Valuation report of the independent real estate expert
Acting on behalf of Zug Estates Holding AG for purposes of accounting as of the balance sheet date of December 31, 2015, Wüest & Partner AG (Wüest & Partner) valued the properties and sections of properties held by the Zug Estates Group. 15 investment properties, three properties under construction and six operating properties were valued.
Wüest & Partner hereby confirms that the valuations were performed in accordance with national and international standards and guidelines. The property values determined correspond to the current value (market value) as described in Swiss GAAP ARR 18, item 14.
Definition of market value
«Market value» is defined as the amount for which a property would most probably be exchanged on the open market on the valuation date between two independent and knowledgeable parties, willing to buy and sell respectively, with due allowance made for a reasonable marketing period.
Property transfer tax, property gains taxes, value added tax and other costs and commission fees that would be incurred if the property were sold are not included. Nor is any account taken of the Zug Estates Group's liabilities in respect of taxation (apart from ordinary property taxes) and financing costs.
In valuing Zug Estates Group Properties, Wüest & Partner applied the discounted cash flow (DCF) method, by which the market value of a property is determined as the total of all projected future (100 years) net earnings discounted to the valuation date. Net income is discounted separately for each property with due allowance for specific opportunities and threats, and adjustment in line with market conditions and risks.
The properties under construction were also valued using the DCF method by means of reverse calculation (residual value method), inferring the project value on the balance sheet date in three steps:
- Valuation of the property at the time of completion – taking account of the current occupancy/sales rate and the market and cost estimate on the balance sheet date;
- Calculation of the market value on the balance sheet date, taking account of the projected investments still to be undertaken;
- Estimate of the development risk according to the current project status and treatment as a separate cash flow of a cost position.
Basis of valuation
Wüest & Partner is familiar with all the properties, having carried out inspections and examined the documentation provided. The properties have been analysed in detail in terms of their quality and risk profiles (attractiveness and lettability of rented premises, construction type and condition, micro- and macro-location etc.). Currently vacant premises are valued with due allowance made for a reasonable marketing period.
The value of the properties under construction could be reliably estimated. Sufficient documentation, such as construction permits, cost estimates, project plans, rent rolls/breakdowns of apartments, was available as a basis for such estimates.
Five investment properties, five operating properties as well as three properties under construction were inspected in connection with the valuation as of the balance sheet date of December 31, 2015.
As of December 31, 2015, Wüest & Partner determined the market value of the total of 24 properties. These break down into 15 investment properties, three properties under construction and six operating properties. The market value (current value) of the properties as of the balance sheet date is assessed as follows:
15 Investment properties CHF 1 013 515 775.00
3 Property under construction CHF 31 018 000.00
6 Operating properties CHF 113 693 000.00
Total CHF 1 158 226 775.00
Changes during reporting period
Within the review period from January 1, 2015 to December 31, 2015 the following changes took place:
- Property Industriestrasse 8, Oberentfelden AG: Sale of property;
- Property Rote Trotte 14, 16, Baar ZG: Sale of one apartment, two parking spots and one craft room;
- Property Suurstoffi 3–17 (construction site 2), Risch (Rotkreuz) ZG: Sale of building house number 3.
Independence and confidentiality
Wüest & Partner performed the valuation of Zug Estates Group real estate properties independently and neutrally in conformity with its business policies. It was carried out solely for those purposes specified above; Wüest & Partner shall accept no liability in respect of third parties.
Zurich, February 5, 2016
Wüest & Partner AG
Marco Feusi MRICS
Investment properties and operating properties
Valuation of the investment properties is based on the following key assumptions:
The lettable areas were factored into the valuations on the basis of the rent rolls of the Zug Estates Group and verbal information provided by the Zug Estates Group. Discrepancies between this information and the property plans were verified with the Zug Estates Group.
The rent rolls as of January 1, 2016, on which the valuation was based, were received by Wüest & Partner in November 2015.
The DCF model adopted is a one-period model. The valuation period extends for 100 years from the valuation date with an implicit residual value during the eleventh period. Exceptions are possible in the case of leasehold properties with a corresponding reversion scenario.
Discounting is based on a risk-adjusted interest rate. The applicable rate is determined separately for each property. Riskfree interest rate + property risk (immobility of capital) + premium for macro-location + premium for micro-location depending on use + premium for property quality and income risk + any other specific premiums. The discount rates of the property portfolio of Zug Estates Holding AG range from 3.20% to 4.70% (net real terms).
Unless otherwise specified, the valuations assume an annual inflation rate of 1.00% for both income and expenses. When considered in nominal terms, the discount rate is adjusted accordingly. The cash flow trend and the discounting applied are presented in real terms.
Indexing of rental contracts
Specific indexation of existing rental contracts is taken into account. 80% indexing (Swiss average) is assumed after contract expiry, with contracts adjusted to market rates every three to five years, depending on occupancy.
The valuation makes no explicit allowance for credit risks posed by any of the tenants.
Scheduling of payment flows:
In the case of existing rental contracts, individual payments are scheduled according to the contractually defined arrangements. After expiry of the contracts, cash flows are factored in quarterly in advance for commercial tenancies and monthly in advance for residential tenancies.
Recoverability of ancillary costs
For the running costs, completely separate service charge accounts were assumed, with all tenancy-related ancillary costs passed on to tenants.
Maintenance (repair and upkeep) costs were calculated using the building analysis tool. Based on an analysis of the condition and remaining lifespan of the various building elements and components, the software models periodic refurbishments and calculates the associated annual reserves for maintenance costs. The results were plausibility-tested using comparables and benchmarks derived from Wüest & Partner surveys. The calculation factors in 100% of repair costs in the first 10 years and 60% to 80% (individual recoverable share) from year 11 onwards, in line with the assumed value-preserving investments.
Properties under construction
Wüest & Partner also determined the current value (market value) of the properties under construction. These valuations are based on the following assumptions:
Where appropriate, the Zug Estates Group divides the properties into partial plots. For reasons of transparency, this subdivision is taken over by Wüest & Partner in the valuations.
Project development strategy
Where deemed plausible by Wüest & Partner, the strategy in relation to project development/promotion (e. g. sale vs. letting) has been taken over from the Zug Estates Group.
The background data of the Zug Estates Group are verified and adjusted where appropriate (e. g. utilization, lettable areas, schedule/development process, rental/absorption).
The valuations are subjected to an impartial assessment of income, costs and investment returns.
Design-and-build or general service contracts
With regard to the service contracts of general and design-and-build contractors, it is assumed that construction costs have been secured.
Services provided by project developers
The construction costs include the services of the Zug Estates Group as the developer's representative and the project developer.
In the case of sections of properties earmarked for sale (e. g. condominiums), costs of sale have been taken into account in the valuations.
Where known, preparatory work is taken into account in construction costs (e. g. remediation of legacy contamination, demolition work, infrastructure).
Construction costs include the usual incidental costs such as construction finance, but exclude financing of the plot of land. These costs are implicitly included in the DCF model.
Services provided to date
Where known, value-relevant services provided to date by third parties or by the Zug Estates Group in the form of investments made are taken into account.
It is assumed that the income from the planned commercial properties is subject to VAT. The construction costs are therefore presented exclusive of VAT.
The valuations do not include any deferred taxes.