Valuation Worries

Rising Interest Rates Hit Real Estate Shares

  • Why it matters

    Why it matters

    There are widespread concerns among investors that the German housing market might be overvalued and any potential devaluation could hit real estate shareholders hard.

  • Facts

    Facts

    • The publicly listed real estate firms Vonovia, Deutsche Wohnen, LEG Immobilien and TAG Immobilien own almost a million apartments in Germany.
    • Brokerage firm Engel & Völkers recently published a price growth rate of 18.8 percent for residential and commercial buildings in central Berlin in 2016.
    • Deutsche Wohnen has announced valuation gains of at least €2.2 billion ($2.4 billion) for the past year.
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    Audio

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Berlin – Kreuzberg
Apartments in Berlin are shooting up in price. Source: Jens Kalaene/DPA

In a few days, Germany’s apartment rental giants will present excellent figures for the last fiscal year to their shareholders. The reasons are simple: The four firms, Vonovia, Deutsche Wohnen, LEG Immobilien and TAG Immobilien, are benefiting from a housing shortage that makes it easier to rent apartments. At the same time, this scarcity increases the value of their properties.

This means that healthy revaluation surpluses will be reflected in the financial results of the companies, all of which are listed on either Germany’s top stock index, the DAX, or its smaller cousin, the MDax.

But there’s a problem. Revaluation surpluses are not compatible with interest rates that have been rising since the election of Donald Trump as the new U.S. president. Vonovia Chief Executive Rolf Buch, for example, constantly finds himself having to explain to investors why higher valuations are still justified. Real estate values are the key factor.

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