Deutsche Annington joins MDAX, adds 5,000 new units

Germany’s largest residential housing company, the listed Bochum-based Deutsche Annington, took a step closer to its long-term goal when it entered the MDAX at the end of September – the second tier of Germany’s largest listed companies. The MDAX consists of the 60 largest companies by stock exchange turnover and market capitalisation after the DAX-30 companies.

This brings the number of real estate companies in the MDAX to six – alongside Annington are Deutsche Euroshop, Deutsche Wohnen, Gagfah, LEG Immobilien and TAG Immobilien. Property financier Aareal Bank is also there, along with construction companies Bilfinger and Hochtief. Deutsche Annington’s current market capitalisation is about €5.5bn, with 72.75% nominally in free float. UK private equity group Terra Firma still holds a big stake in the group.

Annington board chairman Rolf Buch commented on the promotion of Annington from the smaller index SDAX into the second division. “This will raise our profile among institutional investors, for whom the MDAX is a benchmark. The strong development of our company since our IPO last year sends out a very clear message – we are an attractive and reliable partner for our investors.

Last year Annington refinanced debt of $4.46bn (dollars), partly through a loan of €2.5m (euros) arranged by US banks Morgan Stanley and JP Morgan in a complex transaction underpinned by unsecured corporate bonds issued by Annington. Both banks are acting as strategic partners to Annington, said Rolf Buch when he took over the top job at Annington last year.

The company has been struggling to achieve adequate returns on its 210,000 apartment units across the country (about 27,000 of which are managed for third parties), many in depressed parts of western Germany where pushing through rent increases in poorer cities particularly in North Rhine-Westphalia has proved difficult, and led to tenant protests and image problems for the group.

Part of Buch’s strategy is to move up the quality curve on the group’s holdings. It recently acquired a portfolio of 5,000 apartment units from CitCor Residential Group, a joint venture between Citigroup Property Investors and Corpus Sireo, with the bulk of the units (about 2,500) located in Berlin. The rest are located in Ludwigslust south of Schwerin, Dresden, Jena, Leipzig and Erfurt. The package also included 210 commercial units.

The price paid was thought to have been around €310m, based on multiples of the average prevailing rents. With average monthly net rents of €5.52 per sqm., the total portfolio encompasses living and usable space of more than 344,000 sqm.

CEO Buch said in a statement on the deal, “The purchase of the new units represents another step in our growth strategy to generate value from our existing portfolio and to develop new, high-quality portfolios with the acquisition. The purchase meets our acquisition criteria and has a positive effect on both FFO and NAV per share and maintains our BBB rating from Standard & Poor’s.”

Board member Klaus Freiberg highlighted the move eastwards in the acquisition: we are raising our countrywide presence as Germany’s largest apartment company with the acquisition of the new apartments in metropolitan areas of the new federal states. The housing package fits our existing portfolio well and can be optimally integrated into our efficient and price-conscious management platform.” The net rent levels fulfil the firm’s claim of ensuring affordable housing even in metropolitan areas, he added. The deal brings Annington’s apartment holdings in Berlin to 16,200 units.

The Annington acquisition comes shortly after another major residential acquisition which we reported on in these pages recently. In July the Berlin-based Westgrund bought 13,500 apartments from the City of Berlin-owned housing group Berlinovo, paying about €32,500 per unit. The listed Westgrund is just one of many listed residential companies hungry for building up their residential holdings, particularly in Berlin with all its associated synergies in asset and property management.

Investors also see further rent-raising potential in the capital city as it catches up (from a low base) with other European capitals. Last year Berlin rents (on new leases) rose 8% - in other German cities the previous strong rises have seen a noticeable slowing-down. Hamburg, for example, according to broker CBRE, actually saw a slight fall of 0.6% for the year.

However, another evident trend is the move into lower-tier cities than just the Big 7, as prices have become frothier in the biggest metropolitan areas and supply of suitable assets dries up. Prospering second-tier cities such as Dresden, Leipzig and Jena are being increasingly scrutinised, as typified by the latest Annington acquisition.