P&L Check

Vonovia’s Growing Pains

main 69098823 source Ina Fassbender DPA – house Essen Vonovia
High housing prices aren't necessarily a good thing for real-estate companies like Vonovia. Source: Ina Fassbender/DPA

It was a series of massive acquisitions that turned Vonovia into Germany’s largest owner of residential property. The company, formerly known as Deutsche Annington, concluded its latest takeover in January, buying rival Conwert for around €1.7 billion ($1.9 billion) in cash and shares.

Conwert added another 24,000 apartments, especially in metropolitan areas like Berlin, Dresden and Leipzig, to the 333,000 homes that Vonovia already owned across Germany at the end of last year. That takeover was only the fourth-large acquisition since Vonovia’s became a listed company in July 2013, and one of more than a dozen since British private equity firm Terra Firma and its boss Guy Hands founded Annington in 2001.

However, faced with an ongoing property price boom in Germany, it’s no longer a buyer’s market. Gobbling up rivals is becoming more difficult: “Real estate prices were too high in 2016 for us to make any large acquisitions beyond Conwert,” Vonovia’s Chief Executive Rolf Buch said earlier this year. The biggest possible prize, acquiring its largest domestic rival Deutsche Wohnen last year in what would have been a record deal, wound up falling flat.

Shareholders will need to get used to the idea that Vonovia, which became one of Germany’s 30 blue-chip DAX-listed companies in 2015, is no longer going to bring them the kind of rapid growth they’ve come to expect.

“We are growing by offering new services, and through active portfolio management, our investment program and the construction of new apartments.”

Rolf Buch, CEO, Vonovia

Vonovia’s success as a company to date has essentially involved buying up additional properties, driving up rental income and running the acquired operations more efficiently. With that kind of quick-fire growth out the window, Mr. Buch will have little choice but to grow his company organically in the coming years. That involves, for example, focusing on the development of lucrative secondary businesses. In Mr. Buch’s words: “We are growing by offering new services, and through active portfolio management, our investment program and the construction of new apartments.”

Vonovia plans to build 1,000 new apartments this year, in most cases by building on top of existing properties with prefabricated housing modules. Building new apartments offers more freedom to set rents, because raising lease contracts for existing tenants is constrained by German law.

Mr. Buch knows that such projects won’t match the growth rates of previous years. For 2017, Vonovia is forecasting a recurring income per share – roughly rental income minus costs plus proceeds of services, for instance energy supply – of €1.80, excluding the impact of the Conwert acquisition. This would represent a 10-percent increase compared to the €1.63 earned in 2016. That is still very acceptable, but it pales with last year’s growth rate of 23 percent and 30 percent in 2015. To investors, the recurring income measure figure is crucial, because 70 percent of it is paid out as a dividend to shareholders.

Part of Vonovia’s growth potential in the past has come from its focus on metropolitan areas, where rental prices have surged in the past five years. Houses in the urban areas of Berlin, Munich and Frankfurt, for instance, are popular with higher income groups, offering better opportunities to hike rent than in more rural areas. Foreigners moving to Berlin from places like London or New York, where rents have never been cheap, has also helped drive up the market.

For investors seeking stable returns from rental income, Germany is the place to be. It has the lowest rate of homeownership in Europe after Switzerland: Only 51.9 percent of Germany’s 41 million households currently own a house – and that’s actually higher than Germany’s historic rate of well below 50 percent. The average in Europe lies at 75.1 percent. As the continent’s largest economy with an export-focused manufacturing industry and high employment level, German rental income represents a huge, stable cash flow from almost 20 million households.

200 Vonovia-01 WTB

While the price boom on Germany’s property market, fueled in part by foreign investors, has made it difficult to find attractive takeover targets, it does have an upside: Vonovia’s assets are gaining in value. In no other German city did Vonovia improve its value as much last year as it did in Berlin, namely by 28 percent, and in no other German city have rents gone up as much in recent years, either. Only Munich has seen real-estate property prices rise faster overall.

Of course, such value gains are merely on paper unless you actually sell the properties. Some obververs, including the Bundesbank, have also sounded some concerns that Germany’s high-flying property market might not be sustainable. If there is a crash, the value of Vonovia’s assets will fall again with it.

Vonovia and its competitors, Deutsche Wohnen and LEG, reject fears that the property price gains will evaporate again quickly. They argue that they have substantial buffers between their own book and market values. As evidence, they cite regular sales of portions of their portfolios above their book value. They also point out that rents continue to rise across the board. For the first quarter of 2017, vdp Research reports a 3.8-percent increase in rents nationwide, with above-average increases in metropolitan areas.

Vonovia also hasn’t given up on buying its way to growth entirely. Even with high property prices, Mr. Buch says the company is still analyzing possible takeovers, but will only take advantage of those that truly make sense. Mr. Buch has long had established criteria for acquisitions, and he does’n intend to change those benchmarks just because the going is getting tougher. The apartments Vonovia buys must increase its operating profits, may not reduce the net asset value, or NAV, and may not drive up debt to an extent that would jeopardize the company’s strong BBB+ Standard & Poor’s credit rating. For a real estate company, the NAV is roughly the value of its apartments minus its debt.

For now, Vonovia is also bringing in extra cash by selling properties it deems less attractive (either due to quality or location) at a higher price than it aquired them. It sold 26,631 homes last year, generating proceeds of €1.2 billion. This money, in turn, might again be used for new acquisitions. But until that happens, Mr. Buch will have to show he can still grow the company on its own.


Reiner Reichel has been working for Handelsblatt since 1995 and specialises on real estate, closed-end fund and system models. Gilbert Kreijger, an editor with Handelsblatt Global, contributed to this article. To contact the authors: reichel@handelsblatt.com

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