Simon Bierwald
Vonovia's apartments are almost full, rents are rising, tenants are paying and property values have turned upwards. Yet shares in Europe's largest residential landlord are trading at less than half their reported net tangible asset value. That apparent contradiction may be the most useful guide yet to the state of Germany's residential market.
With more than 528,000 apartments across Germany, Sweden and Austria and a property portfolio valued at €81.8bn, Vonovia is the closest thing German housing has to a publicly quoted barometer. Its half-year figures suggest that the operational recovery in residential property is considerably further advanced than the recovery in the capital markets financing it.
The operating numbers are difficult to fault. Adjusted rental EBITDA rose 3.5% to €1.269bn despite Vonovia owning almost 5,000 fewer apartments than a year earlier. Organic rent growth reached 3.6%, vacancy remained at just 2.3% and the rent collection rate was 99.6%. German in-place rents averaged €8.32/sqm.
The Value-add business, which includes Vonovia's craftsmen organisation and energy services, performed even more strongly, with adjusted EBITDA increasing 27.6% to €128.5m. Investment in modernisation and new construction rose 10.7% to €553.6m.
Most significantly for property investors, values are moving in the same direction. Vonovia's half-year revaluation produced a 1.1% increase excluding investment, up from 0.7% a year earlier, and 1.8% including investment. After the large write-downs triggered by the interest-rate shock, that provides further evidence that the worst of the valuation correction is over. But it does not mean that the residential investment market has returned to normal.
Vonovia itself describes the environment for disposals as challenging, with uncertainty making buyers more cautious. Around €700m of disposals were agreed during the first half, including the preferred redemption of a roughly €200m minority stake in Dutch residential fund Vesteda, but only around €400m had completed by the reporting date. Management expects more activity during the second half.
There is an intriguing counterpoint. In its Recurring Sales business, where Vonovia sells selected apartments individually rather than entire portfolios, the average selling price was 43.8% above fair value.
The comparison needs care. Individual condominiums selected for sale cannot be valued on the same basis as large institutional portfolios. Nevertheless, the difference is revealing. Private buyers will apparently pay substantial premiums for individual apartments at the same time that institutional buyers remain cautious about committing capital to residential portfolios.
Finance remains the constraint
Financing helps explain the discrepancy. Vonovia increased total adjusted EBITDA by 2.4% to €1.457bn, ahead of market expectations, but adjusted EBT fell 2.6% to €962.3m. Its adjusted net financial result deteriorated by 11.8%, from -€363.3m to -€406.3m.
The company does not have a problem accessing capital. It has refinanced around €4.4bn so far this year with an average maturity of approximately eight years and an average euro coupon of around 3.2%. In June it placed an €850m five-year zero-coupon convertible. Rather, old cheap funding is progressively being replaced in a world where money costs considerably more.
Leverage remains high, with LTV at 46% and net debt/EBITDA at 14 times. Higher financing costs therefore continue to absorb some of the improvement being produced by the properties themselves.
The stock market appears unconvinced that the gap has closed. With Vonovia shares trading at around €21 against EPRA NTA of €46.22 per share, the equity is valued at a discount of roughly 54% to reported tangible assets.
That discount cannot simply be interpreted as the market rejecting Vonovia's property valuations. Leverage, future financing costs, corporate expenses and regulation all enter the equation. But put alongside rising appraised values and the 43.8% premium achieved on selected apartment sales, it suggests investors still attach a substantial risk premium to owning German residential property through a highly leveraged listed company.
Regulation is part of that risk. Berlin provides a particularly revealing example. The city's new Mietspiegel increased its median basic rent from €7.21 to €7.71/sqm, a rise of 6.9%. Vonovia nevertheless announced average increases of 4.8% for affected tenants, capped at €70 a month, with hardship provisions where housing costs would exceed 30% of household net income.
Leaving some of the permitted increase unused also sends a useful political signal. Vonovia and Deutsche Wohnen own around 130,000 apartments in Berlin, where large private landlords remain at the centre of the debate over housing affordability and socialisation. Maximum theoretical rental growth and maximum achievable rental growth are not necessarily the same thing.
CEO Luka Mucic has proposed a more fundamental bargain. Large private landlords, he argues, could reserve one-third of their housing for socially disadvantaged tenants under regulated conditions while the remaining two-thirds would be subject to greater market pricing. "I believe we need to differentiate more on social grounds," he said in June.
His argument is ultimately an investment one. Germany cannot simultaneously demand substantially more housing and make the returns on providing it unattractive. But the proposal also suggests that Vonovia has concluded the present regulatory settlement is unlikely to provide a durable answer to Germany's housing shortage. By accepting an explicit social obligation for part of its portfolio, it is effectively offering policymakers a compromise — and signalling that it would rather help shape a new framework than wait for one to be imposed.
For institutional investors, that brings the half-year numbers back to the central contradiction. German residential property already has most of the ingredients normally associated with recovery: rising rents, negligible vacancy, exceptionally high collection rates and rising valuations. What it does not yet have is pricing power commensurate with that demand, plentiful transaction liquidity or cheap capital.
Vonovia's results therefore do not show a residential market waiting to recover. Operationally, much of that recovery has already happened. What remains unresolved is the price investors are prepared to pay for it. Until the gulf between improving property fundamentals and the valuation of the capital behind them begins to close, Germany has a housing-market recovery — but not yet a capital-markets one.