15. Investment property

The investment property can be specified as follows:

 

2019

2018

Investment property as at 1 January

7,024

4,778

Acquisitions

-

1,359

Capital expenditure on property

44

34

Transfer from property under construction

246

385

Property sales

(240)

(292)

Right of use assets (land leases)

127

-

Revaluation

617

760

Investment property as at 31 December

7,818

7,024

The fair value of completed investment property has been determined on a market value basis, in accordance with International Valuation Standards (IVS), as set out by the International Valuation Standards Council (IVSC).

The valuation is prepared on an aggregated ungeared basis. As set out in Note 4, in arriving at their estimates of market values, the valuation experts have used their market knowledge and professional judgement rather than relying exclusively on comparable historical transaction data.

The valuations were performed by accredited external independent real estate valuation experts with a recognised and relevant professional qualification and with recent experience in the location and category of the investment property being appraised.

The fair value of the assets is driven by the net cash flows generated by the assets, which are taken into account by the market, in combination with the discount rate development. The generated cash flow is the net rental income plus the net sales proceeds from the sale of individual units.

The following main inputs have been used in the valuation of the investment property:

 

2019

2018

Average

Sell

 

Hold

Sell

 

Hold

Discount rate (%)

5.8

 

5.5

6.4

 

5.6

Exit yield (%)

4.9

 

5.0

5.1

 

5.1

Rental growth (%)

2.1

 

2.3

2.3

 

2.3

Vacant value growth (%)

2.7

 

2.6

2.7

 

2.9

       

Sell

2019

2018

Region

primary

secondary

other

primary

secondary

other

Discount rate (%)

5.8

6.0

6.1

6.4

6.5

6.5

Exit yield (%)

4.9

5.6

6.9

5.0

5.6

7.0

Rental growth (%)

2.2

2.0

1.9

2.3

2.2

2.0

Vacant value growth (%)

2.7

2.3

2.0

2.7

3.1

1.9

       

Hold

2019

2018

Region

primary

secondary

other

primary

secondary

other

Discount rate (%)

5.4

6.0

6.2

5.7

5.6

5.4

Exit yield (%)

4.8

6.5

6.3

5.1

5.1

5.7

Rental growth (%)

2.3

2.0

2.1

2.3

2.2

2.4

Vacant value growth (%)

2.7

2.3

2.4

2.9

2.7

2.9

       

Sell

2019

2018

Rental segment

<720

720 - 1,200

> 1,200

<711

711 - 1,200

> 1,200

Discount rate (%)

6.1

5.8

5.7

6.4

6.4

6.4

Exit yield (%)

5.3

5.1

4.5

5.9

5.2

4.5

Rental growth (%)

2.2

2.1

2.2

2.1

2.3

2.3

Vacant value growth (%)

2.7

2.6

2.8

2.2

2.7

2.8

       

Hold

2019

2018

Rental segment

<720

720 - 1,200

> 1,200

<711

711 - 1,200

> 1,200

Discount rate (%)

5.8

5.5

5.3

5.7

5.6

5.8

Exit yield (%)

5.9

5.0

4.7

5.3

5.1

5.5

Rental growth (%)

2.1

2.3

2.3

2.2

2.3

2.3

Vacant value growth (%)

2.6

2.7

2.5

2.8

2.9

2.8

In almost all segments, the discount rate is higher than the exit yield. This can be explained by the current market in view of increasing prices and decreasing yields for residential complexes. The opposite situation (discount rate < exit yield) in the segment “Other” is caused by the higher investment risk related to this type of real estate (less value-fixed real estate (example: residential complexes in the higher rental segment) is more sensitive to market forces).

These inputs are considered to be the most important drivers in the valuation of investment property.

External independent real estate valuation experts determine the fair values using discounted cash flow models with a 10-year period. When calculating the present values, the valuation experts use discount rates in the DCF models to account for the time value of money and reflect the inherent risk with regard to the cash flows in the model. Exit yields are indicators used to determine the exit values that can be achieved at the end of the DCF lifetime. Rental growth is the average rental growth in the 10-year period of the discounted cash flow model. Vacant value growth is the average vacant value growth in the 10-year period that is assumed in the cash flow model.

Sensitivity analysis

The table below presents the sensitivity of the valuation to changes in the significant parameters driving the underlying valuation of investment property. The analysis was carried on the investment property value exclusive the value of the right of use asset (land leases).

 

-100 bps

Fair value 

+100 bps

As at 1 January 2019

   

Discount rate

7,463

7,024

6,563

Exit yield

7,672

7,024

6,505

Rental growth

6,715

7,024

7,327

Vacant value growth

6,924

7,024

7,126

    

As at 31 December 2019

   

Discount rate

8,136

7,691

7,231

Exit yield

8,269

7,691

7,252

Rental growth

7,431

7,691

7,950

Vacant value growth

7,535

7,691

7,848

Right of use assets

Under the investment property the right of use of land leases are included as an integral part of the investment property value.

To reconcile the by external independent real estate valuation experts appraised investment property, the value of the investment property value presented should be adjusted by the land lease right of use.

 

2019

Investment property value

7,818

less Right of use

(127)

Valuation as per valuation report

7,691