Asset Buyout Partners Annual Report 2020

At year-end all properties were valued by C&W. Each property is considered a separate asset based on its unique nature, characteristics and risks. The internal valuation team did not prepare a full valuation for all properties at year-end. However, analysis based on historical experience and expectations on future events were made of the movements in each property’s value. Furthermore, the analysis performed includes inspections and technical reviews of all properties. The external valuation report was also considered during the process. The internal valuation team verifies major inputs applied in the external valuation report by agreeing the information in the valuation computation to amounts in lease agreements, market reports and other relevant documentation. If the fair value changes in the external valuation report are different from expectations based on internal analysis, the changes are further discussed with the external valuation expert. When the Group’s management has finalized their assessment, the valuation results are presented to the Board of Directors and the major assumptions used in the valuations are discussed with the Board of Directors. It has been concluded that the valuations prepared by the external valuation expert may be used as basis for the accounting of investment properties at fair value at the balance sheet date. The following assumptions are considered to be the key inputs to the valuations: Rental cash inflows Future cash inflows consist of both contracted cash flows, from non-cancellable leases, and future lease income which is estimated based on assumptions on market rent and re-let costs. The market rent is estimated based on property location and type. C&W assists in estimating market rent by performing individual assessments of each property based on research and knowledge of the relevant area. The assessment of market rent distinguishes between property and land in line with contractual rent. Property costs Cost levels used in the valuation are based on normalized cost levels over the life of the building. Costs mainly consist of owner’s costs (e.g. maintenance, administration, insurance and taxes) and common costs. Inflation rate The inflation rate is used to forecast the development in rent levels. Inflation prognosis is based on yearly average forecast from Norges Bank, commercial bank(s) and Statistics Norway. Discount rates Discount rates are used for discounting contracted cash flows. Applied discount rates are set by performing individual assessments of tenants and properties. Exit yields Exit yield equals the expected normalized net initial yield for a prop- erty in a given geographical location and type. The overall building type and age is taken into account and seen against lifetime and reletting cost. The exit yield is given in real terms but is discounted with a higher nominal discount rate to take the effect of inflation in the DCF model. It is the expected real return for a property within a given geographical location and type. Exit yield is used for discount- ing future lease income and residual value of each asset. Undeveloped land The value of undeveloped land is estimated as if the land were sub- divided, developed, and sold. Development costs, incentive costs, and carrying charges are subtracted from the estimated proceeds of sale, and the net income projection is discounted over the estimated period required for market absorption of the developed sites. The table below shows to which degree the investment property portfolio is affected by change in exit yield, property cost, discount rate, inflation and market rent, given that all other factors are unchanged (undeveloped land not included). Assumption Changes (p.p.) Effect on fair value (NOK) % Changes (p.p.) Effect on fair value (NOK) % Market rent 10,00 % 534 300 000 6,23 % -10,00 % -534 280 000 -6,23 % Property costs 10,00 % -60 500 000 -0,70 % -10,00 % 64 200 000 0,74 % Inflation year 1 1,00 % 77 700 000 0,91 % -1,00 % -77 500 000 -0,90 % Discount rate 0,25 % -178 100 000 -2,08 % -0,25 % 227 690 000 2,65 % Exit yield 0,25 % -131 100 000 -1,53 % -0,25 % 142 750 000 1,66 % 1) Estimates by Cushman & Wakefield Realkapital in conjunction with valuations at 31 December 2020 Asset Buyout Partners | Annual Report 2020 29