Austria’s Conwert still hungry for German residential

Viennna-listed Conwert Immobilien is another Austrian company which, like Immofinanz (see elsewhere in this issue), is hungry for German residential portfolios to add to its burgeoning German holdings. Its latest acquisition is a portfolio of 4,016 units located in or near the company’s core markets of Leipzig, Berlin and North Rhine-Westphalia.

Conwert is paying€178.8m to GE Capital Real Estate Deutschland for the 266,000 sqm portfolio, which includes acquisition costs and the commitment to invest a further €33m over the coming three years. The deal meshes with GE Capital Real Estate’s move to exit entirely from the German residential property market.

With Conwert’s planned capex over the coming years, the rental income from the properties is expected to rise steadily from its current €1.5m annually. The portfolio yields 8.7%, and at a sale price of a multiple of 11.6 times annual rent, suggests that GE were prepared to make some modest concessions in the interests of a clean and unprotracted deal. The cash flow profile of the deal is also very attractive for Conwert, contributing about 4.3m of FFO Funs from Operations before sales, which equates to an FFO yield of 9.4% on acquisition – with further potential down the line.

Conwert’s total German holdings including this deal now jump by 17% to 27,500 units, with a total lettable space of more than 2 million sqm. Overall the yield on the Conwert portfolio is now pushing 6.2%, up from the first quarter’s 6.0% with this higher-yielding additional portfolio.

Conwert CEO Johannes Meran, who is retiring as CEO in October, recently presented the company’s first half results, which showed net profit rising by 150% to €26m and FFO by 52%. Full year guidance is expected to be revised upwards shortly, he indicated. However, he said first half earnings are the highest in company history, outstripping 2010’s and 2011’s full-year data. Revenues from property sales totalled €147m at a margin of 10.3% above the IFRS book values, and no significant property revaluations were registered.

After the major refocusing of company strategy over the past two years, away from the more volatile project-related trading of assets, Meran said that Conwert is now generating 80% of earnings from the more sustainable long-term management of portfolio properties, having reduced its vacancy rate to 11.8% from 15.9% and raised the average yield of the portfolio from 5.2% to 6%.

Perhaps as a parting shot to other investors scrambling to get a toehold in the German residential market, Meran had some interesting comments to say about the current state of the market. He said that yields on residential portfolios in big cities such as Vienna, Munich and parts of Berlin were now so low that it was no longer worth investing in the sector for institutionals. Yet many have been lining up to buy into the sector, as evidence by the huge interest in recent big auctions such as the GBW or LBBW portfolios, both acquired by Patrizia Immobilien-led consortiums.

Many of the institutional investors entered the market much too late after the onset of the financial crisis, he believes. “The typical German insurance company or pension fund is extremely risk-averse and only wants to buy top locations, but sometimes at unrealistically high yields… They should have invested in the sector in 2008 or 2009, but nobody had the nerve to do that then”, he commented.