Real Estate

Real estateWhat you need to know about the merger of Vonovia and Deutsche Wohnen

Deutsche Wohnen will soon be part of Vonovia – if the antitrust authorities agree.IMAGO / Stefan Zeitz

The project has failed once before. When Vonovia tried to take over Deutsche Wohnen in 2016, the shareholders and Deutsche Wohnen boss Michael Zahn took a stand. At that time, Zahn said at a press conference in Berlin, the atmosphere was “hostile”. But now there is a common “attitude and culture”.

So this time it should work – number one swallows number two for 18 billion euros. Number one Vonovia owns around 400,000 apartments in Germany, Deutsche Wohnen owns 140,000. The merger would mean that the two companies would become the largest private residential property owner in Europe. He would have a market capitalization of around 45 billion euros, the value of the two properties would be around 90 billion euros. The two DAX companies signed a joint agreement in principle for this mega-deal.

The antitrust authorities have yet to approve the merger, it is foreseeable that they will do that soon – so how does it come about that the two have tried again and what does the merger mean for shareholders and tenants?

How is the market reacting?

The market reacted in two parts, but promptly, to the announcement: The price of the Deutsche Wohnen share shot up by a good 15 percent immediately after the start of trading. The Vonovia share price, on the other hand, fell six percent. The increase at Deutsche Wohnen is not surprising, because listed companies often benefit from being traded as takeover candidates, as “target companies”. Even if initially there are often only rumors of mergers. Most of the time, their courses get off to a strong start and settle down slightly below the threshold offered by the buying company as a compensation offer. In this case Vonovia wants to pay the Deutsche Wohnen shareholders around 53.06 euros per share for the merger. Of which 52 euros as cash compensation and 1.03 euros in the form of a cash dividend.

Deutsche Wohnen SE share

Deutsche Wohnen SE share chart
Course provider: L&S RT

However, the share of the takeover candidate Deutsche Wohnen is already trading at around 52 euros. Which roughly corresponds to the value of your property minus debts, the net asset value, which, according to analysts, is around 52.50 euros. So the exciting question about the merger should be: will the shareholders really part with their shares at this price? Or is that not enough for you?

Vonovia’s earlier takeover attempt had already failed once because too few shareholders offered their papers to the group. Only around 30 percent of Deutsche Wohnen investors wanted to sell their shares at the time. How will it be different today? The business prospects for Germany’s second largest real estate company are good – it could exceed its forecasts this year.

Dynamic growth

Deutsche Wohnen’s operational business is growing dynamically, also because the group is currently building many new apartments and is thus increasing its portfolio by around 18,000 units. The entry into the development companies Quarterback and Isaria also contributed to this. In 2021 alone, another 500 million euros are expected to flow into the new building. The vacancy rate is also quite clear at two percent.

In addition, the Federal Constitutional Court has just declared the Berlin rent cap to be unconstitutional, and Deutsche Wohnen is benefiting from this in particular since it is heavily dependent on the Berlin rental market: around 70 percent of its housing stock is in Berlin, which corresponds to around 115,000 apartments. After the constitutional court ruling, the group announced that it would demand the outstanding money from the tenants.

Vonovia could claim back 10 million euros according to its own information, but does not want to do that. The company waives back payments because most of their tenants would not have put the money back and therefore probably could not raise it. Nor does it necessarily have to demand the rents in order to benefit from the judgment: the market value of your property will definitely increase as a result.

Financial scope

Deutsche Wohnen has also discovered healthcare real estate as a business area for itself – the Berlin group sees great growth opportunities here. The balance sheet currently leaves a lot of leeway for financing new projects. Much of it can therefore be financed with on-board funds. In any case, the equity ratio at Deutsche Wohnen is currently quite high at 43 percent. It is less dependent on outside capital than its competitor Vonovia, whose equity ratio is 39 percent. However, Vonovia brings out more returns based on equity, namely 13.3 percent, while Deutsche Wohnen only manages 11 percent.

However, Deutsche Wohnen shareholders shouldn’t gamble too high, after all, analysts are of the opinion that the Deutsche Wohnen share has largely exhausted its price potential. Many see the target price at around 52 euros, which means that the paper would have already reached the top of the flagpole. The company could only expect significantly more profitability – especially in relation to the greatly increased number of employees – or significantly more earnings if it opens up new cooperation opportunities. Just like now with the merger.

Above all, this also opens up a lot of potential for Vonovia. Because Germany’s largest housing group had recently not only grown through new buildings, acquisitions and increasing rental income, but also mainly because of its concept of “home-related services”: Several in-house craftsmen provide additional income for repairs in the apartments.

Good for Deutsche Wohnen investors

Vonovia also sells housing-related insurance products and supplies energy to tenant households. For a long time now, he has drawn his income not only from rent, but from a variety of other services. From an investor’s point of view, that’s a good thing. From a tenant’s point of view, however, it also means that you are paying for more and more services from the corporate universe via the utility bills, the prices of which you have long since lost control of yourself.

Vonovia was also able to continuously increase the amount of rental income: The company is investing billions in the modernization of its portfolio – most recently it even issued an initial “green bond” to make buildings more climate-neutral. And it allocates the cost of the renovations to the rents.

Above all, these modernization rent increases are responsible for the bad image of the large housing groups in public, because many socially disadvantaged tenants are gradually reaching their financial limits. While the corporations are thus enhancing the value of their real estate holdings for the shareholders – at the expense of the tenants.

Clearer presence in Berlin for Vonovia

Vonovia is now not only active in Germany, but also in Austria, Sweden and through its participation in a housing association in the Netherlands. With the takeover of Deutsche Wohnen, the company will initially secure a clearer presence in Berlin and a total of around 160,000 apartments in Germany in which it could also offer its home-related services.

The “German Vonovia Wohnen” would have around 557,000 apartments in total and a good 90 billion euros in joint real estate assets. That would be worthwhile for both, because real estate is a scale business, as analysts put it. The more you do it, the more profitably the business can be organized.

It is therefore quite possible that Vonovia shares will gain significantly after the first takeover crash. Analysts had previously estimated the target price at EUR 66. Vonovia was a long way from that even before the merger was announced, when its price was around EUR 52. Currently it is still 49 euros. Concerns about a possible rise in inflation or the interest rate hikes by the central banks had put a significant damper on it since autumn 2020.

Vonovia shares

Vonovia share chart
Course provider: L&S RT

Minimal loss of rent at Vonovia

Nevertheless, the group was still one of those Dax groups with the most stable price development – especially in the corona year 2020, in which it only had to complain about minimal loss of rent. Vonovia shares have climbed a whopping 80 percent since being included in the German benchmark index in 2015. And as long as real estate prices rise, the portfolio value of the housing group will continue to grow.

If the management in the joint group becomes even more profitable, then it becomes all the more likely that the new large housing group will soon also achieve the target price. In any case, the majority of analysts say: It could be worthwhile to buy the share.

Vonovia boss Rolf Buch and Deutsche Wohnen CEO Michael Zahn explained how the merger could take place at a joint press conference in Berlin. In the future, the two companies want to operate as “Vonovia SE” – the Deutsche Wohnen brand is to be retained. The headquarters are to remain in Bochum, but the company will be managed from the Ruhr city and Berlin. “Deutsche Wohnen will continue to exist, we will then be the majority shareholder,” said Buch. Buch ruled out redundancies for operational reasons until 2023.

How the merger will affect tenants has so far been difficult to assess, because: Even if Vonovia and Deutsche Wohnen were to jointly become the largest player in Europe, the market power of “Vonovia SE” would be relatively low. Together, the two companies have 550,000 residential units, which means a market share of around two percent. Even in places where the two companies’ apartments are clustered, it is unlikely that they could raise rents well above the rent level.

No faster rising rents

The two CEOs denied in front of the press that rents in Germany would rise faster as a result of the merger. They promised that they would raise rents by just one percent by 2026. In addition, tenants should only be involved in modernizations with 2 euros per square meter. It is not a sustainable business model if rents rise faster than incomes over a long period of time. “We have to take this fear away from people.”

The one percent rule only applies to the apartments Vonovia and Deutsche Wohnen own in Berlin. No nationwide regulation could be found, as the rental markets in the various municipalities looked different. In other cities there would therefore also be other regulations.

In addition, the new company wants to sell 20,000 apartments to the municipal housing associations of the city of Berlin – the city is thus approaching the self-set mark of 400,000 apartments. Berlin’s Governing Mayor Michael Müller said that this should take pressure off the rental market. “That is a real impact on the rental market,” said Müller.

“We have to put an end to the fact that many tenants in this city, including our companies, are not satisfied,” said Buch. He sees the merger of the two groups as a kind of new beginning for the companies. But also in terms of their role in society. The policy of the new “Vonovia SE” is “build, buy and cap”. Zahn spoke of the fact that one was now able to find “pragmatic solutions on a voluntary basis without courts”.


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