Failed Vonovia Deal Sends German Landlords Back to Basics

  • Shareholders sent 'clear message' against rapid-fire deals
  • Housing companies should focus on renting, building apartments

Vonovia SE’s failure to seal a record-breaking 8 billion-euro ($9 billion) takeover of its biggest competitor will force German landlords to go back to basics: boosting profits by building and renting.

"A clear message has been sent by shareholders" that they’re opposed to the German housing market’s frenetic pace of acquisitions, said Peter Papadakos, an analyst at Green Street Advisors in London. "The companies will have to see how they can grow rents and profitability from developments, steering the focus toward operations and away from M&A."

Vonovia, Germany’s biggest residential landlord with 370,000 apartments, said on Wednesday it didn’t secure enough shares to acquire Deutsche Wohnen, Berlin’s biggest homeowner, after a four-month hostile takeover battle. That puts a brake on a buying spree in the industry as landlords sought to profit from cheap financing and rising rents in Germany’s biggest cities.

Housing transactions reached 25 billion euros in 2015, the most ever, with Vonovia’s deals including the 3.9 billion-euro acquisition of publicly traded Gagfah SA and the 1.9 billion-euro purchase of homes owned by Suedewo Group.

German rents rose more than 7 percent in the past two years, according to data compiled by online broker ImmobilienScout24, and landlords are cashing in. Demand has risen as more people migrate to cities and more Germans live alone, boosting demand for demand for small, mid-priced apartments that make up the bulk of Vonovia and Deutsche Wohnen’s assets.

While both companies mainly rent existing apartments that they’ve acquired, they’re increasingly also building from scratch.

The latest deal’s failure puts into question Vonovia’s strategy of growing by acquisition, said Hans Op ’t Veld, a portfolio manager at PGGM. The Dutch pension fund owns stakes in both companies.

"If I were Vonovia, I’d be very cautious to follow up with another aggressive buying spree," Op ’t Veld said. Deutsche Wohnen’s pace of acquisitions should also slow, he said. "Both CEOs are now guiding toward a slower path of acquisitions, and I will hold them to that."

Missed Target

Rolf Buch, Vonovia’s chief executive officer, has doubled the company’s properties since taking over in 2013. After announcing the low share count on Wednesday -- only 30 percent of Deutsche Wohnen shareholders tendered their stakes, much less than the required 50 percent -- Buch repeated that the company will be selective about deals.

"We don’t have to acquire," he said by phone. "We’ll only buy when the advantages are obvious."

Deutsche Wohnen has less scope than Vonovia to grow by acquisition because of its narrower, regional focus on Berlin, northern Germany and areas around Frankfurt. Vonovia owns homes all over Germany.

Deutsche Wohnen, which has 147,000 homes -- mostly in the German capital -- is still recovering from a string of failed deals. In October, the company had to call off its takeover of Dusseldorf-based rival LEG Immobilien for 4.6 billion euros. In April, Deutsche Wohnen was unable to get backing for its proposed acquisition of Vienna-based Conwert Immobilien Invest SE.

It’s probably just a matter of time before German property deals get back into gear, just on a smaller scale, said Andre Adami, head of residential for research firm Bulwiengesa AG in Berlin.

‘Licking Wounds’

Vonovia’s managers will dial back acquisitions in the short term while they
"lick their wounds," Adami said. However, both landlords will continue expanding
through acquisitions, he said.

"The consolidation will continue, with the acquisition of more small- and medium-sized portfolios," Adami said. Vonovia may even decide to bid for another listed company once the stock market stabilizes, he said.

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