Germany's two largest residential property owners, Vonovia and LEG Immobilien, have independently announced plans to drastically cut back their investment plans for 2023, cancelling all new possible acquisitions and ending any previously considered construction plans.
LEG's has downgraded its expectations for its full-year 2022 figures, is changing its business strategy, and said its new priority is to hold tight to its money and preserve liquidity. According to CEO Lars von Lackum, presenting the Q3 figures in Düsseldorf this week, "We too are being seriously affected by the war in Ukraine, the energy crisis, the rise in interest rates and much higher building costs, leaving us no choice but adapt our business strategy and impose higher cost discipline on our activities.”
LEG was reversing its previous expansionary approach, and would not be acquiring any new residential portfolios, nor starting any further new-build developments, he said.
Some months ago LEG waived its option to take over a majority of Brack Capital Partners (BCP), a subsidiary of troubled Adler Group, likewise listed on the Frankfurt Stock Exchange. At the end of last year LEG bought 31% of BCP, along with an option to buy a majority stake. Adler had expected the deal to go through, for about €770m-
Von Lackum cast doubt on LEG's ongoing dividend strategy, previously based on a payout ratio of 70% of key metric FFO1, the operating profit. This has been downgraded for the full year to a range of close to €490m to a new range of up to €485m. In future, said von Lackum, the metric AFFO (Adjusted Funds from Operations) would be a more suitable benchmark on which to base the dividend.
The Bochum-based Vonovia, Europe's largest listed housing company with more than 550,000 apartments, has also announced a radical reduction in its new-build and modernisation budget for 2023. It will invest €850m, well down on this year's expenditure of about €2bn.
CEO Rolf Buch told news agency dpa-AFX, "It makes no sense to undertake a major investment programme given the current uncertainty of interest rates, the uncertainty of construction costs, the uncertainty of subsidy programmes and our own capital costs." The company would instead pay down more of its debt, he said. In the coming year Vonovia would invest €350m in new construction and €500m in upkeep and modernisation.
The building industry will probably continue to finish new construction projects until around mid-2023, - "but then only a few housing projects will be started - and in 2024 we will see the consequences," said Buch. The only way to resolve the industry standstill would then be through political intervention, either by "significantly increasing the amount of subsidies" or by reversing the current course of ever higher building standards, he said.
Buch said the impact of Russia's war on Ukraine, rising interest rates, high construction costs and the shortage of skilled workers posed immense challenges to the industry. He said the shortage of affordable housing was worsening, especially in the major cities. However, a joint show of strength is needed if investors are to continue to invest in Germany. Otherwise, the housing issue threatens to become the social dynamite of the coming decade, he said.
Buch was sceptical about the governing "traffic light" coalition's goal to build 400,000 dwellings per year. This would require an investment of around €150 billion per year - "At the moment, a figure in no way financeable, because interest rates have increased by a factor of four," he said. To raise this, either more subsidies or a really intensive debate about building standards are needed.
Like LEG, Vonovia orientates its dividend policy around 70% of its FFO1, which this year surged 35% to €1.6bn following the consolidation of Deutsche Wohnen into its figures. Next year's FFO is likely to come in just under this year's, said Buch, due to higher interest rates and taxes. Profit for the period, meanwhile, fell 42.8% to €2.21 billion from last year's €3.87 billion.The company plans further disposals of around 66,000 apartments over the coming years.
Vonovia's plans to cut back on investment spending have already evoked the ire of labour groups. The building trade union Industriegewerkschaft Bauen-Agrar-Umwelt criticised the planned reduction in investments. "If the top dog among the housing companies now puts the brakes on new construction and modernisation in a profit-oriented manner, then this is irresponsible," said Carsten Burckhardt, director of the trade union. People urgently need more affordable housing and especially social housing.
"Germany's largest landlord must no longer be about what profit it makes and what profits it distributes to its shareholders," said Burkhardt, as he called on the federal government to take a stake in Vonovia. In order to gain influence on the long-term strategy, a share of 25% plus one share would be necessary, he said.
