Goldman’s LEG IPO Flat as Property Value Gains Questioned

LEG Immobilien AG, which completed the largest initial public offering for a German property company yesterday, was unchanged on its first day of trading as analysts questioned whether its homes will grow in value.

“Considering their portfolio, the pricing was very ambitious,” said Georg Kanders, an analyst at Bankhaus Lampe KG. Many of LEG’s apartments are in small cities whose population is shrinking, he said. Some are in regions with struggling economies. “The quality of the properties’ locations doesn’t justify the price.”

LEG Immobilien, which became Germany’s largest publicly traded property company by market value through the IPO, closed at 44 euros in Frankfurt, giving the company a market value of 2.3 billion euros. Before the IPO, Goldman Sachs Group Inc. owned 95 percent of the company.

German property stocks have been in demand as investors seeking a safe haven amid the European sovereign debt crisis. Stocks of companies that own homes in booming cities such as Berlin trade more expensively than those with properties in smaller cities.

“We’re comfortable with our share price development today,” LEG Chief Executive Officer Thomas Hegel said in an interview. “Our IPO was clearly oversubscribed. We’re a long-term product.”

Deutsche Wohnen, Germany’s second-largest listed property company has about 50% of its apartments in the German capital and trades at 19 percent above its net asset value, according to data compiled by Warburg Research GmbH. NAV measures the value of a property company’s buildings excluding debt. By contrast, TAG Immobilien AG, whose holdings are more widely scattered among smaller cities, trades at a 5 percent discount, according to Warburg.

“The share is expensive compared to its peers,” said Torsten Klingner, an analyst at Warburg Research. LEG’s IPO was priced at 16 percent above its net asset value, which is higher than the average of other German residential companies, he said. “I don’t see any upside.”

LEG Regions

LEG owns 91,000 apartments in North Rhine-Westphalia, Germany’s most populous state. The state’s gross domestic product is the country’s highest, according to data compiled by the state government.

Some cities, especially former mining centers such as Dortmund and Essen, have falling populations and declining economies, said Ralph Henger, an economist at the IW Koeln economic institute.

LEG has about 70% of its apartments in cities with shrinking populations, according to data compiled by Warburg.

“North Rhine-Westphalia has the highest population density in Germany, and it’s a place where people rent their homes,” Hegel said. “We have properties in extraordinary locations and they’re widely spread.”

Before it's here, it's on the Bloomberg Terminal.