13. Investment properties

MEUR       note 31 Dec 2017 31 Dec 2016
Fair value of investment properties at start of period       3,383.2 2,752.9
Acquisitions, new constructions         29.1 557.7
Other investments to properties         125.0 10.5
Disposals of investment properties       4 -46.2 -66.5
Capitalised borrowing costs       35 1.9 1.1
Reclassification from trading properties         1.2 3.2
Gains and losses from changes in fair value*       70.6 124.3
Fair value of investment properties end of period   3,564.8 3,383.2
*Gains and losses from changes in fair value include foreign exchange gains and losses of EUR -9.3 (23.6) million.  
                 

Significant investments during the period:

In September, SATO acquired 150 apartments located in Espoo, Turku and Vantaa from Veritas Pension Insurance company.

Significant disposals during the period:

In total, 294 (1,267) rental apartments were divested in Finland, with a combined value of EUR 46.2 (66.5) million. The most significant divestments were the sale of 95 rental apartments to Nordea Life Assurance Finland Ltd in February and the sale of 96 rental apartments to JHS-Kiinteistöt Ltd. The divested apartments are mainly located outside SATO’s primary operating area.

Valuation methods

SATO's investment properties mainly comprise of rental apartments that are located in the largest growth centres. Approximately 80 per cent of the housing property is located in the Helsinki region. The quality of investment properties is maintained by renovation and repair activities based on the properties' 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 SATO’s each 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 Board of Directors.

At inception, investment properties are recognised at acquisition value, which includes transaction costs. Thereafter, investment properties are recorded at fair value. Gains and losses from changes in fair value are recorded through profit and loss in the period when they are incurred. Fair value of an investment property represesents the price that would be received for the property in an orderly transaction, taking place in the local (principal) market, considering 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), a 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. The 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 properties 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 the income value method. In 2017, the yields used in estimation of the income value varied mainly 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 the same as the acquisition cost. At inception, these properties are booked at the original acquisition cost, including the transaction costs. Later they are valued on the original acquisition price less accumulated depreciation and impairments.

MEUR         31.12.2017 31.12.2016
Investment property by valuation classes          
Sales comparison method         2,932.8 2,687.6
Income value         478.9 540.6
Acquisition method         153.1 155.1
Total         3,564.8 3,383.2
                 
                 

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
-240.0 -8.2% -120.0 -4.1% 120.0 4.1% 240.0 8.2%
                 
Properties measured at yield value                
Yield requirement 50.9 10.3% 24.1 4.9% -21.8 -4.4% -41.7 -8.4%
Lease income -64.4 -13.0% -32.2 -6.5% 32.2 6.5% 64.4 13.0%
Maintenance costs 18.5 3.8% 9.3 1.9% -9.3 -1.9% -18.5 -3.8%
Utilisation rate -64.4 -13.0% -32.1 -6.5% - - - -
                 

All SATO's investment properties are classified in 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.