Real Estate

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Six months after its attempt to pull off the biggest takeover in the German real estate market foundered, Vonovia is consoling itself with a much smaller meal.

On Monday, the company announced a takeover of Conwert, a deal that values the Vienna-based landlord at about 2.9 billion euros ($3.2 billion), including debt. The purchase will add 27,000 apartments, many in sought-after eastern German cities such as Berlin and Leipzig.

Hungry for Deals
Dealmaking has helped Vonovia establish itself as Germany's largest listed landlord
Source: Bloomberg
*Includes Conwert but otherwise chart shows completed transaction values

Until Deutsche Wohnen shareholders spurned its 14 billion-euro offer in February, Vonovia's appetite for deals had been insatiable. It had gobbled up big chunks of the German property market to become the country's biggest landlord, with more than 300,000 apartments.

After the failure of Deutsche Wohnen, Vonovia had appeared to shift its focus away from takeovers to making its existing property work harder. But it's hard to see how a deal of Conwert's size will help deliver the kind of growth that has helped the shares to double since their IPO in 2013 and propelled the company into Germany's prestigious Dax index.

Residential Returns
Vonovia has joined the Dax and has significantly outperformed most of those heavyweights
Source: Bloomberg

At least the transaction appears manageable. While Vonovia has about 15.2 billion euros in debt on its balance sheet, almost the same as its market capitalization, it has sufficient cash to finance the deal. With its shares close to an all-time high, it can use its equity as a transaction currency too.

Vonovia's shares trade on a 21 percent premium to the portfolio's net asset value. Quantitative easing has also helped investors to see the attractions of German real estate: with yields on government bonds at less than zero, Vonovia's 3 percent dividend yield looks more attractive

Hungry for Yield
Government bonds no longer provide a return, increasing the appeal of landlords like Vonovia
Source: Bloomberg

And thanks to rising property values, Vonovia has a little more room for maneuver. Its closely-watched loan to value ratio (which measures net debt to the value of its holdings) has shrunk to 47 percent from almost 70 percent in 2010. That's still higher than rival Deutsche Wohnen, which has a 41 percent loan-to-value ratio, but adding Conwert should reduce it a little.

Structural factors should continue to provide a tailwind for German rental income and home values. There is a scarcity of apartments in top cities like Berlin, exacerbated by the influx of migrants. Vonovia predicts a vacancy rate of just 2.5 percent for this year, or about half the level in 2010.

While rising asset values may limit the scope for further acquisitions, scaling up typically delivers savings in property management, albeit pretty modest ones in the case of Conwert. Those savings can be plowed back into renovations which, in turn, help further improve rental yields. But that takes time, and Vonovia's shareholders are also hungry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Conwert's shareholders can take cash but the offer in stock is more generous.

  2. The company plans to pay a dividend of at least 1.05 euros a share for 2016. 

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net