If you’re an international real estate investor, you’ve probably been looking closely at Germany residential property market over the past few years. The real estate wave set off by the financial crisis has continued rolling into 2017 — and by all indications is not about to break in the coming year. When you think of companies in the sector, you might think of Vonovia, Germany’s largest residential property group and the real estate flagship in the country’s blue-chip DAX index.
But the best surfer this year didn’t come from the residential sector. Instead, that award goes to a little-known Luxembourg-based company called Aroundtown. Rather than homes, it focuses on the offices, hotels and logistics properties that have gotten shorter shrift in Germany. Operating under the radar, Aroundtown has become the largest commercial real estate company in the country, growing its portfolio from just €2.4 billion in 2015 to nearly €9 billion today.
Any investor that picked up a piece of Aroundtown a year ago will have seen their shares jump more than 50 percent, better than any other member of the Stoxx Europe 600 Real Estate index.
Aroundtown’s strategy can be summed up in a few words: Buy cheaply, renovate, rent at higher prices or resell. Managing Director Andrew Wallis calls the objects of desire “properties with potential for appreciation.” Their success is apparent in an average return of 5.5 percent on their properties, well above the average top yield of 3.2 percent in the segment, according to real estate consultants CBRE.
One of Aroundtown’s flagship properties, the Frankfurter Büro Center (FBC), offers a window into how the company has grown. The unfashionable 142-meter office tower from the 1970s was plagued by high vacancy rates when Aroundtown acquired it in 2016. Clifford Chance, the last remaining anchor tenant, was set to move out in 2019. Aroundtown set about refurbishing the building and finding a more than adequate replacement: Germany’s central bank, the Bundesbank, has leased the entire FBC for 1,000 of its bankers while its own headquarters in the city are being refurbished.
Germany’s commercial real estate market has long been regarded as much less scarce, with sufficient available space. But that is starting to change.
Such successes didn’t attract the eye of investors until earlier this year — and much of that is Aroundtown’s own fault. Before 2017, it was headquartered in Cyprus and listed on the Paris Stock Exchange. “Cyprus is actually an EU country, but for many investors it was a red flag. Apparently, it wasn’t EU enough,” Mr. Wallis said. But Georg Kanders, an analyst at Bankhaus Lampe, says the lack of interest had more to do with a lack of transparency.
Over the past year, Aroundtown has started to clean up its act. It began publishing financial statements and moved its headquarters to Luxembourg. The listing on the Paris exchange was removed, and its listing on the Frankfurt stock exchange moved from the Entry group to Prime Standard, which comes with higher transparency requirements.
The result: All 13 financial analysts that cover the company now recommend buying the stock, according to Bloomberg. Baader Bank recently named it a top stock for 2018 and expects its stock price to rise another 15 percent next year. A member of Germany’s small-cap SDAX index since September, it is widely expected to move up to the MDAX next year.
At first glance, commercial real estate doesn’t sound as exciting as housing. Residential property prices have boomed over the past few years as investors have swarmed and demand has outstripped supply in Germany. Investing in residential real estate wouldn’t have been a bad choice: The country’s two major listed real estate firms, Vonovia and Buwag, which intend to merge, were in second and third place in stock gains behind Aroundtown, each with a gain of just under a third in 2017.
By contrast, Germany’s commercial real estate market has long been regarded as more volatile and less scarce, with sufficient available space. But some believe that may be starting to change: Vacancies are declining in Germany’s major cities, and service provider JLL estimates that turnover in the sector will reach a new record in 2017, passing the previous record of €55.1 billion two years ago.
This bodes well for Aroundtown. Four-fifths of its properties are located in Germany, and almost half in the metropolitan areas of Berlin, Frankfurt, Munich and Hamburg. The company is currently operating in a “very good environment,” according to Christine Reitsamer, an analyst with Baader Bank. A September study by the Kirchhoff consulting firm found that shares in companies renting out offices, shopping centers or other commercial buildings have better prospects than those of companies that rent out apartments.
Aroundtown’s own figures also make the case: Over the past few years its funds from operation (FFO), a measure of income commonly used in the real estate industry, have grown alongside its portfolio. It expects to reach €339 million for 2017, up from just €94 million two years ago.
Mr. Wallis said the solid figures reflect not just the company’s potential but the investors’ appetite for risk. This year alone, Aroundtown raised €4.2 billion in the form of shares and bonds. An upgrade to “investment grade” from rating agency Standard & Poor’s in December should make raising funds even easier next year.
The company has used much of the money to buy new properties, spending €3 billion this year and planning at least €1 billion in acquisitions next year — a conservative estimate according to Mr. Wallis. “Our pipeline is well filled,” he said, adding that even without acquisitions, revenue from rents alone could grow by 35 percent in the coming years.
There are still some potential red flags for investors. On the transparency front, Aroundtown still doesn’t publish a concrete list of the properties in its portfolio. Another cause for worry might be that it holds a 37 percent stake in residential property firm Grand City Properties. Usually, publicly traded real estate companies focus on one sector — commercial or residential. But Mr. Wallis insists that Grand City, itself a member of the MDAX index since last year, is a shooting star worth holding on to.
So far, this has not disturbed investors any more than the fact that there is a large anchor shareholder behind Aroundtown (as well as Grand City Properties). Israeli investor Yakir Gabay holds 40 percent of the shares in Aroundtown through the Avisco Group. Normally, investors and stock brokers expect a higher proportion of a company’s shares to be in free float, but the Aroundtown wave seems just too tempting to ignore.
Matthias Streit is a finance editor for Handelsblatt based in Frankfurt. To contact the author: firstname.lastname@example.org