INVESTOR REPORT 3RD QUARTER 2017 DNB SCANDINAVIAN PROPERTY FUND DA

Transcription

1 REIM INVESTOR REPORT 3RD QUARTER 2017 DNB SCANDINAVIAN PROPERTY FUND DA Øyrane Torg

2 Contents 1. Summary Market values and return Investment capacity and planned issues Market comments DNB REIM The property portfolio Portfolio structure Tenants Corporate social responsibility Corporate social responsibility in general GRESB Environment report for DNB Scandinavian Property Fund Breeam-Nor In-Use Risk management Development in unit values Lillestrøm Torv

3 1 Summary Return target NAV 7 9 % per cent per annum Target for distributions 3 5 % per cent per annum Portfolio target NOK 12,5 billion Paid-in capital NOK 6.440,3 million Committed, uncalled capital approx. NOK 1 bn. Geographic portfolio breakdown Norway: 95 per cent, Sweden: 5 per cent Breakdown by space use Offices: 54 per cent, Retail: 29 per cent Hotel 13 per cent, Parking/Other: 4 per cent Annual rental income NOK 347 million Aggregate area 230,165 m² Remaining lease term 7,3 years (Value-weighted average for the portfolio) Financing 100 per cent equity capital Net asset value (NAV) NOK 7.389,5 million Return so far ,7 per cent Return ,3 per cent The fund s net asset value (NAV) at the end of the 3rd quarter of 2017 was NOK 7.389,5 million, which represents an increase of NOK 151,1 million or 2.2 per cent for the quarter and NOK 381,0 million (5.7 per cent) so far this year. The direct return for the property portfolio was NOK 66.6 million (1 per cent), while the value change was NOK million (1.4 per cent), in total 2.4 per cent. The total return for the property portfolio so far this year is NOK mill. (6.2 per cent). The development in value has also been good during this quarter, with increasing office rents in the Oslo area and continued pressure on the yield level being important value drivers. A recent letting in Sirkeltomten and a positive development for hotels has contributed in the same direction. For further information on the return, see section 2: Market values and return. So far this year the fund has acquired property for approximately NOK 1.4 billion and sold property for NOK million. Øyrane Torg, a shopping centre in Arna, Bergen, was taken over on 1 September for a net property value of NOK 580 million. The property sold was Myrdalsvegen 22 in Åsane, Bergen, also in the third quarter. A lot of work has been devoted to new investments, but competition for attractive core properties has at the same time been strong, both in Norway and Sweden. The fund is currently working on an attractive pipeline of properties, but will use the time necessary to secure the right investments. For further information on issues and investments, see section 3: Investment capacity and planned issues. The fund has recently received the annual benchmark from GRESB (Global Real Estate Sustainability Benchmark). GRESB surveys the status of the fund s environmental work and the aggregate score was 83 points against 81 points for The fund thus continues to be in the category Green Star, and number 2 out of 89 in its peer group. For further information on environmental work and the GRESB survey, see section 6: Corporate social responsibility. Work on simplifying the feeder structure through a merger of certain limited partnerships was completed with effect from 1 July Thereby the fund s maximum limit, the limited partnership feeder structure and the board s composition have been changed in accordance with information previously provided. Annualised return last 3 years (*) Annualised return last 5 years (**) 8,4 per cent 7,2 per cent The fall in petroleum investment is bottoming out and employment has picked up. At the same time, it is expected that interest rate levels will remain low with the first increase by Norges Bank towards the end of With less building of new office space in the Oslo area, lower vacancy levels and higher rents, there is much to indicate that the property market will remain attractive on a 1-2 year view. Growth in retail sales towards 2020 and a positive development in occupancy in the main parts of the hotel market point in the same direction. In Sweden we expect that domestic demand will slow somewhat, but that export growth will pick up. The base rate is expected to remain at the current level until There are therefore grounds to have a positive view on Sweden as well. For further comments on market developments, see section 4: Market comments. (*) Annualised return 3 years relates to (**) Annualised return 5 years relates to

4 2 Market values and return The estimated net asset value (NAV) of DNB Scandinavian Property Fund as at was NOK 7.389,5 million. During the first quarter capital of NOK 830 million was paid in and in the third quarter NOK 388 million. There has been a value increase of NOK 381,0 million since the start of year, when the NAV was NOK 6,020.4 million, corresponding to 5.7 per cent. The fund has total paid-in company capital of NOK 6,440.3 million and uncalled capital of around NOK 1 billion. Including the dividend Fig. 2.1 Volume development paid-in capital and net asset value, including and excluding dividends paid Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 NAV NAV incl. dividends paid Paid-in capital 2Q17 for 2016 DNB SPF DA has distributed NOK 1,142.5 million since it was established in Figure 2.2 shows the annual percentage change in NAV for the fund in total, as well as the property portfolio s direct return in per cent. The fund has had a high occupancy level and good direct return over time, but a gradually weakening percentage direct return as a result of higher property values. Annual return 15,0 % 10,0 % 5,0 % 0,0 % -5 % -10 % -15 % 1,5 % -9,6 % -1,8 % 11,1 % 9,7 % 4,5 % 6,3 % Direct return property Development NAV 10,9 % Fig. 2.2 Annual return on net asset value and direct return NOK mill Paid in capital DNB SPF DA Percentage share NAV NAV DNB EiendomsInvest KS 2.115,8 34,38 % DNB Scandinavian PropFund 4 KS 1.532,3 24,57 % 1.815,9 DNB Scandinavian PropFund 5 KS 948,4 13,76 % 1.017,0 DNB Scandinavian PropFund IS 496,9 7,03 % 519,3 DNB Scandinavian PropFund ASA 42,0 0,76 % 55,8 DNB Scandinavian PropFund 1 AS 434,3 6,33 % 467,5 DNB Scandinavian PropFund 2 AS 870,6 13,18 % 973,7 Totalt 6.440,3 100,00 % 7.389,5 Tab. 2.3 Breakdown of paid-in capital and net asset value 8,1 % 6,3 % 5,7 % 2017 The properties in the portfolio have solid tenants and a large proportion of long and medium-term leases, something that has contributed to the good direct return. See further also Market comments in section 4. A breakdown of paid-in capital in the fund company and NAV by feeder company as at is set out in table 2.3. Return on the property portfolio Value changes The fund s property portfolio as at had an aggregate value of NOK 7,474.3 million against NOK 5,927.2 million as at.16 and NOK 6,870.9 million as at Adjusted for the purchase of Lillestrøm Torv in January and Øyrane Torg on 1 September, the value change is NOK 288 million so far this year, equivalent to 4.4 per cent before improvements. The Norwegian property portfolio is valued by Akershus Eiendom and Cushman & Wakefield. The properties had an aggregate value at the end of the quarter of NOK 7,093 million, which adjusted for the purchase of Lillestrøm Torv and Øyrane Torg involves a value increase so far this year of NOK 302 million, corresponding to 4.4 per cent. Adjusted for improvements of NOK 32.5 million the value increase is NOK million, corresponding to 3.9 per cent. The Swedish portfolio is valued by CBRE and Cushman & Wakefield. The total value of the property portfolio in Sweden is SEK 389 million, which gives an aggregate decrease in value so far this year of SEK 14.5 million, corresponding to 3.6 per cent. Adjusted for improvements of SEK 13.5 million, the fall in value is SEK 28 million, corresponding to 6.7 per cent. Direct return and total return The portfolio s direct return this quarter was NOK 66.6 million, corresponding to 1.0 per cent. This is the same level as the previous quarter. The total return for the property portfolio so far this year is NOK million, corresponding to 6.2 per cent. In the third quarter this amounted to NOK million and 2.4 per cent respectively. The difference between the return on the property portfolio and the return on total capital (NAV) is mainly due to transaction costs, tax and the management fee charged at fund level. Table 2.4 shows the annual direct return, the value change and total return for the property portfolio from establishment of the fund until today. Figure 2.5 gives a presentation of the fund s quarterly development in NAV and direct return.

5 2 Market values and return Annual return on property portfolio Q 2017 Direct return 23,3 6,0 % 31,7 5,7 % 41,1 5,9 % 90,5 6,1 % 145,0 5,7 % 217,5 5,6 % 223,8 5,7 % 239,4 5,5 % 259,2 4,7 % 199,3 2,9 % Value change (75,0) -15,7 % (42,0) -7,1 % 41,2 6,1 % 71,3 4,8 % (13,2) -0,3 % 34,5 0,9 % 185,2 4,7 % 193,8 3,6 % 131,7 2,3 % 242,5 3,3 % Total return (51,8) -10,2 % (10,2) -1,7 % 82,3 12,1 % 161,8 10,9 % 131,8 5,4 % 252,0 6,5 % 409,0 10,4 % 433,2 9,1 % 390,9 6,9 % 441,8 6,2 % Tab. 2.4 Annual return and value change for property portfolio 8,00 6,00 Development NAV Direct return property 6,4 % 4,00 2,00 0-2,00-4,00 1,0 % 0,5 % -1,3 % -3,5 % -2,8 % -2,1 % -2,8 % -0,3 % -0,8 % 2,1 % 3,3 % 3,2 % 2,8 % 2,9 % 2,6 % 2,3 % 2,1 % 2,2 % 2,2 % 2,4 % 1,6 % 1,3 % 1,3 % 1,6 % 1,8 % 1,7 % 1,9 % 1,2 % 1,4 % 1,8 % 1,1 % 0,9 % 0,4 % 0,7 % 0,8 % 3,1 % 1,1 % 0,7 % 2,7 % 2,2 % -6, Fig. 2.5 Quarterly development in NAV and direct return 5

6 3 Investment capacity and planned issues In July the fund sold Myrdalsveien 22 for a gross property value of NOK million and took over Øyrane Torg on 1 September for a net property value of NOK 580 million. As a result investments totalling NOK 1.4 billion and sales for NOK million have taken place so far this year. Øyrane Torg is located in Indre Arna, close to the railway station and main road. The journey by rail to the Central Station in Bergen takes about 8 minutes. In August in order to finance the purchase of Øyrane Torg new capital was raised from international investors that subscribed at the end of the fourth quarter of In July the fund received a new international commitment of NOK 500 million, so that the aggregate committed, uninvested capital remains at around NOK 1 billion. The fund has participated in a number of bidding processes in Norway and Sweden during the current year and is experiencing strong competition in the market. This is not least the case for attractive CBD investments in Oslo, despite a falling yield and a yield gap that is virtually zero for most attractive properties. A lot of work is being carried out to obtain and evaluate potential new investments, and our objective is to have further investments in place by the end of the first quarter of New issues will depend on progress in completing new investments as well as interest from existing and potential investors. The segment breakdown of the fund s property portfolio is today well-suited to the portfolio strategy and investments can be made within offices, retail and hotels. The allocation to Sweden is currently only 5 per cent and we are therefore focusing on Sweden as well. Proposed changes in tax rules are creating some uncertainty however, and as a result greater caution is required in evaluating relevant investment opportunities. In the office market in the Oslo area higher rents and a low supply of new office space are expected in the coming 3 years. In Stockholm and Gothenburg rents are also rising and, with continued low interest rates in both Norway and Sweden, we believe that there is a good basis for making new and attractive property investments. 6

7 4 Market comments DNB REIM 4.1 Macro The global cyclical upturn has become stronger and more broadly based across countries and sectors than previously expected. Positive and self-reinforcing forces are in operation and will act to keep growth up. Global growth is expected to be in the range 3.2 to 3.4 per cent annually in the period of The emerging economies continue to lead, but the Eurozone also shows improvement with expected growth in the current year of 2.1 per cent. It is expected that growth in the wealthy industrialised economies will slow during the period but will still be strong enough for unemployment to fall further and for inflation to pick up a little. A normalisation of monetary policy is also expected and that central banks will begin to increase interest rates. There are still political risk factors that may affect developments, including Brexit, Donald Trump s actions as US president and North Korea s provocative activities. The fall in oil investment is in the process of coming to an end and activity in the Norwegian economy is starting to rise. The upturn is due to a less negative impact from the oil sector and higher growth in consumption and corporate investment. Expectations of a weaker development in housing investment next year will have a contrary effect, but GNP growth for mainland Norway is expected to be around 2% in the coming years. The rise in the growth rate has led to an increase in employment, and unemployment, which shows a falling trend, is now below 4.5 per cent and is expected to fall to 4 per cent in Wage growth is expected however to be weak and inflation to remain below Norges Bank s target of 2.5 per cent. DNB Markets therefore does not expect that the base rate will be raised before the end of Forecast for important macro factors GDP Mainland Norway 2,0 2,0 1,9 1,9 10-year swap rates 2,0 2,2 2,5 2,5 CPI 2,1 1,6 1,4 1,5 Unemployment (AKU) 4,3 4,2 4,1 4,0 Fig. 4.1 Economic Outlook, DNB Markets 4.2 The property market in general The economic upturn supports positive prospects for the property market in general and that it will continue to be attractive to be invested in commercial property. Uncertainty mainly relates to a faster and stronger rise in interest rates than expected and political risk factors internationally. The Norwegian market is still characterised however by geographic differences, and the downturn in the oil sector continues to be felt in Bergen and Stavanger. Rising employment will generally contribute to an increase in demand for premises and thus support expectations of rising rental levels. Generally, this is expected to give a positive development in values in the coming years in spite of the fact that some increase in yield levels must be expected. 4.3 The transaction market Activity in the Norwegian transaction market held up well during the second quarter with an aggregate transaction volume of NOK 16 billion. During the first half year property sales totalled NOK 40 billion, following a very strong first quarter. The conditions are in place for continued good activity in the second half year, and 2017 therefore looks likely to be one of the most active years in the Norwegian market. Offices are the largest segment with a share of around 53 per cent, while retail property amounts to 11 per cent. Oslo dominates the picture with a share of the transaction volume of around 65 per cent, which is slightly higher than normal. International investors are still active in the Norwegian market and their share of the volume in the first half year was 27 per cent. With regard to categorisation of market participants, property companies have been most active so far this year, both on the buying and selling side, followed by a syndication managers and property funds. 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Q Yield gap after aggregate borrowing cost for prime offices Aggregate borrowing cost (5-year swap plus loan margin) Prime yield offices Oslo Normal yield office clusters along Outer ring road +/- 50 bps Prime yield along Outer ring road +/- 50 bps (long lease) Q Q Q Fig. 4.2 Office yields in Oslo (Source: DNB Næringsmegling) Q Q Q Q Q Q Following significant compression of the prime yield for offices in Oslo during 2016, the yield level has been more stable in The prime yield is estimated by several commentators to be 3.6 per cent, but not many transactions have been observed at such level. Most expect a relatively stable level going forward, in spite of expectations of higher interest rates and bank margins in the future. This is balanced by a high level of demand and expectations of rising rents. For so-called normal property in Oslo the yield level is per cent, and this has fallen less than the prime yield. Increasing interest in this type of property may lead to further yield compression in this segment. In the case of retail property yield levels have been relatively stable in recent times. In central Oslo examples can be found of transactions around 4 per cent, while the yield for shopping centres is generally between 4 and 5 per cent. With regard to the other main cities, prime property in Bergen is being sold on a yield between 4.75 and 5 per cent, Trondheim at 5 per cent and Stavanger at 5.5 per cent. 4.4 The rental market for offices in Oslo Better times for most sectors combined with growing optimism as to the future has resulted in a relatively broad upturn in the office rental market in Oslo during the last year. According to Arealstatistikk, the first half of 2017 saw the highest number of new leases since the first half A result of higher demand and a reduction in the supply side, due in part to conversion to housing, is falling vacancy levels and rising rents. Office vacancy in Oslo is expected to be around 7 per cent at the end of 2017, and then to fall further to 6.3 per cent in The reduction comes as a result of higher demand, growth in employment with an associated increase in demand for premises and a limited supply side. Rents are rising across Oslo with the exception of Bryn- Helsfyr and Lysaker where the development has been weaker. Growth has been strongest for buildings in or close to the city centre. Prime rents for CBD West (Vika/Aker Brygge) are estimated at NOK 4,200 per square metre and for CBD East (Bjørvika) at 3,300 per square metre. 4.5 The rental market for offices in other cities DNB Næringsmegling estimates vacancy in Bergen to be around 10 per cent and expects a flat development during 2017 and subsequently a falling trend as a result of lower new building activity and growth in employment. The prime rent in Bergen is 7

8 4 Market comments DNB REIM NOK 2,700 per square metre. Vacancy in Trondheim has fallen slightly to below 9 per cent but this is considered to be temporary and that the level will rise again as a result of new building. In Stavanger vacancy overall is about 11 per cent but with big geographic differences, such that at Forus vacancy is estimated to be 16 per cent. No major changes in the vacancy situation are expected in 2017 in spite a slight recovery in optimism following the oil downturn. Prime rents in Trondheim and Stavanger are respectively NOK 2,700 and NOK 2,600 per square metre. 4.6 Retail Kvarud s shopping centre index at the end of July shows that turnover in shopping centres increased by 1.1 per cent in the first seven months of the year, adjusted for space changes and shopping days during that period. Growth in private consumption has been one of the drivers behind rising growth in Norway over the last year and DNB Markets expects that growth will be 2.1 per cent in 2017 and in the range per cent in the years up to There is still strong growth in Internet shopping but total volume represented only 7 per cent of aggregate retail sales in The development of e-commerce and shopping habits will nevertheless be important factors for the retail sector and shopping centres will need to think innovatively with regard to physical sales, content and the adaptation of leases to a changed market situation (50 000) ( ) Fig. 4.3 Supply and demand for office space in Oslo (Source: DNB Næringsmegling AS, June 2017) 4.7 Hotels The hotel industry overall has experienced a good development in 2017, with higher occupancy rates and a high REVPAR. There are nevertheless considerable variations between different districts as a result of differences in the provision of new capacity and the fact that the impact of the downturn has varied. The development has been particularly good for Oslo and the Gardermoen area with record highs for the main key figures. The occupancy rate exceeded 70 per cent at Gardermoen in the period January-July (71 per cent), and in Oslo the occupancy rate has been above 70 per cent (70.9 per cent) for the first time since Here REVPAR also rose by around 11 per cent compared with the same period in So far in 2017 Stavanger has experienced what may be a turning point with a rise in occupancy from 49.3 per cent to 51.6 per cent. Bergen however has experienced the effect of a substantial increase in capacity and the occupancy rate has fallen from 65.7 per cent in the period January to July 2016 to 62.1 per cent for the same period in At the same time there has been a reduction in REVPAR of around 4 per cent. In the Trondheim market occupancy rose from 60.4 per cent to 63.4 per cent for the same period combined with an increase in REVPAR of around 13 per cent. Newbuilding net Growth in let space Vacancy in per cent (right axis) Estimated vacancy (right axis) E 2018E 2019E 12,0 % 10,0 % 8,0 % 6,0 % 4,0 % 2,0 % 0,0 % 4.8 Sweden The high growth rate in Sweden continues, primarily driven by a solid rise in investment, particularly on the housing side. Private consumption also remains strong. Looking forward, it is expected that domestic growth will slow somewhat, but that export growth will pick up. In aggregate DNB Markets expects that GDP growth will decrease from 3 per cent in the present year to 1.8 per cent in In spite of the high growth rate and inflation being close to its target, the Swedish Riksbank is continuing to buy assets. The bank has however given signals of a normalisation and it is expected that the first interest rate increase will take place in mid-2018 and that the base rate will be around 1.0 per cent in There was a strong development in the Swedish transaction market in the second quarter, with a continued high level of activity in most markets and segments. Volume for the second quarter was close to SEK 40 billion and for the first half year approximately SEK 75 billion. This was slightly below the figure for the first half of There is still a good level of interest from international investors within most segments, but it seems that most focus is on the most central geographic areas. The prime yield for offices in Stockholm has been unchanged during the last quarter at 3.5 per cent. There have however been relatively few transactions, probably as a result of sellers expecting a continued rise in values. Gothenburg has developed positively in recent years, which has also benefited the office market. Vacancy has fallen towards 4 per cent and the prime office rent is around SEK 3,250 per square metre. The prime yield is estimated to be around 4 per cent. In the Stockholm CBD office vacancy is at a very low level of roughly 2 per cent. The prime rent level in this area is generally around SEK 6,000 per net square metre, but rents up to SEK 8,000 per net square metre have been recorded for the most attractive premises. A continued low level of new building activity and high level of demand is expected to result in continued upward pressure on rents. Growth in private consumption is expected to remain at around 2 per cent in the years to 2020, even though this is lower than the growth rate of 2.4 per cent recorded in This leads one to expect a continued good development for the retail sector. The hotel market in Stockholm has experienced a strong development over several quarters but in the second quarter of 2017 the trend was somewhat weaker with a fall in the occupancy rate of 2.2 percentage points to 75 per cent and a fall in REVPAR of 4.7 per cent. The decreases appear to be due to the addition of new capacity.

9 5 The property portfolio The portfolio as at consists of the following properties/property companies: Petroleumsveien 6 AS: Location: Petroleumsveien 6 at Forus, Stavanger Type of building: Offices/retail Year built: 1983/87/98 Purchase date: Area: approx m 2 Kronprinsensgate 9 AS: Location: Kronprinsensgate 9, Oslo Type of building: Offices/parking Year built: 1971 Purchase date: Area: approx m 2 Akerselva Atrium AS: Location: Christian Kroghs gate 16, Oslo Type of building: Offices Year built: 2008/09 Purchase date: Area: approx m 2 Sirkeltomten II AS (Portalen): Location: Dyre Halsesgate 1, Trondheim Type of building: Offices/retail Year built: 2010 Purchase date: Area: approx m 2 Kungsbacka AB: Location: Hantverksgatan 27 in Kungsbacka outside Gøteborg Type of building: Retail Year built: 2009 Purchase date: Area: approx. 10,100 m² internal space and 1,183 m² covered outdoor market Sandslihaugen 30 AS: Location: Sandslihaugen 30, Bergen Type of building: Offices Year built: 1986 Purchase date: Area: approx m 2 Uppsala Bicycle Property AB (Boländerna 5:21): Location: Bolandsgatan 16D 16H inuppsala Type of building: Shopping centre/retail Year built: 2009/10 Purchase date: Area: approx m 2 Barcode 115 AS: Location: Dronning Eufemias gate 28, Oslo (Bjørvika) Type of building: Offices Year built: 2012 Purchase date: Area: approx m 2 Barcode 123 AS: Location: Dronning Eufemias gate 32, Oslo (Bjørvika) Type of building: Offices Year built: 2012 Purchase date: Area: approx m 2 Fornebu Hotellinvest AS: Location: Snarøyveien 20, Fornebu Type of building: Hotel Year built: 2012 Purchase date: Area: approx m 2 /301 rooms St. Olavsgate 26 AS (Smarthotel): Location: St. Olavsgate 26, Oslo Type of building: Hotel Year built: 2013 Purchase date: Area: approx m 2 /257 rooms Lillestrøm Torv AS: Location: Lillestrøm Type of building: Shopping centre Year built: 1985/1997 Purchase date: Area: approx m 2 Øyrane Eiendom AS: Location: Indre Arna outside Bergen Type of building: Shopping centre Year built: 1994 Purchase date: Area: approx m 2 9

10 5 The property portfolio 5.1. Portfolio structure The fund s target is to have a diversified portfolio of good quality properties, based on active management through purchases, sales, development, leasing and operation. When the portfolio reaches the newly set target size of NOK 12.5 billion it will satisfy the following structure limits: Segment Offices: % Retail: up to 40 % Other: up to 25 % Geography Norway: minimum 60 % Sweden: up to 40 % Development projects Up to 5 % The fund s strategy is to invest in commercial property in Norway and Sweden. The main part of the portfolio will be in the main cities in Norway, but investments in Sweden may over time amount to up to 40 per cent, and the focus here will also be on good properties in the main cities. DNB REIM has long experience of investment and management in Norway and Sweden. The breakdown by country shows that investments in Sweden currently amount to around 5 per cent, see figures and It is likely that the proportion will increase in future towards an expected normal level of around 25 per cent. Table shows the breakdown of space as at for the fund's portfolio divided between let and unlet space by type of area as well as economic vacancy. The contract area for Lillestrøm Torv is the net area, i.e. the area without a share of common areas. This will be corrected later. Sandslihaugen 30 is a property under development, and is in the market for sale, and is not included in the table. As at the quarter-end vacancy stood at 3.7 per cent. Figure shows the portfolio s space breakdown by type of space. 5.2 Tenants The portfolio has a good and robust composition of tenants between banks, retail, hotels, media, IT, government and other sectors, and is characterised by large, solid lessees such as DNB, Nordic Choice Hotels, Smarthotel Oslo, Bergen Municipality, Coop, Oslo Municipality, the Norwegian Foreign Ministry, NHST Media Group, etc. The breakdown of tenants by sector is set out in figure Figure shows the development in annual rental income. Total rental income amounts to approximately NOK 347 million for 2017, an increase from NOK 289 million in 2016, mainly due to the acquisition of property. A large proportion of rental income is secured by long and medium-term contracts. Let space Available space Table Space breakdown, let and unlet space (ex. Sandslihaugen) Fig Portfolio breakdown by type of space Economic vacancy 29 % 54 % 13 % 3 % Retail Offices Hotel Parking 1 % Other Total area Retail ,3 % Offices ,1 % Hotel ,0 % Parking ,9 % Other % Total ,7 % % 5 % Norway Sweden 12 % 1 % 75 % 7 % 3 % Bergen Stavanger Oslo Trondheim Uppsala 4 % 10 % 33 % 14 % 4 % 25 % 6 % Services Public sector Retail Hotel Consultants Finance Media 2 % Gothenburg 3 % Oil/Gas Fig Geographic breakdown by country Fig Geographic breakdown by city Fig Tenant breakdown 10

11 5 The property portfolio Fig Development in annual rental income The average remaining lease term is 7.7 years for the properties in Norway, while for the properties in Sweden it is 1.6 years. The average value-weighted remaining lease term for the entire portfolio is 7.3 years. Table shows the average value-weighted remaining lease term by property in the portfolio. Property Acquired City Country Area m² Average remaining lease term Petroleumsveien Stavanger Norway ,3 Kronprinsensgate Oslo Norway ,6 Akerselva Atrium Oslo Norway ,8 Sirkeltomten II AS Trondheim Norway ,5 Sandslihaugen 30 AS Bergen Norway ,3 Barcode 115 AS Oslo Norway ,2 Barcode 123 AS Oslo Norway ,2 Fornebu Hotellinvest AS Oslo Norway ,1 St. Olavs gate 26 AS Oslo Norway ,8 Lillestrøm Torv AS Oslo Norway ,2 Øyrane Torg Bergen Norway ,6 DNB Kungsbacka AB Gothenburg Sweden ,0 Uppsala Bicycle AB Uppsala Sweden ,3 Total/average ,3 Tab Calculation of average lease period 11 Barcode

12 6 Corporate social responsibility 6.1 Corporate social responsibility in general DNB REIM, as part of the DNB group, is covered by DNB s guidelines for corporate social responsibility. DNB has a goal that its business should not involve any infringement of human rights or the interests of employees, corruption, serious environmental damage or other action that can be regarded as unethical. DNB has chosen to support and participate in a number of global initiatives such as, for example, the United Nations Global Compact and the OECD s guidelines for multinational companies. DNB imposes strict requirements on suppliers and their observance of corporate social responsibility and all suppliers must sign DNB s Self declaration on supplier s corporate social responsibility. DNB s anti-corruption guidelines state that the group has zero tolerance of corruption, and prevention of any corruption risk in DNB and its management s engagement and obligations are important elements. DNB REIM is certified in accordance with ISO 14001, which is an environmental management system. The system should contribute, among other things, to the company fulfilling the authorities requirements relating to the external environment, to it establishing an environmental policy, environmental goals and measures, as well as continuous improvement of its own environmental impact. survey. See figure 6.1 below. In relation to the peer group, which consists of unlisted property companies with a comparable property strategy, the fund was number 2 out of 89. An increased use of BREEAM-Nor In-Use certification and better documentation of how the manager carried out environmental work in accordance with the ISO standard contributed to the rise in this year s score. For further information on the survey reference is made to the fund s website where the scorecard is available together with more information on the development within the survey s 7 main areas. We will also follow up with more information to those of the fund s investors who require a one-to-one meeting in future. Our opinion is that sound environmental work is an important factor for investors in the fund and for certain of them it is a condition of their investment. At the same time knowing that we are on the right road and among the best in our sector contributes to increased enthusiasm in our own environmental work. GRESB measures the fund portfolio s environmental status, the manager s ability to organise environmental work, as well as to convey objectives and results. This takes place by measuring the status in 7 main areas for environmental work. The result ends with a score for each area, a total score and a benchmark against other participants. Feedback from the survey is extensive and detailed, and gives a manager a good overview of strong and any weak areas, and thus a good basis for the right focus in environmental work. A total of 823 funds and property companies from 62 countries with total assets of USD 3.7 trillion were benchmarked in GRESB (Global Real Estate Sustainability Benchmark) The results from the fund s 2017 international environment benchmark, GRESB (Global Real Estate Sustainability Benchmark) were published in September. The score for the year was 83, an increase of two percentage points from 2016 and a Green Star classification. Environmental work carried out in the fund s property portfolio can thus show a continuous improvement since 2013, which was the first year the fund participated in the Fig. 6.1 DNB Scandinavian Property Fund. GRESB score utvikling 12

13 6 Corporate social responsibility 6.3 Environment report for the fund A separate environment report is prepared for the property fund, which is available on the fund s website. The report shows targets and performance for what are defined as DNB REIM s most important environmental factors: energy, waste and pollution. DNB REIM purchases electric power (direct electric power) with a guarantee of origin, which means that the proportion derived from fossil fuels is very low. Energy used in the fund s buildings consists of direct electric power, district heating and district cooling. Direct electric power amounts to 66 per cent of the total. As a result of energy efficiency measures DNB Scandinavian Property Fund has reduced energy costs by 19 per cent since the basis year In 2016 energy consumption was reduced by 9 per cent, corresponding to 2,500,000 kwh. In addition, there has been particular focus on waste and waste sorting and buildings managed as a general rule have 5 7 different waste fractions. 6.4 Goal: BREEAM-Nor In-Use Our objective that all the fund s buildings in Norway should be certified in accordance with BREEAM-Nor In-Use. As at the following have been certified: Sirkeltomten ll, Trondheim Petroleumsveien 6, Stavanger Kronprinsensgate 9, Oslo Akerselva Atrium, Oslo Smarthotel, Oslo Quality Hotel Expo, Fornebu Oslo It is planned to certify Barcode 115 AS and Barcode 123 AS in 2018, and Lillestrøm Torv AS and Øyrane Eiendom AS in BREEAM In-Use The assessment of: Akerselva Atrium Christian Krohgs Gate 16 Oslo Norway has been carried out according to Technical Manual: BREEAM In-Use International: 2015 by a Licensed Assessor for: Akerselva Atrium AS Asset Manager: DNB Næringseiendom AS Certificate Number: Asset Performance: Very Good Building Management: Good Occupier Management: Not Assessed BIU Issue: 1.0 The assessment process is certified by BRE Global Limited in accordance with the requirements of Scheme Document SD % 53.5% Norconsult AS Licensed Assessor Company Stine Martinsen Assessor name BAUD0556 Assessor Number Signed on behalf of BRE Global Ltd, Gavin Dunn Director, BREEAM 29 Nov 2016 Date of Issue 29 Nov 2017 Valid until This certificate is issued to the Licensed Assessor Organisation named above based on their application of the assessment process in accordance with Scheme Document SD123. This certificate is valid on the date of issue on the basis of the data provided by the client and verified by the Assessor Organisation. To check the authenticity of this certificate visit scan the QR Tag or contact us: E: breeam@bre.co.uk T. +44 (0) This certificate remains the property of BRE Global Limited and is issued subject to terms and conditions available at BRE Global Limited is a UKAS accredited product certification body, No. 0007, which can be verified by visiting BREEAM is a registered trademark of BRE (the Building Research Establishment Ltd. Community Trade Mark E ). SD123 Cert. No.BIU BF1255 Rev 2.0 Page 1 of 2 BRE Global Ltd,

14 7 Risk management The fund s risk profile is moderate, and the fund is classified as a Core fund in accordance with INREV s definitions. Investment in companies within property involves a risk that an investor may incur a loss, and a historical return is no guarantee of a future return. The risk of loss or a poorer return than expected will depend on a number of factors such as, for example, developments in the macro economy, changes in operating parameters, counterparty risk, etc. For further comments, see below. DNB REIM has established procedures and systems for identifying, measuring and managing relevant risks to which the fund is exposed. In order to fulfil requirements for an independent risk management function that is separate from the manager s operations, the risk manager in DNB REIM reports directly to the Chief Executive. Identified risks: Set out below is an overview of significant risks when investing in DNB Scandinavian Property Fund. The overview is not exhaustive. Macro-economy: The property market is affected by the development in the macro-economy and the general economic situation. A market review is prepared half-yearly which forms the basis for recommendations in the investment plan for the fund. The investment plan is revised annually and is presented to the board of DNB Scandinavian Property Fund DA for approval. In this connection recommendations are given with respect to the purchase and sale of property. Portfolio risk: In the framework for the fund - Framework for portfolio structure and investment plan - limits are specified for the construction of the property portfolio; see section 5.1 regarding the Portfolio structure. This framework sets out the overall investment strategy for the fund. In order to secure an optimal portfolio composition, the fund is dependent, among other things, on good access to investment properties. If the market develops in such a way that the board of the fund company and the manager do not find that projects are sufficiently good, it may take longer to invest the subscribed capital than expected (normally 3 6 months). This could affect the opportunity to optimise the portfolio structure and thus the annual return. Currency risk: In accordance with the Framework for portfolio structure and investment plan the fund has a mandate to make investments in Norway and Sweden. In the case of investments in Sweden rent and costs for the properties are paid in Swedish krona, which involves a currency risk. A currency strategy has been established for the fund and, in accordance with this, investments outside Norway are currency hedged, and the degree of hedging as far as possible should be 100 per cent. Counterparty risk: When entering into agreements efforts are made to cover the counterparty risk through quality assurance of agreements and through requirements on guarantees, including rent guarantees. When letting premises, as a general rule, a rent guarantee corresponding to 6 months rent is required. In the case of purchases of real estate, a due diligence process is normally carried out by recognised external advisers and negotiation of the purchase contract takes place with support from an external law firm. Political and regulatory changes: A change in operating parameters may lead to new and changed conditions for investors, including a reduction in the profitability of the fund, and a reduced basis for distributions etc. Liquidity risk: Guidelines for liquidity management and an associated Liquidity policy have been established. DNB Scandinavian Property Fund and its feeders will at all times hold adequate and sufficient liquidity. The liquidity holding will take account of liquidity requirements as a result of the fund s ongoing ordinary activities, as well as a sufficient liquidity buffer. Valuation and value changes: Guidelines for independent valuations, together with the fund s valuation policy, will ensure that correct and independent valuations are made of assets under management belonging to the fund. The value of the properties is assessed quarterly and is set at an average of the valuation by two independent recognised valuers. The value of properties depends on a number of factors including the proportion let, the rent and changes in yield requirements in the market. Rent adjustment/ change in the CPI: Normally the rent under ongoing leases is adjusted annually by the change in the CPI. When investing in property-owning companies the financial calculations and expected return that are used will be based on the Manager s inflation forecasts. If the annual change in CPI is lower than the Manager s forecasts, it will weaken liquidity and could involve a lower current return for investors than that expected. Correspondingly liquidity will be strengthened and investors will receive a higher current return if the annual change in CPI is higher than the Manager s forecasts. Organisational issues with the Manager: A condition for a satisfactory return includes the fund company s board and manager carrying out their functions in a good way, which among other things is conditional on sufficient expertise. Since several units in the DNB group are involved in the fund, on the ownership side and as manager, conflicts of interest may arise. Conflicts of interest may for example arise with DNB Life on purchases and sales, as well as the letting of property. This is handled through special decision-making mechanisms and through the internal guidelines within the group and for DNB REIM. In addition, separate guidelines have been prepared for the fund, included as attachment to the company agreement for the fund company. Measurement of risk and divergences: A quarterly review is made of specified risks, based on the fund s risk policy. Some of the risks are quantifiable and this is the case for example for requirements as to the portfolio structure and currency risk. In addition, a simulation is made of the valuation model (stress test) quarterly, in order to demonstrate changes in property values in the event, for example, of a change in yield requirements, increased costs and reduced rental income. In the case of proposed regulatory changes within the tax area, tax forecasts are prepared to assess how this will affect the return to the fund. In the Framework for portfolio structure and investment plan a limit is set for development projects at a total of 5 per cent of the fund. Sandslihaugen 30 AS has been vacated and rental income will cease during The property is being re-zoned and has been classified as a development project. This means that the limit of 5 per cent has been filled. The property has however been offered for sale and the fund will not undertake the development itself. 14

15 8 Development in unit values The development in value for an individual investor in DNB Scandinavian Property Fund DA will depend on the issue in which it participated. For investments through Norwegian feeders the table below shows the development in value by unit after payment of dividends DNB Scandinavian PropFund ASA 9,38 9,34 10,15 11,19 11,41 11,60 12,30 12,62 12,70 12,38 12,74 12,72 12,81 12,81 13,08 DNB Scandinavian PropFund 1 KS * 92,99 91,25 101,92 111,26 113,46 115,75 123,11 125,75 127,11 123,30 127,04 128,41 129,43 128,09 DNB Scandinavian PropFund 2 KS * 94,90 92,53 101,46 110,51 112,58 115,05 122,16 124,72 126,06 122,43 126,10 127,38 128,39 127,08 DNB Scandinavian PropFund 3 KS * 101,94 109,43 111,60 113,99 121,30 123,93 125,28 121,50 125,21 126,57 127,59 126,26 DNB Scandinavian PropFund 4 KS 100,14 100,19 104,54 111,08 110,96 112,17 108,77 112,09 113,31 114,22 113,02 118,31 DNB Scandinavian PropFund 5 KS 104,03 105,16 101,56 104,67 105,81 105,27 104,89 107,17 DNB Scandinavian PropFund 6 KS * 103,05 104,18 100,99 104,07 105,19 106,04 104,93 DNB Scandinavian PropFund HM AS 99,36 100,65 101,70 100,56 103,04 105,27 DNB Scandinavian PropFund IS 98,61 101,63 102,66 99,95 102,69 104,90 * DNB Scandinavian PropFund 1 KS, 2 KS, 3 KS and 6 KS have been merged with DNB Scandinavian PropFund 4 KS with effect from The table below shows the developement in value by unit for international investors. 2011* 2012* 2013* 2014* 2015* * * * 2016* * * DNB SIF FCP Unleveraged , , , , , , , , , , ,68 DNB SIF FCP Leveraged , , , , , , , , , , ,52 * Unaudited figures DNB REIM does not give any warranty that the information and material in this document is precise, correct or complete. Some of the information in the document may contain forecasts or statements on macro-economic matters and on the property market, and an investor must make its own assessment of how relevant, accurate and sufficient the information in this document is, and carry out such independent enquiries as it considers necessary or appropriate.. DNB REIM does not accept any liability for direct or indirect loss due to interpretation and/or use of the investor report. 15

16 DNB REIM - DNB Næringseiendom AS P.O. Box Bergen. Tel naringseiendom@dnb.no. Org. no Senior Vice President: Per Ola Nytun, per.nytun@dnb.no. Read more: DNB Scandinavian Property Fund dnb.no/privat/sparing-og-investering/investeringsprodukter/eiendomsinvesteringer/naeringseiendomsfond.html