Realtor Realities

Size Doesn’t Matter

Michael Zahn at Deutsche Wohnen's Berlin headquarters. Source: Handelsblatt/Butzmann
Michael Zahn at Deutsche Wohnen's Berlin headquarters.
  • Why it matters

    Why it matters

    Deutsche Wohnen holds two-thirds of its apartments in Berlin, where young people are moving in and rents are rising rapidly.

  • Facts


    • Deutsche Wohnen was founded by the Deutsche Bank, in order to pay tax-free dividends.
    • In 2007, Berliner Gehag and the private equity firm Oaktree took over Deutsche Wohnen.
    • It resulted in the second largest stock exchange-listed landlord in Germany, managing 148,000 apartments.
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Michael Zahn, the boss of real estate developer Deutsche Wohnen, recently arranged the largest capital increase ever for a German real estate firm. Sellers of large housing portfolios know him as a man who stands by his word, whether bidding for apartments or orchestrating takeovers of rivals GSW and Conwert. He managed to acquire GSW, but not Conwert. He spoke recently with Handelsblatt about what drives the company.

Handelsblatt: Mr. Zahn, the capital increase worked, but not the purchase of Austrian property group Conwert. What did the failed deal cost you?

Michael Zahn: Nerves and time.

No more?

And €7 million ($7.4 million). Every euro I lose that way annoys me.

The Conwert price has risen since then and the value of Deutsche Wohnen has suffered. Was it due to the capital increase or because of the new, expensive apartments?

Each capital measure initially puts pressure on prices. A 6 percent markdown is comparatively low. We obtained a portfolio with modernized apartments for 20 times the annual rent. That sounds expensive. On average, renters pay €5 per square meter. The new rent contracts, however, are about €6 on average. So we have some room for rent increases.

With low interest rates, it makes sense to increase debt and therefore the returns on equity capital. You are doing the opposite. Why?

We are moving from 50 percent indebtedness to 40 percent. We believe from talks with rating agencies that it can have a positive effect on the rating.

Are better interest terms also a consequence of a better rating?

After a capital increase and replacement from old credits, our average interest burden goes down to less than 2 percent. With that, we have the lowest debt costs of all the market-listed real estate companies in Germany.

Is a debt component of 40 percent optimal for a real estate company?

That’s hard to say. I like to have options and alternatives. There are more at 40 percent than at 60 percent indebtedness. One of the worst mistakes investors can make is to finance with too much outside capital. In a recession, for example when values have to be written down, you can land in a debt trap.

How much longer can declining costs drive operating profits?

On the outside capital side, I don’t see much more improvement for profits. The same with costs for each managed unit. For maintenance and modernization, we tend to spend more money. I find that good and correct. With vacancies under 2 percent, there also isn’t much room to improve by reducing vacancy. So we’re living off rent increases, which are about 3 percent this year – apart from acquisitions.

Have price increases reached a limit in light of this perspective?

There are international assessments for Germany behind the price increases. They say living in Germany is favorable, in terms of international comparison. With declining share prices, our profitability will be even better, by the way, because dividend returns increase.

Prices of German real estate companies are much higher than their real estate value minus debt per share – or “net asset value.” Are the prices or valuations incorrect?

It would be a grave mistake, if we would try to depict the market dynamic on the balance sheet too quickly, in order to get the net asset value per share closer to the price.

How important is size for a real estate company?

Too many people think only about size and not about value. I would not have expected that we would someday be number two in the German market. For acquisitions, we had the most favorable time frame by far – not because we were better than others, but because we could tidy up our balance sheet earlier. But you can’t rule out that our 150,000 units are worth more in the long run than the 350,000 of (real estate rival) Deutsche Annington. What matters is where my apartments are located.

What separates number one and number two among German real estate firms – Deutsche Annington and Deutsche Wohnen?

Annington views itself as a Germany-wide investor. We have a clear focus on dynamic regions.

Some analysts say the only alternatives for big landlords are “eat or be eaten.”

I think otherwise. If the growth dynamic in the industry lets up – and operating profits eventually grow only about 2 to 3 percent – the competition for capital resources will intensify. If then Annington and Deutsche Wohnen were to merge, we would be one of the most valuable real estate firms in Europe. At least from the capital market point of view, a merger of Annington and Deutsche Wohnen would be significant. In an international context, German real estate companies are still too small.

Do the two companies fit together?

Currently, we have completely different approaches and visions. But does that necessarily rule out fitting together? Because, believe me, hostile takeovers are too expensive.

Do you not expect a large lump risk for Deutsche Wohnen shareholders with the focus on Berlin? After all, the company has two-thirds of its apartments in the capital.

The concentration on Berlin is an opportunity and not a risk. I would rather have 120,000 apartments in Berlin than a portfolio spread over all of Germany or the state of North Rhine-Westphalia.

What speaks for Berlin?

The Berlin housing market is interesting because it is growing. Many young people are moving there and rents are going up. Rents in Berlin begin at a lower level, of course. In Munich, rents are much higher. But perhaps Berlin is better for investors. Because in Munich, I don’t pay €1,200 for a square meter of living space, but €3,500.

You recently criticized Berlin’s rent index, a list of maximum rents in each area of the city. What about it enrages you so much?

The new rent index is set up so scandalously that it is actually obvious for everyone – that rents on the index don’t reflect the market.

How would you create affordable housing?

Like they did in the 1960s – by subsidizing construction of new apartments. Today’s construction costs are so high. There has to be an incentive system so capital is made available.

How should it be subsidized?

Ultimately, I am in favor of subsidizing rents. But the question then immediately becomes: Who should finance that? That’s when politicians should be honest and discuss the possibility of tax increases.


Reiner Reichel covers the real estate industry. To contact the author:

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