PROLOGIS EUROPEAN PROPERTIES FUND II, FCP-FIS

Transcription

1 PROLOGIS EUROPEAN PROPERTIES FUND II, FCP-FIS Consolidated Financial Statements For the year ended 31 December 2016 With the Report of the Réviseur d Entreprises agréé thereon 34-38, Avenue de la Liberté L-1930, Luxembourg RCS number : K704

2 TABLE OF CONTENTS Page 2 Report on Activities 4 Report of the Réviseur d Entreprises agréé 6 Consolidated Statement of Financial Position 7 Consolidated Statement of Comprehensive Income 8 Consolidated Statement of Changes in Equity 9 Consolidated Statement of Cash Flows 10 Consolidated Statement of Investment in Property 11 Notes to the Consolidated Financial Statements 45 Unaudited Supplemental Information

3 REPORT ON ACTIVITIES FOR THE YEAR ENDED 2016 Values increased 1.9% on a like-for-like basis Total portfolio occupancy remained strong at 96.5% Over 1.9 million sqm of leases signed Registered positive net effective rent change on leases signed of 3.1% Approximately million invested in acquisitions and development land Disposed of eight buildings, totalling approximately million Repaid the remaining million of the Deutsche Pfandbriefbank loan, unencumbering 29 buildings in Central Europe Upsized Deutsche Pfandbriefbank UK loan by 22.6 million and extended the term by three years IFRS NAV increase Despite valuations being positive the Fund registered a 3.0% decrease in IFRS NAV per Unit during the year to 7.64 from 7.88 at the end of The decrease was primarily driven by Sterling depreciation and negative debt mark-to-market adjustments. Modest Value Growth 100% of the Fund s assets were re-valued at year-end with the assistance of independent valuation firms. In 2016, capital values continued to grow each quarter albeit at a more subdued pace. The value increase was mainly driven by leasing activity with limited cap rate compression and rental growth. Property values grew 1.9% on a like-for-like basis (excluding the effect of currency movements) during the year. The overall portfolio value (excluding the effect of currency movements but taking acquisitions and dispositions into account), increased by 2.2% to 4.9 billion from 4.8 billion at 31 December Positive Operating Results In 2016, the Fund stayed close to the record occupancy levels from prior year. Total portfolio occupancy remained strong at 96.5% (2015: 96.5%), while operating portfolio occupancy decreased only slightly to 96.9% (2015: 97.2%). Leasing activity totalled over 1.9 million sqm. The net effective rent change was positive at 3.1%. Active Capital Deployment During 2016, the Fund invested approximately million acquiring 10 assets with a total leasable area of nearly 225,000 sqm located in Italy, Spain, Poland, Hungary and Slovakia. The Fund also completed the sale of eight buildings during the year - three in France, two in the UK and one each in Hungary, Italy and Germany all in separate transactions, totaling approximately million. The Fund recorded a total net loss of 6.4 million compared to historical cost. At 31 December 2016, the total portfolio comprised 308 assets, covering 6.7 million sqm in twelve European countries (2015: 301 assets, covering 6.6 million sqm), with a total market value of 4.9 billion (2015: 5.0 billion). The net initial yield of the total portfolio stood at 5.6% at 31 December 2016 (2015: 5.8%). The percentage of assets held in the UK at year-end stood at 24.4% based on Gross Market Value (2015: 27.1%) Thus, the Fund has remedied the breach of the country maximum of 25%, applied to the gross market value of the total portfolio. Strong and Stable Financial Position In January 2016, the Fund repaid the remaining million of the Deutsche Pfandbriefbank loan, unencumbering 29 buildings in Central Europe. As a result, all debt maturities have been repaid up to mid In addition, the secured existing Deutsche Pfandbriefbank UK loan was upsized from 40.0 million to 62.6 million and the term extended by three years to February

4 As a result of the well-capitalised position of the Fund, in Q1 2016, both Moody s and S&P confirmed their stable outlook of the existing credit ratings of the Fund. At year-end, the Fund had 80.0 million balance outstanding on its revolving credit facility, with 120 million remaining undrawn, and held a cash balance of 54.0 million. Leverage decreased 60bps during the year to 31.9% by year-end. The weighted average interest rate decreased from 3.3% to 3.1% during the year while the weighted average maturity decreased from 4.9 to 4.3 years. In Q1 2016, the Fund deployed the final 40.3 million equity commitment from the million equity raise. In Q1 and Q3 2016, the Fund received redemption requests for 14.8 million and 4.0 million, respectively. Both converted to secondary trades with existing investors. Prologis ownership at year-end 2016 was 31.2% (2015: 31.3%). Distributable Cash Flow Alternative Investment Fund Managers Directive The Fund is an alternative investment fund in scope of the Luxembourg law of 12 July 2013 ( AIFM Law ), and has appointed the Management Company as its AIFM. The Management Company is authorised and regulated as an AIFM by the Luxembourg Commission de Surveillance du Secteur Financier, having obtained such authorisation in For the purpose of Article 20 of the AIFM Law, the Management Company confirms that there have been no material changes in the information listed in Article 21 during the reporting period. The Management Company further confirms that the information prescribed by Article 20 paragraph 2 (d), (e), (f) and Article 21 of the AIFM Law will be made available to investors and regulators upon request million of distributable cash flow was declared to unitholders in relation to the Fund s earnings in 2016 (2015: million). The average dividend per Unit for the year decreased to 0.40 (2015: 0.48). Incentive Performance Participation ( IPP ) According to Article 9 of the Management Regulations of the Fund, the most recent IPP period ended on 30 September Financial Risk Management The Management Company monitors the various financial risks the Fund is exposed to as described in Note 16 of the Consolidated Financial Statements. 3

5

6

7 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes As at 31 December 2016 As at 31 December 2015 ASSETS Non-current assets Investment property 4,905,174 4,998,051 Deferred tax asset 10 8,323 10,137 Hedging instruments, non-current 16.4,17 41,787 33,430 Due from related parties, non-current 10, ,623 48,413 4,999,907 5,090,031 Current assets Trade and other receivables 4 52,880 58,656 Other current assets 11,450 12,169 Cash and cash equivalents 5 53,971 85, , ,132 Total assets 5,118,208 5,246,163 EQUITY AND LIABILITIES Equity attributable to Unitholders Unitholders capital 6 3,048,873 3,006,195 Other reserves (112,085) 42,250 Retained earnings 99,683 43,354 3,036,471 3,091,799 Non-controlling interests 13,108 12,035 Total equity 3,049,579 3,103,834 Non-current liabilities Interest bearing borrowings, net of current portion 9 1,635,951 1,605,567 Hedging instruments 16.4,17 16,865 15,315 Deferred tax liability , ,578 1,864,315 1,834,460 Current liabilities Interest bearing borrowings, current portion 9 47, ,497 Hedging instruments, current portion 16.4, ,344 Due to related parties 14 5,074 7,188 Accounts payable 2,755 3,051 Income and other taxes payables 9,043 10,308 Accrued expenses and other current liabilities 11 90, ,904 Deferred income 49,523 51, , ,869 Total liabilities 2,068,629 2,142,329 Total equity and liabilities 5,118,208 5,246,163 6 The accompanying notes are an integral part of these consolidated financial statements.

8 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Notes For the year ended Fourth 31 December Quarter Rental income , ,977 Other property income 1, Total revenue 307, ,886 Property management fees 14 (6,163) (6,151) Other property operating expenses (7,372) (5,504) Cost of rental activities (13,535) (11,655) Gross profit 294, ,231 Asset management fees 14 (20,255) (19,487) Depositary fees (651) (693) Other fund expenses (4,609) (5,363) Fund expenses (25,515) (25,543) Investment property fair value movements 28, ,792 Net gain from investment property disposals 1,089 1,132 Profit before net finance costs and tax 297, ,612 Finance income Finance expense 13 (59,504) (67,535) Profit before tax 238, ,087 Income tax expense 10 (20,879) (101,660) Profit for the year 217, ,427 Profit attributable to: Unitholders 216, ,306 Non-controlling interests 941 4,121 Profit for the year 217, ,427 Other comprehensive income/(loss): Items that are or may be reclassified subsequently to profit or loss Currency translation differences 16.1 (155,244) 47,832 Net gain on cash flow hedges ,041 15,249 Other comprehensive income/(loss) for the year, net of tax (154,203) 63,081 Total comprehensive income for the year, net of tax 63, ,508 Total comprehensive income attributable to: Unitholders 62, ,297 Non-controlling interests 1,073 4,211 Total comprehensive income for the year, net of tax 63, ,508 7 The accompanying notes are an integral part of these consolidated financial statements.

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2016 Unitholders capital Attributable to Unitholders of the Fund Retained earnings Translation reserves Hedging reserve Total Total equity (Note17.2) Balance at 1 January ,006,195 43,354 68,239 (25,989) 3,091,799 12,035 3,103,834 Other comprehensive income Other comprehensive income (155,244) 909 (154,335) 132 (154,203) Profit for the year 216, , ,545 Total comprehensive income for the year 216,604 (155,244) ,269 1,073 63,342 Transactions with Unitholders Contributions (Note 6) 42,678 42,678 42,678 Distributions for the year (Note 8) (160,275) (160,275) (160,275) Total transactions with Unitholders 42,678 (160,275) (117,597) (117,597) Balance at 31 December ,048,873 99,683 (87,005) (25,080) 3,036,471 13,108 3,049,579 For the year ended 31 December 2015 Unitholders capital Attributable to Unitholders of the Fund Retained earnings Translation reserves Hedging reserve Total Noncontrolling interests Noncontrolling interests Total equity (Note17.2) Balance at 1 January ,922,316 (302,635) 20,407 (41,148) 2,598,940 7,985 2,606,925 Other comprehensive income Other comprehensive income 47,832 15,159 62, ,081 Profit for the year 530, ,306 4, ,427 Total comprehensive income for the year 530,306 47,832 15, ,297 4, ,508 Transactions with Unitholders Contributions (Note 6) 83,879 83,879 83,879 Distributions for the year (Note 8) (184,317) (184,317) (161) (184,478) Total transactions with Unitholders 83,879 (184,317) (100,438) (161) (100,599) Balance at 31 December ,006,195 43,354 68,239 (25,989) 3,091,799 12,035 3,103,834 8 The accompanying notes are an integral part of these consolidated financial statements.

10 CONSOLIDATED STATEMENT OF CASH FLOWS Notes For the year ended 31 December Cash flows from operating activities Profit before tax 238, ,087 Adjustments for: Investment property fair value movements (28,306) (426,792) Net gain from investment property disposals (1,089) (1,132) Reversal of rent levelling adjustment (14,160) (5,664) Net unrealised currency loss 1, Reversal of amortisation of transaction costs relating to borrowing 13 3,329 4,056 Reversal of interest expenses 13 51,356 59,375 Reversal of ineffective portion of hedges 13 1,129 1,967 Reversal of borrowing repayment and swap breakage costs 13 2,364 1,647 Change in: Trade and other receivables 5,776 (5,504) Other current assets 719 3,365 Accounts payable (296) 1,151 Amounts due to related parties (2,114) 2,173 Accrued expenses and other liabilities (1,960) 2,305 Deferred income (2,054) 6,343 Taxes paid (14,486) (8,779) Interest, debt repayment and Swap breakage costs paid 13 (55,377) (58,315) Net cash from operating activities 184, ,450 Cash flows used in investing activities Acquisition of properties from Prologis, excluding contributions-in-kind (51,648) (112,836) Acquisition of properties from third parties (54,748) (78,123) Investment property under construction (25,248) (26,810) Capital expenditure on completed investment property (35,073) (26,726) Proceeds from disposal of investment in property 102, ,679 Net cash used in investing activities (63,779) (136,816) Cash flows used in financing activities Proceeds from issuance of Unitholders capital, excluding contributions-in-kind 6 40,326 66,427 Net proceeds from borrowings 9 108, ,385 Repayment of borrowings 9 (128,377) (270,345) Distributions to Unitholders 8 (168,890) (182,395) Net cash used in financing activities (148,346) (38,928) Net increase in cash and cash equivalents (27,589) 36,706 Cash and cash equivalents at 1 January 85,307 47,852 Effect of exchange rate movements on cash and cash equivalents held (3,747) 749 Cash and cash equivalents at 31 December 53,971 85,307 9 The accompanying notes are an integral part of these consolidated financial statements.

11 CONSOLIDATED STATEMENT OF INVESTMENT PROPERTY For the year ended 31 December Historic Cost Cost at 1 January 4,720,166 4,496,112 Acquisition of properties from Prologis 54, ,288 Acquisition of properties from third parties 54,748 78,123 Investment property under construction 25,248 26,810 Tax indemnification adjustment 3,790 (10,358) Capital expenditure on completed investment property 35,073 26,726 Rent levelling adjustment 14,160 5,664 Disposals (111,074) (102,261) Effect of unrealised currency movements (172,870) 69,062 Cost at 31 December 4,623,241 4,720,166 Net Unrealised Gains/(Losses) Related To Investment Property Net unrealised gains/(losses) at 1 January 277,885 (147,258) Reversal of fair value adjustment on disposals 1,760 (3,912) Investment property fair value movements 28, ,792 Effect of unrealised currency movements (26,018) 2,263 Net unrealised gains at 31 December 281, ,885 Fair Value 4,905,174 4,998,051 Appraised fair values as a percentage of net assets 162% 162% Fair value of investment property subject to secured bank loans 974,885 1,321, The accompanying notes are an integral part of these consolidated financial statements.

12 (1) General Information on the Fund The Fund (the Fund ) is organised as a Luxembourg fonds commun de placementfonds d investissement specialisé ( FCP-FIS ) under the Luxembourg law dated 13 February 2007 on specialised investment funds, as subsequently amended. The Fund is managed by Prologis Management II S.à r.l. (the Management Company ) in accordance with the Management Regulations, as amended. The Advisory Council (the AC ) was created pursuant to the Management Regulations and comprises five representatives of Unaffiliated Unitholders at the reporting date. The AC is responsible for reviewing certain decisions prior to their implementation by the Management Company. In all other respects, the Management Company manages the day-to-day activities of the Fund in the exclusive interest of Unitholders. The Management Company The Management Company, Prologis Management II S.à r.l., is a controlled affiliate of Prologis Inc., a Maryland corporation, USA ( Prologis ). The Management Company was incorporated on 23 July 2007 as a société à responsabilité limitée under Luxembourg law and its duration is at present unlimited. Registered Office and Number of the Management Company Avenue de la Liberté L-1930 Luxembourg B Managers of the Management Company (together the Managers or Management ) Gerrit J. Meerkerk Simon N. J. Nelson Peter G. Cassells The Management Company has engaged several parties that are directly or indirectly controlled, managed or owned by Prologis (the Related Parties ) to act as Investment Managers in different countries and with respect to different aspects of the Portfolio. The Investment Managers operate properties, arrange financing and provide other services on behalf of the Management Company. The Investment Managers also provide services to other Prologis businesses. Investment Strategy The Fund is an investment vehicle that may acquire Distribution Facilities within Europe, or a portfolio of such Distribution Facilities (or any portion thereof or interest therein), either from a Prologis party, from a fund managed by Prologis, or from a third party. Such Distribution Facilities are presented to the Fund by a Prologis party and must individually (or, if part of a portfolio of distribution facilities, when assessed as a portfolio as a whole) meet the Transfer Criteria as outlined in the Investment Policy and Criteria Agreement (the IPCA ), for as long as the Fund has available capital, either through recourse to Uncalled Subscription Commitments or additional debt capacity, subject to the Fund s leverage policy. 11

13 Going Concern Assessment The managers of the Management Company have assessed that the Fund has maintained its going concern status. The consolidated financial statements of the Fund were authorised for issuance on 13 February 2017 by the Management Company. Alternative Investment Fund Managers Directive The Fund is an alternative investment fund in scope of the Luxembourg law of 12 July 2013 ( AIFM Law ) as amended, and has appointed the Management Company as its AIFM. The Management Company is authorised and regulated as an AIFM by the Luxembourg Commission de Surveillance du Secteur Financier, having obtained such authorisation in (2) Summary of significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. 2.1 Statement of Compliance The consolidated financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRS ). The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Critical accounting estimates and assumptions are described in Note Basis of preparation The consolidated financial statements have been prepared on a going concern basis and are presented on a historical cost basis, except for the measurement of investment property and derivative financial instruments. The significant accounting principles applied by the Fund are regularly re-evaluated by the Management Company to ensure their continued quality and reasonableness. They are as follows: 2.3 Basis of consolidation The consolidated financial statements include all activities of the Fund and its subsidiaries. Subsidiary companies Subsidiaries are entities controlled by the Fund. The Fund controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Fund and are deconsolidated from the date on which control ceases. The accounting principles of the Fund may differ from those applied in other countries. Where necessary, the accounts of the underlying entities are adjusted or reclassified on consolidation in order that their results may be consistent with the accounting principles of the Fund. Acquired companies are included in the consolidated financial statements using the acquisition method of accounting when, and only when the transaction can be identified as a business combination. When determining if an acquisition qualifies as a business combination or not, the Management Company considers if the transaction includes the acquisition of supporting infrastructure, employees, service provider agreements and major input and output processes, as well as active lease agreements. 12

14 For business combinations, the consolidated income or loss and consolidated statement of cash flows include the results and cash flows of acquired companies for the period from the date when control is transferred to the Fund to the period end. The cost of acquisition is measured as the aggregate of the consideration transferred, measured at the acquisition date fair value and the amount of non-controlling interest in the acquiree. Transaction costs are expensed as incurred. When the transaction has not been identified as a business combination, it is accounted for as an acquisition of individual assets and liabilities with the initial purchase consideration allocated to the separable assets and liabilities acquired based on their relative fair values. Such transactions or events do not give rise to goodwill. The cost of investment in a subsidiary is eliminated against the Fund s share in the net assets of that subsidiary at the date of acquisition or contribution. All intercompany receivables, payables, income and expenses are eliminated. Where the Fund, either directly or indirectly, holds a controlling interest in a subsidiary but does not have complete control of that subsidiary, the value of the interest not held by the Fund is recorded as non-controlling interest in the consolidated statement of financial position. Related Parties Related parties are defined as parties either directly or indirectly controlled, managed or owned by Prologis, which indirectly, through one or more wholly-owned subsidiaries, owns the Management Company and 31.15% (2015: 31.31%) of the Units of the Fund. 2.4 Foreign currency transactions and operations The presentation and functional currency of the Fund is the euro. The functional currency is assessed for each of the Fund s subsidiaries and items in the consolidated financial statements are measured using that functional currency. This may be different to the local currency of the country of incorporation or the country where the subsidiary conducts its operations. Subsidiaries with operations in all jurisdictions, except for the UK and Sweden, use the euro as their functional currency. Transactions in currencies other than the functional currency of an entity are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in such currencies are translated at the rate of exchange ruling at the consolidated statement of financial position date. All differences are recognised in the consolidated statement of comprehensive income under Finance expense. The cumulative effect of exchange differences on cash transactions are classified as realised gains and losses in the consolidated statement of comprehensive income in the period in which they are settled. Exchange differences on transactions not yet settled in cash are classified as unrealised gains and losses under "Finance expense". The assets and liabilities of subsidiaries are determined in accordance with the accounting principles of the Fund. Where the functional currency is different from the presentation currency of the Fund those assets and liabilities are translated at the rate of exchange ruling at the date of the consolidated statement of financial position. The income statements of such subsidiaries are translated at the average exchange rate for the period. The exchange differences arising on the currency translation are recorded as a separate component of other comprehensive income under the heading of Exchange differences on translating foreign operations". On the disposal of such a subsidiary, accumulated exchange differences are recognised in the consolidated statement of comprehensive income as a component of the gain or loss on disposal, including any tax effects. Exchange differences arising on monetary items, which in substance form part of the Fund's net investment in a foreign entity, are recorded as a separate component of other comprehensive income under the caption of Currency translation differences". 13

15 Fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the acquired Company and are recorded at the opening exchange rate of the date of the transaction. 2.5 Investment property Investment property mainly comprises the investment in land and buildings in the form of distribution facilities which are not occupied substantially for use by, or in the operations of, the Fund, nor for sale in the ordinary course of business, but are held primarily to earn rental income and capital appreciation by leasing to third-parties under long-term operating leases. Investment property is measured initially at cost including related transaction costs and where applicable borrowing costs. Expenditure on renovation and development of investment properties and leasing commissions are initially capitalised at cost. After initial recognition, investment properties are measured at fair value as determined by third party independent appraisers (the Independent Appraisers, Note 3.1). The gain or loss arising from a change in the fair value of the investment property is included in the consolidated statement of comprehensive income in the period in which it arises. Depreciation is not provided on investment properties. Gains on the disposal of investment property are recorded at the time title is transferred which corresponds to the time when significant risks and rewards of ownership are passed on to the buyer. Realised gains and losses on the disposal of investment property is determined as a difference between disposal proceeds and carrying value at the prior quarter end and is included in the consolidated statement of comprehensive income in the period in which it arises. 2.6 Financial Instruments The Fund classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss and loans and receivables. The Fund classifies non-derivative financial liabilities into other financial liabilities category. Non Derivative Financial Assets and Financial Liabilities - Recognition and Derecognition The Fund initially recognises loans and receivables and debt securities issued on the date when they originate. All other financial assets and liabilities are initially recognised on the trade date. The Fund derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial asset that is created or retained by the Fund is recognised as a separate asset or liability. The Fund derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. Financial assets and financial liabilities are offset and the net amount presented in the consolidated statement of financial position when, and only when, the Fund has a legal right to offset the amounts and intends either to settle them on net basis or to realise the asset or settle the liability simultaneously. 14

16 Non Derivative Financial Assets - Measurement Financial Assets at Fair Value Through Profit or Loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such on initial recognition. Directly attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income, are recognised in profit or loss. Loans and receivables - Measurement These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised costs using the effective interest rate method. Amounts due from or to related parties (Note 14) are measured at amortised cost. Trade receivables are carried at cost less provisions for doubtful debts, if any. The Management Company assesses specific provisions on a customer-by-customer basis throughout the period. A provision for impairment of trade receivables is established where there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy or financial reorganisation proceedings, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the consolidated statement of comprehensive income within Other property operating expenses. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against Other property operating expenses in the consolidated statement of comprehensive income. Non-Derivative Financial Liabilities - Measurement Non derivative financial liabilities are initially recognised at fair value less any directly attributable costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. It comprises of secured and unsecured notes and bank loans. Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include internal administrative or holding costs. 2.7 Derivative Financial Instruments and Hedge Accounting The Fund holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Derivatives are initially recognised at fair value: any directly attributable transaction costs are recognised in the statement of comprehensive income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, any changes therein are generally recognised in the statement of comprehensive income. 15

17 Cash flow hedges When a derivative is designed as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income ( OCI ) and accumulated in the hedging reserve. Any ineffective portion of changes in fair value of the derivative is recognised immediately in profit or loss. The amount accumulated in equity is retained in OCI and reclassified to profit or loss in the same period or periods during the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or it is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to be occur, then the amount accumulated in equity is reclassified to profit or loss. The Fund uses interest rate swaps and cross currency swaps as hedges of its exposure to changes in market interest rates and in currency rates (Notes 16 and 17). 2.8 Cash and Cash Equivalents Cash includes cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. 2.9 Unitholders Capital and Ownership of the Fund The Fund classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The Fund has redeemable units in issue as follows: Class A(1), Class A(2), Class B(1), Class B(2), Class B(3), Class B(4), Class B(5) and Class B(6) that are the most subordinate classes of financial instruments in the Fund and rank pari passu in all material respects and have identical terms and conditions. The redeemable units - Class A(2) and all Classes (B) - provide investors with the right to require redemption for cash at a value proportionate to the investors share in the Fund s net assets at each quarterly redemption date and also in the event of the Fund s liquidation. A puttable financial instrument that includes a contractual obligation for the Fund to repurchase or redeem that instrument for cash or another financial asset is classified as equity if it meets all of the following conditions: it entitles the holder to a pro-rata share of the Fund s net assets in the event of the Fund s liquidation; it is in the class of instruments that is subordinate to all other classes of instruments; all financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features; apart from the contractual obligation for the Fund to repurchase or redeem the instrument for cash or another financial asset, the instrument does not include any other features that would require classification as a liability; and the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the Fund over the life of the instrument. The Fund s redeemable units meet these conditions and are classified as equity. 16

18 Incremental costs directly attributable to the issue or redemption of redeemable units are recognised directly in equity as a deduction from the proceeds or part of the acquisition cost. When redeemable units recognised as equity are redeemed, the par value of the units is presented as a deduction from the Unitholders capital. Any premium or discount to the par value is recognised as an adjustment to retained earnings. The rights of Unitholders may be limited in several important ways, including the following: the Management Company has the exclusive right to manage the Fund in the exclusive interests of Unitholders; the Management Regulations limit when the Management Company can be replaced, other than for cause; the Management Regulations specifies that the AC is comprised of five (5) members being representatives of the five (5) largest unaffiliated unitholders; and can be replaced, other than for cause; the AC members have limited rights with respect to the management and governance of the Fund Distributions of Distributable Cash Flows Distributions of Distributable Cash Flows ( Distributions ) are made quarterly within 30 days following the relevant quarter end to the extent that distributable cash flow is available as prescribed in the Management Regulations. Distributions are recognised in the consolidated financial statements as a liability in the period to which they are related. The Management Company has discretion to adjust Distributions to Unitholders in order to maintain a healthy capital structure by periodic contributions to a contingency reserve that may not exceed 10 million in total. A deduction from Distributions to a contingency reserve in excess of 10 million is subject to prior approval by the AC Taxation Current Income Tax The consolidated subsidiaries of the Fund are subject to taxation in the countries in which they operate. Current taxation is provided for at the applicable current rates on the respective taxable profits. Deferred Income Tax Deferred tax is provided for using the liability method for temporary differences at the consolidated statement of financial position date between the tax base of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences cannot be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. 17

19 Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry forward of unused tax credits and unused tax losses can be utilised, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each consolidated statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are re-assessed at each consolidated statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered in the foreseeable future. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Fund expects, at the end of the reporting period, to recover or settle the carrying amount of its assets or liabilities. For investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted. Deferred tax assets and liabilities are measured at the tax rates expected to apply when an asset is realised or the liability settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the consolidated statement of financial position date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. The exemption on the initial recognition of the deferred tax may need to be revised ( eroded ) in the subsequent periods. The erosion (partly or in full) of the exempted temporary difference occurs when, for example, the fair value of an investment property decreases to such extent that it affects the initial temporary difference. The erosion is not subsequently reversed. In case of subsequent increase of the fair value of an investment property, the lowest eroded exemption will be applied in the measurement of the deferred tax Provisions A provision is recognised when, and only when, the Fund has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation Deferred Income Deferred income represents rental income which has been billed to customers at the reporting date, but which relates to future periods and to non-refundable deposits on assets held for sale that are received by the Fund. 18

20 2.14 Non - Current Assets Held for Sale Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell unless the assets are investment properties measured at fair value or financial assets in the scope of IAS 39 in which case they are measured in accordance with those standards Revenue Recognition Rental Income and Other Property Income The Fund leases its buildings to customers under agreements that are classified as operating leases. Rental income represents rents charged to customers and is recognised on a straight-line basis taking account of any rent-free periods and other lease incentives, net of any sales taxes, over the lease period to the first break option ( rent levelling ). The rent levelling asset is included in investment property. Other property income represents income derived from property sources other than rental income from customers, and is recognised on an accruals basis in the period to which it contractually relates, net of any taxes Expense Recognition Expenses are accounted for on an accruals basis. Expenses are charged to profit or, except for those which are related to the raising of debt (Note 2.6) or incurred in the acquisition of an investment or construction of a property which are capitalised as part of the cost of an asset (Note 2.5). Expenses arising on the disposal of investments are deducted from the disposal proceeds. The Fund acts as an agent in respect of the recovery of maintenance, utilities and similar expenses and therefore they are presented net in the consolidated statement of comprehensive income Finance Income and Expenses Finance income is recorded using the effective interest rate for all financial instruments measured at amortised cost. Finance income includes interest income received during the period and is recognised on an accruals basis. Finance expenses are recorded using the effective interest rate for all financial instruments measured at amortised cost and include: interest expenses related to secured and unsecured notes, long-term and short-term debt, and is recognised on an accruals basis; amortisation of transaction costs which are part of the effective interest rate (Note 2.6); the effect of the unrealised foreign currency gains and losses on monetary assets and liabilities arising in the period (Note 2.4); and the effect of the realised foreign currency gains and losses on cash transactions completed during the period (Note 2.4) New and Amended international Financial Reporting Standard in issue as at 31 December 2016 A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on 1 January None of these are relevant for the consolidated financial statements of the Fund, except the following: Annual Improvements Cycle: these improvements are effective from 1 January 2016, impact various Standards and are not expected to have a material impact on the Fund. Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11). 19

21 Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28). Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38). Disclosure Initiative (Amendments to IAS 1). The adoption of the above standards and interpretations had no impact on the Fund s Consolidated Financial Statements. Below is a list of standards/interpretations that have been issued but are not yet effective and that are relevant for the Fund as at 31 December 2016: IFRS 15 (effective 1 January 2018) Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted, subject to EU adoption. The application of IFRS 15 is not expected to have a material impact on the Fund. IFRS 9 (effective 1 January 2018) Financial instruments forms the first part of a new standard on classification and measurement of financial assets that will replace IAS 39. IFRS 9 has two measurement categories: amortised cost and fair value. All equity instruments are measured at fair value. A debt instrument is at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest, otherwise it is at fair value through profit or loss. The application of IFRS 9 is not expected to have a material impact on the Fund. IFRS 16 (effective 1 January 2019, not yet endorsed by the EU) introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard i.e. lessors continue to classify leases as finance or operating leases. The application of IFRS 16 is not expected to have a material impact on the Fund. Annual Improvements Cycle: these improvements are effective from 1 July 2016, impact various Standards and are not expected to have a material impact on the Fund. Management estimates that the adoption of the above standards and interpretations will not have a material impact on the Fund s consolidated financial statements and does not expect to early adopt these standards and interpretations. 20

22 (3) Critical Accounting Estimates and Assumptions The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 3.1 Investment Property The Fund accounts for the value of its investment property using the fair value model under IFRS 13. The definition of Fair Value (Market Value) has been settled by the International Valuation Standards Council (IVSC) as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is not intended to represent the sales value of the investment property, which would be dependent upon the price negotiated at the time of sale less any associated selling costs. Fair valuations are undertaken quarterly by the Valuation Committee of the Management Company of the Fund being also the AIFM who appoints Independent Appraisers in accordance with the Valuation Policy and the Prospectus of the Fund. The Independent Appraisers provide valuations to the Valuation Committee in accordance with the appropriate sections of the Practice Statement (PS) and United Kingdom Practice Statement (UKPS) contained within the Royal Institution of Chartered Surveyors (RICS) Valuation Professional Standards version January 2014 (revised April 2015). The latest valuation exercise was performed as at 31 December The Independent Appraisers currently appointed are Jones Lang LaSalle Limited, Cushman & Wakefield and CBRE Ltd. For all investment properties, their current use equates to the highest and best use. Fair valuations are predominantly undertaken on an income capitalisation approach using comparable recent market transactions on an arm s length terms. In those countries where Discounted Cash Flow ( DCF ) is the primary basis of assessment of fair value, that methodology is adopted. Fair valuations were based on various assumptions as to tenure, letting, town planning, the condition and repair of buildings and sites including ground and groundwater contamination, as well as the best estimates of applicable Net Operating Income ( NOI ), reversionary rents, leasing periods, purchasers costs, etc. The sensitivity of the fair value of investment property to changes in yields is presented in Note Current and Deferred Income Taxes The Fund is subject to income and capital gains taxes in numerous jurisdictions. Significant judgement is required in determining the total provision for income and deferred taxes. There are many transactions and calculations for which the ultimate tax determination and timing of payment is uncertain during the ordinary course of business. The Fund recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income and deferred tax provisions in the period in which the determination is made. In addition, relating to deferred tax liability, the Fund accounted for the tax indemnification from the Management Company as defined in the expired Stabilised Property Contribution Agreement (SPCA) included in Note Fair Value of Cross Currency and Interest Rate Swaps The Fund estimates fair values of swaps by reference to current market conditions compared to the terms of the swap agreements using the results of an external appraisal (Notes 16.4, 16.5 and 17). 21