13. Investment properties

MEUR       note 31 Dec 2016 31 Dec 2015
Fair value of investment properties at start of period       2,752.9 2,528.0
Acquisitions, new constructions         557.7 218.0
Other investments to properties         10.5 29.1
Disposals of investment properties       4 -66.5 -87.0
Capitalised borrowing costs       36 1.1 1.1
Reclassification from trading properties         3.2 1.3
Gains and losses from changes in fair value *         124.3 62.4
Fair value of investment properties end of period       3,383.2 2,752.9
*Gains and losses from changes in fair value includes foreign exchange gains (losses) of EUR 23.6 (-9.3) million.  
                 

Significant investments during the period:

In December, SATO acquired 113 apartments located in Espoo, Vantaa and Tampere from a fund managed by Patrizia. In April, SATO purchased 1015 homes that are mainly located in the Helsinki metropolitan area and Turku region, from Suomen Laatuasunnot Oy. In April, SATO also acquired the shares of SVK Yhtymä Oy, and the transaction resulted in the transfer of 1255 rental homes to SATO.

Significant disposals during the period:

In total, 1,267 (1,743) rental apartments were divested in Finland. The most significant divestment was the sale of 294 rental apartments to KAS Group in December. The divested apartments are mainly located outside SATO’s primary operating area.

Valuation methods

SATO's investment properties mainly comprises of rental apartments that are located in the largest growth centres. Approximately 78 per cent of the housing property is located in the Helsinki region. Investment property value is taken care of by renovation and repair activity based on their lifecycle and repair plans. Increase in the fair value of SATO's investment property was mainly due to market price levels, reclassifications from measurement group to another when legal restrictions have ended and changes in parameters used in valuation.

Some of the investment properties are subject to legislative and usage restrictions. The so-called non-profit restrictions apply to the owning company and the so-called property-specific restrictions apply to the investment owned. The non-profit restrictions include, among other things, permanent limitations on the company’s operations, distribution of profit, lending and provision of collateral, and the divestment of investments. The property-specific restrictions include the use of apartments, the selection of residents, the setting of rent and divestment of apartments, and they are fixed-term.

The valuation of SATO’s investment properties is based on a method which has been prepared by SATO in co-operation with a third party expert (currently: JLL (Helsinki office)). The external expert quarterly issues a statement on the applicability of SATO’s valuation methods, the appropriateness of sources of information used and the credibility of the valuation. As part of the valuation process, the external expert also reviews each SATO's property on site every three years. Existing properties located in St. Petersburg are valuated by a third party expert (currently JLL, St. Petersburg office). The principles and methods used in the fair value valuation are approved by the Corporate Management Group. During the valuation process all the periodical changes are analysed. The result of the valuation and the periodic change in fair value booked through profit and loss are reported to the Corporate Management Group and the Board of Directors.

At inception investment properties are booked at acquisition value, which includes transaction costs. Later investment properties are valuated at fair value. Gains and losses from changes in fair value are booked through profit and loss in the period when they are incurred. Fair value is the price at which the property would trade in a competitive auction setting. Fair value of investment properties represents the price in local primary market taking into account the condition and location of the property.

SATO measures investment properties at fair value which are based on:

– Sales comparison
– Income value
– Acquisition cost

Sales comparison method

The sales comparison method is used in properties of which apartments can be sold individually without restrictions. The market value as at the date of the valuation is based on the average of the actual sales prices of comparable housings from the preceding 24 months. As a source for such comparable sales prices, the Company applies housing price data which, according to its view, represents the most comprehensive data source available. Currently, the Company uses HSP (Hintaseurantapalvelu) price tracking service maintained by CGI Suomi Oy as a source of such housing price data. The HSP price tracking service includes information on sales of apartments and real estates in Finland provided by real estate agents. Market value for each property is individually adjusted using rental house discount. Deduction is mainly based on the location, condition and image of the property. Properties located in St. Petersburg are valuated by a third party expert (JLL).

Income value

The properties which can only be sold as entire property and to a restricted group of buyers are valuated using the income value method. The income value is based on the area specific yield and assumption of the long-term rental use of the buildings. Long term renovation costs and interest subsidies are taken into account in income value method. In 2016, the yields used in estimation of the income value maily varied in the range of 5 to 8 per cent.

Acquisition cost

The fair values of properties under construction, interest-subsidised (short term) properties and ARAVA properties are estimated to be same as the acquisition cost. At inception these properties are booked at the original acquisition cost, including the transaction costs. Later they are valued at the original acquisition price less accumulated depreciation and impairments.

MEUR         31 Dec 2016 31 Dec 2015
Investment property by valuation classes              
Sales comparison method         2,687.6 2,054.1
Income value         540.6 508.5
Acquisition method         155.1 190.3
Total         3,383.2 2,752.9
                 

Sensitivity analysis of investment properties

 

  -10% -5% 5% 10%
MEUR Change Change % Change Change % Change Change % Change Change %
Properties measured at market values
               
Change in market prices
-213.5 -0.1% -106.8 0.0% 106.8 0.0% 213.5 0.1%
                 
Properties measured at yield value                
Yield requirement 49.5 12.5% 23.4 5.9% -21.2 -5.4% -40.5 -10.2%
Lease income -65.1 -16.5% -32.6 -8.2% 32.6 8.2% 65.1 16.5%
Maintenance costs 20.6 5.2% 10.3 2.6% -10.3 -2.6% -20.6 -5.2%
Utilization rate -65.1 -16.5% -32.6 -8.2% - - - -
                 

All SATO's investment properties are classified to hierarchy level 3 under IFRS 13. Items which are included in the hierarchy level 3 are measured using input data which is not based on observable market data.