Gagfah poised to shrink by selling Dresden holdings

Potential large-scale buyers of German residential housing received an information brochure earlier this month from listed residential property owner Gagfah AG, detailing the physical and technical specifications of its 38,000-unit Woba housing division, which the company recently announced it plans to sell by the end of this year.

The Woba division represents the previous social housing division of the city of Dresden, which Gagfah bought at one fell swoop in a historic deal in 2006, enabling Dresden to clear its municipal debt at one go. About 10,000 units have subsequently been sold to private and other professional investors.

With strong demand from institutional investors for German residential property assets, Gagfah is aiming to achieve at least the €1.8bn the portfolio is valued at on its books, its then acquisition cost, and representing about a quarter of Gagfah’s total holdings. Gagfah bought Woba €1.7bn, and has since then invested some €160m, while valuations have gone up by 2%-2.5% p.a., according to company figures.

Back in May, Gagfah CEO Stephen Charlton had posited a sale of the Woba division as one of a number of options faced by the company, with refinancing on the division due in 2013. “Resolving Gagfah’s 2013 loan maturities will remain our principal focus for the remainder of the year,” he said.  €1.1bn of Gagfah loans fall due in May next year, with a further €2.2bn in August. The Dresden apartments are considered by many analysts to have been above-average in Gagfah’s portfolio, both in quality and in yield generated.

Presenting the company’s first half figures earlier this month, Charlton commented: “Despite the continued economic and political uncertainty within the Eurozone, our key operational metrics remain stable and generally within our expected range… Having successfully extended our 2012 debt maturity, resolving Gagfah's 2013 loan maturities will remain our principal focus for the remainder of the year. Investors and lenders both continue to value investments that provide stable cash flows throughout the economic cycle, creating an environment within the German residential real estate market that is conducive to our asset and portfolio sales efforts, as well as supporting our refinancing initiatives.”

Charlton also added that Gagfah is looking to sell 3,000 homes in the city of Osnabrück to an institutional buyer, and also has plans to sell an addition 4,000 apartments as part of its privatisation program before the end of the year.

Given the experience of Gagfah, itself 61% majority-owned by private equity group Fortress, there is not thought to be much further scope for a private equity group to leverage much further profit from the enormous Woba portfolio.  However, it is much more likely to appeal to existing housing associations, listed property groups or even insurance companies looking for stable cash flow from regular rental income.

Not surprisingly then, among those expressing immediate interest was Gagfah rival, fellow-listed Deutsche Wohnen AG, who recently expanded its own holdings by 50% to 75,000 units following the acquisition of the BauBeCon portfolio. CEO Michael Zahn said of the forthcoming sale, “Dresden is certainly one of the most interesting cities in Germany.  The portfolio has a decent size so that you’d have a significant local position.”

The Woba sale is being handled by Frankfurt-based specialist bank Leonardo, which also handled the huge sale earlier on this year of Stuttgart bank LBBW’s 22,000-unit residential housing division to a consortium led by Patrizia Immobilien AG for €1.4bn.

Gagfah has been a star performer on Germany’s stock market this year, rising 125% since settling a number of burdensome lawsuits, changing a number of its top executives, pressing ahead with its share buyback program, and taking clear steps to tackle its refinancing issues – against a background of buoyant investor interest in large-scale residential acquisitions.