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Report of Executive Board of Directors

Main Fund risks

The value of the shares in the Fund is dependent on developments in the financial markets and real estate markets. The Fund considers the following risk factors of relevance for investments in this Fund. This list of risk factors is limited, but other circumstances and events may arise that are not mentioned but that do affect the value of the Fund. Investors are therefore asked to take note of this section and other sections to arrive at a well-informed opinion on the risks in this Fund.

1 Market risks

This is the risk that the value of the real estate in the Fund fluctuates due to supply and demand mechanisms in the markets in which the Fund operates. Some of the underlying risk factors may influence the Fund's income return and cash flows, while others primarily affect capital growth. A drop in the value of direct real estate in the Fund has a direct impact on the Fund's capital growth.

The following risk factors may also influence the specific assets in the Fund:

Occupancy rate

Occupancy depends on market demand, availability of competitive propositions and fund portfolio positioning in the market. Occupancy is an important driver for the Fund’s expected income return. In the event of an oversupply of properties in (parts of) the Fund’s operating market, financial occupancy rates (rental cash flows as a percentage of cash flows at market rates when fully let) may be lower than anticipated and affect the Fund's cash flows and returns.

Operational expenditure

To rent out properties and to keep the Fund’s assets in good condition, the Fund has to incur operational expenses. If these expenses are higher than anticipated, this may reduce the Fund's returns.

Inflation risk

Inflation risk is the risk that future inflation is lower than expected or rental markets deviate from these future inflation trends. Rental contracts usually contain inflation indexation clauses, which influences the (future) cash flows of the Fund. Real estate prices in general are also influenced by general price rise assumptions.

Valuation risk

This is the risk that the value of the property changes and does not reflect fair value. This risk is mitigated by having all properties owned by the Fund revalued by external appraisers on a quarterly basis. This revaluation is the most important driver for the Fund’s capital growth. 

Market Concentration risk

Part of the Fund's strategy is to select geographies where rental markets and rental properties are growing faster than the market as a whole. This strategy results in concentrations in geographical areas or property categories. This makes Fund vulnerable when unexpected trends have a negative impact on these concentrations.

2 Credit risk & Counterparty risk

Credit risk

This is the risk that a counterparty cannot fulfil its contractual financial obligation. Defaults or payment problems may result in clients not paying their contractual rents and service costs and this may affect cash flows and the value of the property.

Counterparty risk

The Fund may have to incur unexpected losses due to the default of one or more counterparties, such as banks or developers. The Fund’s liquidity is deposited with a reliable, highly rated bank in the Netherlands.

As one of the main pillars of the Funds strategy is to optimise its assets, the Fund relies on counterparties to complete these assets and has often already paid instalments to the developer in line with the progress of the construction. Should the developer run into financial difficulties, the Fund may incur additional costs to complete the property.

3 Liquidity & Funding Risk

This is the risk that the Fund has insufficient means to pay current or future commitments. This risk has two angles:

  • Liquidity: the liquidity required to pay the Fund’s current expenses and dividends to its shareholders.

  • Funding risk: the risk that insufficient (investor) funding is available for the unfunded future commitments at the time of actual investment. This may then interact with market liquidity, which is the risk that the liquidity required in the market to dispose of assets (as part of its hold-sell analysis or to finance redemptions by investors) at prices in line with valuations is lacking (i.e. not distressed prices).

4 Non-financial risks

The Fund is also subject to the following non-financial risks:

  • Fiscal risk: the risk that changes in tax laws unexpectedly influence the value of the underlying properties or the value of the Fund’s certificates.

  • Legal risk: the risk that interpretations of contracts and legal clauses unexpectedly influence the value of these contracts.

  • Outsourcing risk: risk that outsourced activities are not executed with the quality or integrity expected.

  • IT risk: Risk related to IT systems, cybercrime, data security or IT strategies that are not adequate enough to support key processes.

  • Model risk: the additional risk that expected (modelled) returns have not materialised at the time of sale or valuation and the risk that the Fund may not meet its plan IRR.

Other non-financial risks are mainly related to the management organisation and are managed at that level.

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