer plan in which actuarial and investment risks are almost in full for the account of the employees. Employers who joined this arrangement have no obligation to contribute additional premium in case of a deficit. Vesteda’s obligations are limited to contribution of the premium set by the pension fund. The Managing Board of ABP determines this premium annually on the basis of its own data files and with reference to the parameters and requirements specified by the supervising authority of ABP (the Dutch Central Bank).

The premium obligation arises from being a participant in the pension arrangement in the current year and does not originate from having joined the pension plan in previous years. From reporting point of view the ABP pension arrangement qualifies as a defined contribution (DC) plan. Consequently the premium is recognised as an expense for the year, and no further explanation is required.

Current liabilities

Trade payables and other current liabilities are recognised at amortised cost, which is generally in line with face value.