ARC FUND ANNUAL REPORT 2014 AMVEST RESIDENTIAL CORE FUND

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1 AMVEST RESIDENTIAL CORE FUND ANNUAL REPORT

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3 CONTENTS PROFILE 5 KEY ISSUES 6 KEY FIGURES 7 REPORT OF THE FUND MANAGER 9 The Dutch economy 13 The Dutch residential market 16 Investing in the Dutch residential market 18 Portfolio and fund figures Client satisfaction and sustainability 29 Risk management 31 AIFMD 34 INREV 35 Portfolio funding 35 Compliance, Corporate integrity, Code of conduct 36 Outlook ANNEXES 74 Legal structure Amvest Residential Core Fund 75 Composition of the property portfolio 76 Overview of the property portfolio 78 Overview of the pipeline portfolio 81 Combination of FGR 1 and FGR 2 82 External appraisers, property managers, valuer 84 Resumes of the management team 85 Definitions 86 FINANCIAL STATEMENTS Statement of comprehensive income 38 Statement of financial position 39 Statement of changes in equity 40 Cash flow statement 41 Accounting principles and common notes to the financial statements 42 Notes to the statement of comprehensive income 54 Notes to the statement of financial position 57 Additional notes 67 OTHER INFORMATION 71 Provisions in the articles of association governing the appropriation of profit 73 Proposal for profit appropriation 73 Special rights under the articles of association with regard to control 73 Subsequent events 73 Transactions with direct stakeholders

4 Capitalised terms used in this annual report but not defined herein shall have the meaning ascribed to them in the terms and conditions of management and custody of Amvest Residential Core Fund. 4

5 PROFILE residential investment fund that is open to new investors. properties, consists of approximately 6,000 homes with an average age of nine years. The vast majority of these homes are in the mid-priced rental segment and located in strong economic areas in The Netherlands with an above average value growth potential. These residential properties all have a long-term investment horizon. In order to facilitate an annual 5% rejuvenation of the portfolio, the ARC Fund has the right of first refusal for acquiring rental residential STRUCTURE Amvest Residential Core Fund was created in 2010 following the legal split of the Amvest Vastgoed B.V. (Amvest) investment portfolio into two fiscally transparent investment funds: Amvest Residential Core Fund C.V. and Amvest Residential Dynamic Fund C.V. The shareholder in both these funds was WAP Woningen B.V., a joint venture between the launching Investors AEGON and Pensioenfonds Zorg en Welzijn (PfZW). As from 1 January 2012, WAP Woningen B.V. was split into two separate private limited liability separate private limited liability companies for PfZW, with which they participate separately in both funds. FUNDS FOR JOINT ACCOUNT After the legal split of WAP Woningen B.V., the ARC Fund was converted from a limited partnership (C.V.) into two fiscally transparent funds for joint account (FGR). The launching Investors AEGON and PfZW remain Investors holding a substantial stake, next to the new investors. The division into two funds for joint account was prompted by PfZW's status as a pension fund. The establishment on 17 January 2012 of the funds for joint account marked the initial legal structure as per 31 December 2014 can be found in the Annexes. OBJECTIVE The ARC Fund aims to realise an attractive, stable dividend yield available for distribution and long-term value growth for its Investors, by investing in a portfolio of relatively young residential rental properties located in focus areas. In addition, the ARC Fund aims to provide its Investors with a net IRR derived from rental income, divestment profit and appreciation of at least 7%, including a dividend yield of approximately 4% per year. The ARC Fund has built a portfolio for these purposes made up of residential properties in the mid-priced segment within the rental market, with monthly rents ranging from EUR 710 up to EUR 1,200 per home (depending on the specific area). The ARC Fund has a strict regional policy, based on the ARC Fund focus areas. Around 87% of the portfolio is located in the Randstad area. The remainder is located in selected strong regions outside the Randstad. The ARC Fund focus areas were selected in con department based on economic growth, changes in supply/demand ratios, demographic trends, and the quality of the residential environment. With an average age of nine years, the portfolio is very young. A dynamic portfolio policy ensures that the quality of the portfolio remains at a high level and maintenance costs remain relatively low. The ARC strategy is discussed with and approved by the Investment Committee and Advisory Board based on an annual Portfolio Plan. Amvest focuses on strategic and tactical portfolio management and asset management in order to ensure an effective administration. Day-to-day operational management has been outsourced to regional property managers. In addition to maintaining close contact with the property managers, the portfolio managers and asset managers also liaise closely with tenant organisations and the Amvest tenant platform. The initial closing marked the official start of the ARC Fund. The ARC Fund has a term of ten years ( ), after which the Investors will decide on the prolongation of the ARC Fund. The ARC Fund is supervised by an independent Investment Committee, an Advisory Board, and the closing, new investors have been able to join the ARC Fund. 5

6 KEY ISSUES MARKET TRENDS IN THE NETHERLANDS The economy is picking up again. After years of decline, 2014 was the year in which we have seen signs of an economic recovery. Consumers responded quickly to the first signs of economic growth at the end of This is reflected in a sharp increase in consumer confidence: an important indicator of sentiment on the housing market. The key word in the housing market is recovery. Certainty both government policy for the housing market and the economic recovery has resulted in positive sentiment in the housing market. In 2014 the total number of sales of existing homes in the market was 33% higher than in 2013, totalling over 155,000. Moreover, the price increase was stronger than initially anticipated, and the prices of apartments in particular, rose strongly: 4.8% over After years of decline, the number of building permits granted in 2014 has risen sharply. A total of 42,000 building permits were granted, an increase of approximately 60% compared to However, the current level of building permits will not be sufficient - in some regions - to accommodate the ongoing population growth. The total return - with reservation - in the residential sector was 5.2% in 2014, which is an increase of 5.0% compared to 2013 (IPD 2015, all residential assets). The total return was driven mainly by income return. In recent decades the Dutch residential market has proved to be a stable factor over the longer term. Demand for residential property investments in The Netherlands increased considerably in This was prompted by both foreign and Dutch investors. Expectations for 2015, for both the economy and the housing market, remain positive. These market conditions will further drive demand for investments in residential property. RESULTS FOR 2014 The dividend yield distributed to the Investors totalled 4.7% (EUR 37.3 million), which is above the target of 4.0%. Fund return totalled 4.7%: income return was 4.4% and capital gains were 0.3%. Total gross and net rental income were EUR 64.8 million and EUR 50.1 million, respectively. Unrealised capital gains totalled EUR 0.7 million (0.1%). Net result was EUR 37.4 million. The ARC Fund scored a total return of 5.1% versus 5.2% for the IPD index (all residential assets). The average regular rent increase was 2.3%. The occupancy rate was 95.5%. The ARC Fund was recognized as a Green Star by GRESB. ORGANISATION The ARC Fund welcomed a Dutch Pension Fund as a new investor (as per 1 October 2014). As per 1 January 2015 four other Dutch pension funds will join the ARC Fund as new investors. The ARC Fund is managed by a dedicated fund team employed by Amvest Management B.V. Amvest Management B.V. was ISAE 3402 Type 2 certified as Fund Services Provider for the ARC Fund in 2014 (1 December November 2014). In 2013 Amvest REIM B.V. was established and as of 26 November 2014 Amvest REIM B.V. replaced Amvest RCF Management B.V. as Fund Manager of the ARC Fund. This replacement arose from the need to implement the Alternative Investment Fund Managers Directive (AIFMD). FUNDING The ARC Fund has been funded with a EUR 320 million syndicated loan by a consortium of five banks. The loan matures on 21 April Interest rate risk for EUR 240 million (75.0% of the total facility) has been hedged with four interest rate swaps (IRS). The maturity date of the interest rate swaps is identical to the term of the loan facility. Mark-to-Market (MtM) valuation of the interest rate swaps totalled EUR -9.7 million. The interest rate swaps are not subject to margin calls. As at 31 December 2014, the ARC Fund performed well within the covenants set by the bank syndicate. AIFMD In the first quarter of 2014 Amvest REIM B.V. applied for an AIFMD license. As per 26 November 2014 Amvest REIM B.V. has obtained a license within the meaning of Article 2:65 of the Dutch Financial Supervision Act (Wft). Amvest REIM B.V. is therefore subject to supervision of the Dutch Financial Markets Authority (AFM). Intertrust Depositary Services B.V. was appointed as independent depositary of the ARC Fund. 6

7 KEY FIGURES Amounts in EUR x 1 million Fund returns (as a percentage of the INREV NAV as at 1 January) Income return 4.4% 4.2% 3.9% Capital gains 0.3% -5.3% -5.4% Total return 4.7% -1.1% -1.5% Dividend yield (dividend / INREV NAV as at 1 January) 4.7% 4.2% 3.7% Dividend Net result / Profit of the year Real estate returns (as a percentage of the average real estate portfolio value) Direct yield (1) 4.5% 4.5% 4.3% Realised indirect yield (2) 0.2% 0.1% 0.0% Unrealised indirect yield 0.1% -4.0% -4.1% Total return 4.8% 0.6% 0.2% Cash yield (= 1 + 2) 4.7% 4.6% 4.3% Gross initial yield 5.9% 5.8% 5.4% Real estate results Net rental income (1) Realised capital gains (2) Unrealised capital gains Total capital gains Total income Cash (= 1 + 2) Balance sheet Investment property as at 31 December before revaluation 1, , ,156.8 Fair value adjustments investment property and assets held for sale Investment property as at 31 December after revaluation 1, , ,109.4 Assets under construction as at 31 December Assets held for sale as at 31 December Total property investments including assets under construction and assets held for sale 1, , ,162.6 Total assets (balance sheet total) 1, , ,174.2 Equity capital Syndicated loan Financial income and expenditures

8 Amounts in EUR x 1 million Key indicators/ratios Equity capital vis-à-vis balance sheet total 73.9% 71.0% 70.7% Long-term liabilities compared to total property investments (loan-to-value) (< 30.0%) 24.3% 26.9% 27.3% Average interest rate on long-term liabilities (including costs and interest rate swaps) 3.2% 3.1% 3.1% Bank covenants Long-term liabilities compared to mortgaged property investments (loan-to-mortgage-value) (< 45.0%) 39.9% 39.7% 42.0% Long-term liabilities including MtM value IRS compared to total property investments (loan-to-value) (< 35.0%) 25.1% 27.7% 28.5% Net rental income+proceeds on sales-capital expenditures/interest on long-term liabilities (interest cover ratio) (> 3.0) Occupancy rate (as a percentage of the theoretical rental income) 95.5% 94.2% 94.3% Cost percentage excluding the landlord tax (as a percentage of the theoretical rental income) 20.6% 20.9% 19.8% Cost percentage including the landlord tax (as a percentage of the theoretical rental income) 21.6% 21.0% 19.8% INREV NAV as at 1 January INREV NAV as at 31 December Total Expense Ratio (TER) (INREV GAV) (management expenses / average INREV GAV) 0.57% 0.57% 0.54% Total Expense Ratio (TER) (INREV NAV) (management expenses / average INREV NAV) 0.78% 0.81% 0.75% Total Real Estate Expense Ratio (REER) (INREV GAV) (operating costs / average INREV GAV) 1.30% 1.26% 1.11% Letting portfolio (number of homes) 5,921 6,004 6,113 IPD property indexes 2014 All residential assets IPD 5.2% 0.2% 0.3% Amvest Residential Core Fund 5.1% 0.5% 0.4% 8

9 REPORT OF THE FUND MANAGER 9

10 AMVEST RESIDENTIAL CORE FUND Looking back at the year 2014 we have seen that the recovery of the economy and the residential market that had slowly set in end 2013 has continued during the year. Following a strong improvement of consumer confidence, house prices have increased by 3.5%, which was higher than expected. The number of transactions on the owner-occupied market has also shown a remarkable rise. This recovery did not go unnoticed. The residential investment market has regained interest from institutional investors. The inflow of new capital to the sector will provide investors with the means to make new investments, which will contribute to further improvement of the residential market. Focus on Randstad area With a price increase of 3.5% the recovery of the housing market was even higher than expected. Especially the average apartment price rose remarkably by 4.8%. In large part this can be explained by a growing interest to live in cities. Amsterdam and the other big cities in the Randstad area especially are benefitting from this trend. The house price in Amsterdam rose by 10.2% (NVM). As a consequence there will be also regions in The Netherlands that will be confronted with the negative results from this trend. As an investor it is very important to have an up-to-date regional policy in place. The residential rental market has strong fundamentals. An ageing population combined with a growing demand for more flexibility on the labour market translates into a greater need for more flexible housing. Because of the strong demand, the annual rent increase amounted to 3.0%, which is high compared with an average inflation of 1.0%. Part of the rent increase can be explained by a governmental measure allowing an additional rent increases for tenants with a relatively high income occupying social homes. The ARC Fund has a small portion of social homes in the portfolio and could hardly make use of this facility. The rent increase of the ARC Fund amounted to 2.3%. For the ARC Fund it is more important to maintain a very low exposure to the social segment and to avoid the landlord tax. The package of governmental measures to restructure the housing market had a real effect. The transparency regarding the policy for deductibility of mortgage interest provided clarity to house buyers, which was necessary to bring liquidity back to the market. Only the landlord tax has not yet brought the expected results. Housing associations are not selling off their non strategic stock on a large scale. We therefore anticipate that the landlord tax will remain in place after Initial closing Following the initial closing on 17 January 2012, the ARC Fund is open to new investors, alongside AEGON and PfZW. The ARC Fund has a modern structure and management style. An excellent risk/return trade off and special features that are appealing to investors will contribute to future success. Shortly after the initial closing, the ARC Fund welcomed its first new investor. On 1 October 2014 a Dutch Pension Fund was the second new investor. On 1 January 2015 ARC Fund was pleased to welcome four pension funds as new investors. Launching Investors Launching Investors AEGON and PfZW intend to broaden the investor base of the ARC Fund, while continuing to express their long-term commitment to Amvest and its funds. Both expressed their commitment to the ARC Fund for the entire term (initially ten years). Each Investor will retain a stake of at least EUR 200 million. Their involvement in the ARC Fund and expertise in the residential market will be maintained. At the moment AEGON and PfZW have no intention to reduce their current stake. Investment strategy Residential properties have been selected, based on their ability to make sustainable contribution to returns. The portfolio is very young, with an average age of nine years. Therefore maintenance costs can be kept relatively low, and the portfolio is managed efficiently. The portfolio contains only properties situated in economically strong areas: the ARC Fund focus areas. The investment strategy of the ARC Fund has been updated in 2013 to include the effects of the economic crisis, demographic change, and the governmental restructuring of the housing market. The main outcome is an accentuated layout of the ARC Fund focus areas. 10

11 1. MAIN REGIONS WITHIN THE NETHERLANDS (SOURCE: STEC, AMVEST) 2. UPPER LIMIT MID-PRICED SEGMENT REGION Upper limit mid-priced segment in EUR/month Randstad - big four 1,200 Randstad - core remainder 1,100 Randstad - border 1,000 Remaining regions 900 Sustainability The portfol energy label. The ARC Fund pursues an active policy of rejuvenating the portfolio to keep it youthful and sustainable in terms of using technologies that raise comfort and reduce energy consumption and the environmental burden. The ARC Fund has a sustainability policy in place based on a mid-term strategy and a concrete yearly action plan. The ARC Fund participates in the GRESB survey. In 2014 the ARC Fund was recognized as a Green Star by GRESB (third place out of 13 in the Dutch residential peer group). Randstad big four This region consists of the four largest cities within The Netherlands (Amsterdam, Utrecht, The Hague and Rotterdam) and their suburbs. Randstad core remainder This region consists of the remaining areas in the Randstad and includes large cities like Haarlem, Leiden and Almere. Randstad border This region consists of urban areas around cities in Noord-Brabant (Breda, Tilburg, Den Bosch and Eindhoven), Hilversum, Arnhem/Nijmegen and cities in the Veluwe (like Ede). These three Randstad-related focus areas score above average on indicators such as economic growth, changes in the supply/demand ratio, demographic trends, and environmental quality. In the future, these focus areas will likely show an above-average increase in value compared to other regions in The Netherlands. Remaining regions consist of all other regions within The areas. The portfolio policy in this region aims at stock picking in the remaining regional economic centres in the lower mid-priced segment (EUR ). Zwolle and Groningen are attractive sub-regions. The majority of homes are rented in the mid-priced segment. Table 2 shows the upper limits of the segment by region. Funding and distribution policy -off results from its low-risk strategy with very stable dividend returns. In funding, we keep leverage low with a target level of 25%. The loan facility, which is subject to favourable terms, has a maturity date of 21 April According to the loan facility agreement, at least 50% of the interest rate risk has to be hedged. As at 31 December 2014, EUR 240 million (88.9%) of the interest rate risk of the withdrawn loan facility (EUR 270 million) was hedged. The ARC Fund distributes all rental income and divestment profits to Investors as quarterly dividend net of taxes, fees, costs, expenses, liabilities, and other charges to be borne by the ARC Fund. The nature of the residential sector and the portfolio with its high occupancy rates offer investors the prospect of a stable dividend yield of approximately 4.0% per year (2014: 4.7%). Residential investments are an excellent inflation hedge (on a cash flow basis) due to the link between rental increases and inflation. Partnership with Amvest Development B.V. Amvest Development B.V. is one of the leading property developers in the Dutch residential market. The company has broad experience with integrated area development and complex co-development projects. Its experience with longterm investment funds as the ARC Fund makes Amvest Development B.V. an interesting partner for public authorities and public-private partnerships. 11

12 The partnership with Amvest Development B.V. is highly extensive knowledge of markets (including rental markets) makes it possible to develop a high-quality product for tenants. In addition, a right of first refusal (ROFR) has been agreed with the ARC Fund. This means that all rental homes must first be offered to the ARC Fund, which has the right to is obviously entitled to waive this right. The ROFR gives the ARC Fund access to a high-quality pipeline of properties that are aligned with the ARC Fund strategy. Governance structure A modern governance structure guarantees reliable, efficient, and professional supervision by property experts and investors. The Fund Manager is sole manager of the ARC Fund. The Fund Manager is responsible for both the overall portfolio and the risk management of the ARC Fund. For key decisions (such as the Portfolio Plan and larger acquisitions and sales), the Fund Manager will seek advice or approval from the Investment Committee (and/or the Advisory Board), which consists of three independent experts in development, investment management and the Dutch residential market. The Investment Committee and the Fund Manager met four times in The Advisory Board (comprised of representatives of the Investors) also plays a key role. Its duties include, amongst others, supervising the handling of conflicts of interest, approving the Portfolio Plan, and the appointment of the members of the Investment Committee. The Advisory Board met three times in were held two times in stors are represented, 12

13 THE DUTCH ECONOMY The Dutch economy and the residential property market in 2014: cautiously optimistic The economy is moving again. After years of decline, 2014 was the year in which we have seen signs of an economic recovery. The GDP growth in 2014 was stronger than anticipated, with an average growth of 0.8%, while the QOQ (quarter on quarter) development also showed positive numbers (graph 3). This was brought about by an increase in production volume in the industrial sector and investments in the construction sector. The export of goods and services also increased by 4.4%. The second quarter saw a rise in employment and a fall in unemployment. Total unemployment dropped from 680,000 in 2013 to 642,000 in 2014, representing 8% of the total working population (Statistics Netherlands, 2014). Graph 3 shows the quick response of consumers to the first signs of economic growth at the end of This is reflected in consumer confidence, an important indicator for the sentiment on the housing market. Although consumer confidence has improved, this has not yet been translated into positive figures. In the last two quarters of 2014, household sentiment fell slightly after the initial optimism at the beginning of the year. The somewhat negative sentiment among consumers is probably caused by uncertainties on the labour market and by the international unstable conditions in the Middle East and in Ukraine. Although unemployment numbers have decreased, the number of available jobs remains relatively limited. Employment growth is due mostly to jobs for temporary workers and the increase in the number of self-employed persons (ZZP rs). The flexible job growth and increase in GDP are signs of an upturn in employment for the coming years (CPB Netherlands Bureau for Economic Policy Analysis, 2014). 3. ECONOMIC GROWTH AND CONSUMER CONFIDENCE (SOURCE: STATISTICS NETHERLANDS) 6.0% % GDP growth (year on year) Consumer confidence % % % % % -50 Interest and inflation As in the rest of Europe, inflation in The Netherlands was at its lowest point at the end of 2014: 0.9%. Average inflation in 2014 was 1.0%, resulting in price stability. Inflation was due mainly to rent increases for tenants over the past year. Inflation would have been -0.1% had rents not been increased. A price decrease in the product groups clothing and automotive fuels had a strong dampening effect on the inflation rate. Mortgage loan interest rates dropped further in the first half of 2014 compared with 2013, and now stand at 2.6% (10-year fixed). Interest rates are now at their level in It is anticipated that the European Central Bank will keep interest rates low until there is stable growth (Dutch National Bank, 2014). 13

14 Portfolio policy and focus areas Future demographic and economic developments (which have a significant impact on the housing market) and risk/return profiles are important for the portfolio policy of the ARC Fund. The portfolio policy for the ARC Fund for the next three years, as stated in 2013, focuses on the following operational objects: quality requirements of properties and their location, an excellent operational return reflected by the continued ambition to outperform the IPD Benchmark on gross/net income return, and (partial) divestments of the portfolio in the higher rental segment in order to reduce the vacancy rate. A regional study identifies the main regions in The Netherlands, based on economic, population and capital growth, as showed in graph 4. The regions vary by different risk/return profiles and future demand structures for free-market rental homes. The ARC Fund portfolio is more Randstad-focused compared to the IPD Benchmark portfolio, which contains all residential investment areas. 4. MAIN REGIONS WITHIN THE NETHERLANDS AND TARGET PORTFOLIO ARC FUND (SOURCE: STEC, AMVEST, IPD) Future demand Benchmark portfolio ARC Fund portfolio Target portfolio ARC Fund* Mid-priced segment Randstad big four** + 50% 80% 60% - 80% EUR 710-1,200 Randstad core remainder** + 10% 7% 10% - 20% EUR 710-1,100 Randstad border** 0 19% 7% 5% - 15% EUR 710-1,000 Remaining regions - 21% 6% 0% - 10% EUR * Indicative ** Focus areas of the ARC Fund The ARC Fund focus areas have outperformed the other regions within The Netherlands, in terms of economic growth (graph 5). The portfolio policy for the next years aims to maintain its strong position within the Randstad big four region and to gradually extend the portfolio within the remaining Randstad regions. In 2014 the portfolio has slightly increased its weight in 80%). 14

15 5. ECONOMIC GROWTH, FOCUS AREAS VS. REMAINING REGIONS (INDICES; 1995 = 100) (SOURCE: STATISTICS NETHERLANDS) Indices, 1995 = Randstad - big four, Randstad - core remainder and Randstad - border Remaining regions

16 THE DUTCH RESIDENTIAL MARKET Finance and politics Several new agreements on the housing market have been made in 2013 and These measures affect the residential property market and will be discussed below. As from 2014, the maximal tax bracket for the deductibility of interest payments on mortgages will be lowered from 52% to 38% over 28 consecutive years by 0.5% annually. The tax deduction for mortgage interest will be phased out in annual cuts of 0.5% until 2042, the maximum tax rate at which mortgage interest may be deducted dropped to 51.5% in The maximum loan-to-value (LTV) will be phased out in equal amounts until it is 100% in The LTV was 104% in 2014 and will be further reduced in 2015 to 103%. In The Netherlands it is possible to buy a home with National Mortgage Guarantee (NHG) to stimulate the number of transactions. A temporary increase was adopted during the financial crisis. As a result of economic recovery, the NHG ceiling was further lowered to EUR 265,000 in 2014; in 2015 it will be EUR 245,000. The landlord tax for social houses was implemented in 2013 and now the first effects of the introduction of the extra tax on regulated houses (< EUR as of 1 January 2015) are visible. This tax affects mostly housing associations, but also affects the regulated assets held by institutional investors as well as larger private investors. The regulated assets will be scaled down slowly through gradual rent harmonisation, sale and renovations carried out on real estate, thereby making rent increases possible. In contrast to the extra tax on landlords are rent increases for tenants in the regulated segment. These are as much as 4.0% (excluding inflation) for households with a gross income exceeding EUR 43,602 (households occupying social housing at a rent that is too low in comparison to their level of income). The anticipated effect is that this will increase competition and improve the competitiveness of non-subsidized rented housing in the middle segment. A decision was taken by the government on the reform of the residential valuation system (or Dutch points system) for rental housing at the end of This system defines the maximum rents allowed for social homes. The current sections 'type of housing' and 'residential environment' will be replaced with an evaluation on the basis of the valuation of Immovable Property Act (WOZ value). On average, the WOZ value will account for 25% of the determination of maximum rent. The number of points - and therefore the rent - of homes with a relatively high WOZ value, will as a result be influenced more strongly by the WOZ value. This measure will be introduced in October For the ARC Fund it means that further research must be carried out into the possible consequences for the assets that currently have approximately 142 points (upper limit for social homes). Transactions and supply After a modest increase in the first and second quarter of 2014, the housing market showed further recovery in the last two quarters. Consistent government policy for the housing market and economic growth contributed to this positive sentiment in the housing market. In 2014 the number of homes for sale has decreased due to higher sales figures. Graph 6 shows transactions of new and existing owner-occupied homes registered by NVMbrokers (around 80% market share). The sale of all existing houses in the market was 33% higher than in 2013, totalling over 155,000. This is an upward trend compared to the number of sales between 2012 and The fourth quarter showed a boost in owneroccupied home sales, mainly due to the tightened regulation on donations and mortgages as of Price movements compared with 2013 were positive: an increase of 3.5% resulted in an average sale value of EUR 215,000. The price increase was stronger than initially anticipated, and the prices of apartments in particular, rose strongly: 4.8% over

17 6. TRANSACTIONS OF OWNER OCCUPIED HOMES (ANNUAL AVERAGES) (SOURCE: NVM, NVB BOUW) Transactions (annual averages) 200,000 New owner-occupied homes Existing owner-occupied homes Total 150, ,000 50,000 0 In 2014 the supply of owner-occupied homes decreased by 1.2%. In December 2014, there were 199,000 houses for sale, which is a decrease of 6% compared to December The sales number of new owner-occupied homes increased more rapidly in 2014 (+20%) compared with 2013 (+3%). Over 18,000 transactions were completed in 2013 where in pre-crisis years about 40,000 new homes were sold annually, shown in graph 6. Consequently, this causes tightening of the housing stock. Households seeking to finance an owner-occupied house encountered banks that were easing their conditions to grant mortgage loans to consumers in the first part of 2014 (graph 7). In the last two quarters of 2014 the credit standards were set at 0, which is a positive trend compared to the past 6 years. The easing of banks is - amongst others causes - due to decreasing interest rates and consistent government policy during the past years. Analyzing graph 6 and 7 there is a correlation between the numbers of transactions in 2014 and the easing of banks noted. However, the increase of transactions was stronger than the flexibility of banks. 7. CHANGES IN CREDIT STANDARDS OF BANKS FOR NEW LOANS (FOR HOUSE PURCHASES AND FOR ENTERPRISES) (SOURCE: ECB BANK LENDING SURVEY) Loans for house purchase Loans for enterprises 60 Tightening Easening

18 Supply and demand The number of building permits granted is a leading indicator for the construction of new homes. In 2014 a total number of 42,000 building permits was granted, an increase of approximately 60% compared to 2013 (Source: Statistics Netherlands). After years of decline, 2014 shows a trend reversal in number of granted building permits (graph 8). This increase has positive effects for the number of completions and the renewal of the housing stock in the coming years; however the number of completions prior to 2008 will not be realized in the near future. Furthermore, the current level of building permits will not be sufficient - in some regions - to accommodate the ongoing population growth (apart from the replacement of homes). The relatively low number of new homes for the coming years and increasing consumer confidence levels should put upward pressure on the real estate market. 8. QUANTITATIVE DEVELOPMENTS IN THE DUTCH HOUSING MARKET (SOURCE: STATISTICS NETHERLANDS) 120,000 Building permits granted Completions Households (annual increase in numbers) 100,000 80,000 60,000 40,000 20, INVESTING IN THE DUTCH RESIDENTIAL MARKET Residential property investment market In 2014 there was a considerable increase in demand for residential property investments in The Netherlands. This was prompted by both foreign and Dutch investors. Where foreign investors showed the most interest in existing housing, Dutch investors focused more on new housing (JLL, 2014). The influx of foreign investors brought new dynamics to the residential property investment market, but the majority of the investments will still be made by Dutch (institutional) investors. The estimated scope of transactions in housing in 2014 exceeded the level of The transactions of the Vestia portfolio (Patrizia form Germany) and the Wooninvesteringsfonds (Roundhill from the UK) strongly impacted the number of residential property investments made in 2014 (DTZ, 2015). 18

19 Performance figures for investment classes in real estate In 2014 all investment classes showed positive results, which is an improvement compared to 2013 (table 9). Capital growth figures for industrial and residential property were positive in Capital growth was most negative for retail. The return figures are shown on standing investments basis (properties that have been in operation for the complete year; so the effects of buying, selling and development are excluded). The total return in the residential sector was 5.1% in 2014, which is an increase of 4.6% compared to Total return was driven mainly by income return. In recent decades the Dutch residential market has proved to be a stable factor over the longer term. 9. INCOME RETURN, CAPITAL GROWTH AND TOTAL RETURN AND ANNUALISED TOTAL RETURN FIGURES FOR 3, 5 AND 10 YEARS (STANDING INVESTMENTS) (SOURCE: IPD) Total return index (December 1994 = 100) Total return 2014 (%) Income return 2014 (%) Capital growth 2014 (%) Annualised total return (%) December 2013 December year 5 year 10 year All property Retail Office Industrial Residential Other Residential investments as inflation hedge The annual rent increase of rental homes is linked to the inflation of the previous year, which means investing in the Dutch residential market offers investors relatively solid protection for inflation (on a cash flow basis). The actual rent increase in favour of the residential investors has outpaced inflation over the period (graph 10). Inflation reached an average of 1.0% in 2014, a relatively low value. 10. RENT INCREASES AND INFLATION RATE, (INDICES, 1995 = 100) (SOURCE: IPD, STATISTICS NETHERLANDS) Indices, 1995 = Inflation Rent increases The fundamentals of the Dutch housing market are strong and after years of decline we see a trend reversal: the amount of transactions rose sharply as did the building permits granted. Forecasts to 2040 show that the number of households will increase annually, in particular in the Randstad area. Furthermore, in all regions new homes are needed to replace homes that are withdrawn from the housing stock because of, for example, demolition. There will be a structural demand for new homes until Focussing on the short and mid-term, there is a scarcity of residential property in some regions as a result of the lack of newly built homes and the ongoing population growth. 19

20 PORTFOLIO AND FUND FIGURES 2014 t and favourable market conditions. Its portfolio occupancy rate improved to 95.5% (2013: 94.2%), and operating costs (based on gross rental income) of 22.4% outperformed the IPD olio was 2.3%. The number of individual homes sold increased to 45 with a total gross turnover of EUR 11.6 million (2013: 10 homes; total gross turnover of EUR 2.7 million). Profits from sales amounted to EUR 2.1 million (2013: EUR 0.3 million), adding 0.2% to the As part of the rejuvenation strategy, three properties in operation (EUR 62.8 million) were added to the portfolio. Five properties (EUR 45.3 million) were sold as block sales. The total transaction volume equalled 11.0 of properties rose to almost EUR 250 million, (2013: EUR 16.5 mln). Portfolio value increased by 0.1% (2013: -4.0%). Using the IPD all residential assets ndirect performance was was 4.8% (IPD: 4.5%). Total performance was 5.1% (IPD 5.2%). In the paragraphs below, the portfolio composition, operation and dynamics are explained, concluding in the po. Portfolio composition In 2014, portfolio dynamics resulted in an investment portfolio of 111 residential properties with a total of 5,921 homes and a book value of EUR billion (compared to 108 residential properties, 6,004 homes and EUR billion book value in 2013). The average book value per home increased with 2.2% from EUR 179,000 as at 31 December 2013 to EUR 183,000 as at 31 December Besides the 111 residential properties, the ARC Fund also has 13 properties defined as commercial/other real estate. These 13 properties consist of 9 commercial properties with a book value of EUR million (1.4% of the total portfolio value) and 4 residential properties consisting of 69 units rented out under master lease contracts to various care institutions (book value EUR million; 1.3% of the total portfolio value). The portfolio characteristics add to the portfolio performance. The next tables and graphs break down the portfolio by region, price segment, age, and property value. Homes generate minor) 2% of the rental income is generated by commercial units. These commercial units are part of residential buildings in the portfolio. About one third of the portfolio consists of single-family homes. 11. TOTAL PORTFOLIO BY TYPE Composition by rental income and number of homes Single-family 34% 33% Multi-family 59% 58% Mixed/Other (residential) 5% 7% Commercial 2% 2% 100% 100% 5% 2% 34% Single-family 2,146 2,124 Multi-family 3,520 3,511 Mixed/Other (residential) Commercial - - Total 5,921 6,004 59% Single-family Multi-family Mixed/Other (residential) Commercial 20

21 The next graph shows the allocation of the portfolio over the regions. 80% of t in the four largest cities and their suburbs situated in the Randstad. The remaining properties are situated in regions with attractive perspectives, for example Haarlem and the Brabant cities. The investments and commitments in 2014 add to the existing portfolio allocation over the regions, thereby increasing the allocation in Amsterdam. 12. TOTAL PORTFOLIO BY REGION Composition by book value % 6% Randstad - big four 80% 78% Randstad - core remainder 7% 8% Randstad - border 7% 8% Remaining regions 6% 6% Total 100% 100% 7% 80% Randstad - big four Randstad - border Randstad - core remainder Remaining regions Graph 13 shows the portfolio has a strong focus on the free market rental segment. The mid-priced segment compromises 68% of the portfolio s rental income. Exposure to the top rental segment is limited to 10%. The exposure to the segment below EUR (the landlord tax limit as of 1 January 2015) is limited to 9% (2014: 10%) and decreasing. 13. RESIDENTIAL PORTFOLIO BY PRICE SEGMENT Composition by rental income Price level in EUR/month Low-priced segment < % Mid-priced segment / 1,200 * 68% Higher priced segment 900 / 1,200 * - 1,500 13% Top rental segment > 1,500 10% 100% 13% 10% 9% * rental price limit of the segment EUR 900 to EUR 1,200 per home per month: depending on specific area Low-priced segment Higher priced segment 68% Mid-priced segment Top rental segment As the next graph shows, the portfolio consists mainly of properties with a recent year of construction in the period The average age of the portfolio is 9 years. 14. TOTAL PORTFOLIO BY AGE Composition by book value years 27% 27% 6-10 years 36% 37% years 31% 34% more then 15 years 6% 2% 100% 100% 31% 6% 27% The average age of the portfolio in years % 0-5 years 6-10 years years more then 15 years The portfolio is well diversified over properties. Table 15 shows that the ten largest properties based on book value form a moderate 23.4% of the total portfolio value. 21

22 15. THE TEN LARGEST PROPERTIES Composition by book value (descending) Town Address Number of homes Housing type / Commercial Construction year Title to the land* Region** The Hague Bezuidenhoutseweg (New Babylon, Citytower) 106 multi-family 2010 leasehold Randstad - big four The Hague Steentijdsingel (Ypenburg centrum) 206 multi-family 2005 freehold Randstad - big four Haarlem Bellevuelaan (Hoge Hout) 91 multi-family 2010 freehold Randstad - core The Hague Cornelis de Wittlaan (De Staten I) 128 multi-family 2000 freehold Randstad remainder - big four The Hague Cornelis de Wittlaan (De Staten II) 109 multi-family 2000 freehold Randstad - big four The Hague Bezuidenhoutseweg (New Babylon, Parctower) 70 multi-family 2010 leasehold Randstad - big four Amsterdam Emmy Andriessenstraat (Terrazze) 76 multi-family 2010 leasehold Randstad - big four Groningen Boterdiep (Ciboga) 145 mixed 2002 freehold Remaining regions Berkel en Rodenrijs Thea Beckmansingel (Gouden Griffelbuurt) 119 single-family 2006 freehold Randstad - big four Rotterdam Cor Kieboomplein (De Mondriaan) 160 multi-family 2002 leasehold Randstad - big four The ten largest properties based on book value make out 23.4% of the total portfolio value. Title to the land* Freehold: the title to the land is held by Amvest RCF Custodian B.V. Leasehold: the land was acquired on a long lease. The ground rent has been paid as a lump sum for all leasehold land. Region** Randstad - big four: four largest cities in the Netherlands (Amsterdam, Utrecht, The Hague and Rotterdam) and their suburbs Randstad - core remainder: remaining urban regions in the Randstad (including Almere, Haarlem and Zaanstad) Randstad - border: four biggest cities in Noord-Brabant (Breda, Tilburg, Den Bosch and Eindhoven), Hilversum, Arnhem/Nijmegen and the cities in the Veluwe (like Ede) Remaining regions: remaining regions Portfolio operation Rental income, average rent Net rental income from the portfolio in 2014 was EUR 50.1 million (2013: EUR 50.1 million). The year-end 2014 average monthly theoretical rent per home increased by 4.1% to EUR 960 (2013: EUR 923). The 4.1% growth of rental income is determined by the annual rent increase and portfolio dynamics. Excluding portfolio dynamics (like for like), the rental growth of the standing properties was 2.0%. The average annual rental increase of the rental contracts was 2.3%. The ARC Fund investments focus on the mid-priced rental segment. The upper limits of this segment are shown in table 2. The table below shows the average monthly rent from the residential properties per home by type and region. The average rent in the Randstad - core remainder region is relative high due to the exposure of the Hoge Hout apartment building in Haarlem, which is positioned in the top rental segment. 16. AVERAGE MONTHLY RENT PER HOME BY TYPE AND REGION 2014 % 2013 % Single-family % % Multi-family % % Mixed 856 4% 839 6% Average rent per home per month % % Randstad - big four* % % Randstad - core remainder* 1,107 8% 1,069 8% Randstad - border* 892 7% 892 8% Remaining regions 871 6% 848 6% Average rent per home per month % % *Focus areas of the ARC Fund 22

23 Occupancy The average occupancy rate in 2014 improved to 95.5% (2013: 94.2%). The occupancy rate rose over the course of 2014 from 94.2% to 96.7%. The occupancy rate improved as a result of active management as well as of favourable market conditions. The improvement in occupancy rate came from identifying and managing vacancy risks in an early stage. In addition, the focus was to reduce frictional vacancy by shortening the turnover re-letting time. The graph below shows the development of the different components of vacancy during BREAK DOWN VACANCY RATE 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% Operational vacancy Sales vacancy Initial vacancy Vacancy Core Fund 3.3% 3.1% 1.0% 0.0% Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec % 0.0% Table 18 shows the ten properties with the highest vacancy rates. The weighted average vacancy rate of these top ten properties at year-end 2014 has decreased to 8% (2013: 10%). 18. THE TEN PROPERTIES WITH THE HIGHEST VACANCY RATE Town Address Number of homes Housing type / Commercial Vacancy as % of total portfolio vacancy Vacancy on property level (%) Average rent per home/month in EUR Haarlem Bellevuelaan (Hoge Hout) 91 multi-family 5.9% 10.3% 1,629 Amsterdam Emmy Andriessenstraat (Terrazze) 76 multi-family 5.8% 12.7% 1,551 Hoofddorp Antje Breijerstraat (Chicago) 97 multi-family 4.7% 11.3% 1,101 Den Haag Steentijdsingel (Ypenburg centrum) 206 multi-family 4.1% 6.1% 845 Tilburg Spoorlaan (De Stadsheer) 82 multi-family 3.7% 12.7% 898 Amersfoort Sint Jorisplein 93 multi-family 3.0% 9.6% 857 Schiedam PKO-laan (De Nieuwerdam) 81 multi-family 2.5% 8.7% 895 Den Haag Cornelis de Wittlaan (De Staten II) 109 multi-family 2.4% 5.2% 1,110 Zoetermeer Nederlandlaan (Spazio) 65 multi-family 2.4% 7.8% 1,186 Badhoevedorp Franklinstraat (Zuiderbogen, BOG) commercial 2.3% 100.0% Turnover rate The turnover rate in 2014 was 15.6%, a slight improvement compared to 2013 (16.2%). To reduce the turnover rate, exit interviews with leaving tenants and increased focus on service, particularly in relation to the properties with a high turnover rate, were used in

24 The next table presents the ten properties with the highest turnover rates. 19. THE TEN PROPERTIES WITH THE HIGHEST TURNOVER RATE Town Address Number of homes Housing type / Commercial New rented (or sold) in 2014 as a % of number of homes Average rent per home/month in EUR Hoofddorp Burgemeester van Stamplein (Milaan) 7 single-family 57% 1,525 Nootdorp Woendrechthof 16 single-family 44% 1,073 Zwolle Fruitweidestraat (De Hoven) 10 single-family 42% 940 Arnhem Engelwortelstraat (Kruidenhof) 42 multi-family 38% 750 Arnhem Kea Boumanstraat (Stadsheren) 12 single-family 33% 847 Tilburg Pieter Vreedeplein 29 mixed 31% 1,083 The Hague Van Campenvaart 42 single-family 30% 1,008 Zwolle Frankhuizerallee (De Hoven) 17 single-family 29% 1,011 Amersfoort Sint Jorisplein 93 multi-family 29% 857 Breda Stationsweg (Heren van Breda) 93 multi-family 29% 898 Operating costs Property management has been outsourced to five local property management organisations, which, supervised by asset managers, carry out the technical, administrative, and commercial management. In 2014, operating costs increased due to the landlord tax expenditures. Operating costs as a percentage of the theoretical rental income in 2014 were 21.6% (2013: 21.0%). For a breakdown of the operating costs see note 2 in the financial statements. Due to the relatively recent construction, maintenance costs are significantly lower than the IPD benchmark average. Based on the IPD definition, the operating costs of the ARC Fund were 22.4% (IPD: 26.1%). Landlord tax In 2013, the landlord tax was introduced for homes with a monthly rent below the free market rent level, which amounts to EUR as per 1 January In 2014 (as per 1 January 2014) the free market rent level was adjusted to above EUR While the ARC Fund exposure to the landlord tax is relatively limited, the significant increase of the landlord tax brackets in 2014 from 0.014% to 0.381% of the WOZ value, added EUR 672,000 to operating costs in 2014, compared to EUR 46,000 in the landlord tax is relative minor and decreasing. In 2014, the landlord tax applied to 9% of the based on rental income. This is an improvement compared to 2013, when the landlord tax applied to 10% of the portfolio. This exposure will decrease further in the next years with the end of agreements with municipalities. s. 20. LANDLORD TAX RESIDENTIAL PORTFOLIO ARC FUND Composition by rental income % No landlord tax 91% 90% Landlord tax 9% 10% Total 100% 100% No landlord tax: monthly rent > EUR (1 January 2015); > EUR (1 January 2014) Landlord tax: monthly rent < EUR (1 January 2015); < EUR (1 January 2014) No landlord tax 91% Landlord tax 24