CITY DEVELOPMENTS LIMITED ANNUAL REPORT 2021 FINANCIALS 158 159 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2021 YEAR ENDED 31 DECEMBER 2021 5. INVESTMENT PROPERTIES (CONT’D) (a) Investment properties comprise commercial, residential, hotel and industrial properties that are leased to external customers. Generally, each of the leases is fixed for a period of 1 to 29 years (2020: 1 to 29 years), and subsequent renewals are negotiated at prevailing market rates and terms. (b) During the year, the Group transferred two hotel properties located in Australia held by CDHLT to property, plant and equipment, when CDHLT became both the owner and operator of the properties. In addition, the Group transferred an industrial warehouse to non-current assets held for sale (note 6). In 2020, the Group’s transfers from development properties to investment properties related to two office buildings in Shanghai which were completed and commenced leasing activities during the year. (c) As at 31 December 2021, investment properties of the Group with a total carrying amount of $1,861,453,000 (2020: $1,464,268,000) were mortgaged to certain financial institutions to secure credit facilities (refer to notes 22 and 23 for more details of the facilities). (d) The Group undertook its annual review of the carrying amounts of investment properties for indicators of impairment. Where indicators of impairment were identified, the recoverable amounts were estimated based on internal or external valuations undertaken. The cash generating units (CGU) are individual properties. The recoverable amounts of the investment properties, being the higher of the fair value less costs to sell and valuein-use, were predominantly determined using the fair value less costs to sell approach, and were estimated using the discounted cash flow and income capitalisation methods (2020: discounted cash flow method). Based on the impairment assessment undertaken in 2021, the Group reversed an impairment loss of $3,416,000 on one hotel in Maldives and one hotel in Italy, both of which are held by CDLHT. The impairment losses reversed during the year mainly arose from the improved trading performances, following the progressive recovery of the hospitality sector in the countries in which these hotels are located. In 2020, the Group recognised an impairment loss of $12,035,000 on one hotel in the Maldives and one hotel in Italy, both of which are held by CDLHT. The impairment loss was a result of the challenging operating performance of these hotels and the subdued outlook for these hotels as a result of the COVID-19 pandemic. The impairment loss reversed or recognised was recognised in “other operating expenses” and the investment properties segment. The key assumptions used in estimating the recoverable amounts are set out below: Maldives Italy Occupancy rate 2021 54.4% to 67.2% 75.0% to 81.0% 2020 28.0% to 67.0% 50.0% to 82.0% Average room rate growth 2021 1.8% 2.7% 2020 3.7% 2.3% Discount rate 2021 11.8% 5.3% to 6.3% 2020 12.0% 6.8% Terminal rates 2021 8.8% 4.0% to 5.0% 2020 9.0% 4.9% Capitalisation rate 2021 8.5% N/A 2020 N/A N/A 5. INVESTMENT PROPERTIES (CONT’D) The forecasts cover a five to ten years period, and cash flows beyond this period are extrapolated using a growth rate ranging between 1.2% and 2.0% (2020: 1.8% and 3.0%), which is based upon the expected trading growth for each hotel and inflation in the country in which the hotel is located. Sensitivity analysis The Group’s impairment review is sensitive to changes in the key assumptions used. An increase in occupancy rate and/or average room rate growth in isolation would result in a higher recoverable amount. An increase in discount rate, terminal rate or capitalisation rate in isolation would result in a lower recoverable amount. (e) Determination of fair value The fair values for a majority of the Group’s investment properties are determined by independent external valuers who have appropriate recognised professional qualifications and recent experience in the location and category of the investment properties being valued. The fair values of certain investment properties located in Singapore are based on in-house valuations conducted by a licensed valuer who is also an officer of the Company. The internal valuer has appropriate recognised professional qualifications and experience in the location and category of the investment properties being valued. The fair values of the investment properties were estimated using the discounted cash flow, income capitalisation, direct comparison, standardised land value adjustment and residual methods. The discounted cash flow method involves the estimation and projection of an income stream over a period and discounting the income stream with an internal rate of return to arrive at the market value. The income capitalisation method capitalises an income stream into a present value using revenue multipliers or single-year capitalisation rates. The direct comparison method involves an analysis of comparable sales of similar properties and adjusting the transacted prices to those reflective of the investment properties of the Group. The standardised land value adjustment method considers the price of standard land in the current situation of development and utilisation, under normal market conditions within legal maximum use term as at a special date, that is assessed and approved by the local government. The residual method involves deducting the estimated cost to complete as of valuation date and other relevant costs from gross development value of the proposed development assuming satisfactory completion and accounting for developer’s profit. In relying on the valuation reports, the Group has exercised its judgement and is satisfied that the valuation methods and estimates are reflective of current market conditions. The valuation reports obtained from the external valuers of certain investment properties have highlighted that the COVID-19 pandemic gave rise to an unprecedented set of circumstances on which to base a judgement. Consequently, less certainty and a higher degree of caution should be attached to these valuations than would normally be the case. Values may change more rapidly and significantly than during standard market conditions. Due to the uncertainties that the pandemic may have on the real estate market, the external valuers have also recommended to keep the valuation of these properties under frequent review. The fair value disclosure for the investment properties for the Group and the Company of $9,945,537,000 (2020: $8,901,489,000) and $1,662,892,000 (2020: $1,114,435,000) respectively has been categorised as a Level 3 fair value based on the inputs to the valuation techniques used.
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