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DES - Online Annual Report 2008

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Investment properties

Under IAS 40, investment property must initially be measured at cost at the date of acquisition. The costs for the shopping centers under construction are transferred from Property, plant and equipment to Investment properties following their completion. The initial valuation at fair value takes place at the end of the financial year in which the property was completed.

Subsequently, all properties must be measured at their fair value, and the annual net changes recognised in income in measurement gains. Investment property is property held long term to earn rentals or for capital appreciation. Under IAS 40, investment property measured using the fair value model is not depreciated.

As in previous years, the fair values of the property in the period under review were determined by the Feri EuroRating Services AG/GfK GeoMarketing appraisal team using the discounted cash flow method (DCF). In accordance with the DCF method, future cash flows from the property concerned are discounted back to the measurement date. In addition, the net income from the respective property is determined over a detailed planning period of 10 years. A resale value is forecast for the end of the 10-year detailed planning phase. The net income is then capitalised over the remaining life. In a second step, the resale value is discounted back to the measurement date.

Averaged across all properties, net income amounts to 86.9% of rental income, i. e. 13.1% of rental income is deducted for management and administrative costs.

The capitalisation rate comprises a forecast interest rate for a 10-year German federal bond and a mark-up that takes account of the individual risk profile of the property. Around 150 individual indicators are used to determine the risk profile. These include a forecast of population development over the long term, the rate of employment and the resulting effects on retail demand, the development of the competitive environment and construction activity.

The capitalisation rate averaged 6.68% compared with 6.38% in the previous year. The rate is composed of a yield from a 10-year German federal bond of 4.58% (2007: 4.78%) compared with the current yield of 2.95% (as at 31 December 2008) and an average risk premium of 2.1% (2007: 1.6%).

On the basis of the expert appraisals, the real estate portfolio has an initial net yield of 5.64% for the 2009 financial year, compared with 5.49% in the previous year.

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