VNA.GR - Vonovia

[petec]

Vonovia is a German residential real estate company. It owns flats in 15 core markets in Germany and Austria and is considering expanding into other parts of Europe. Its standardised processes give it a cost advantage and it claims to invest in and achieve high levels of customer service which leads to high occupancy.

 

At first glance it's not obviously undervalued (1.3x BV looks around right - it deserves a premium to BV for its non-rental profits). However it strikes me as a simple, inflation-linked long term compounder and according to its presentation apartment prices are well below construction costs which might mean there is a decent runway for BV growth.

 

I'm starting the thread primarily to see if our German members have views on the stock or the German housing market.

 

Thanks

 

P

 

[thowed]

Afraid I can't offer much (as a non-German), but it has popped up in the past year in a number of funds that I track and respect.  e.g. it is a top holding at the Wellcome Trust, who have a very long-term outlook, and are likely to appreciate an I-L compounder.  Capital Gearing are also fans.

 

German property seems very interesting - I missed the boat on the UK-listed REITs, though maybe Phoenix Spree is still worthwhile?

[whiterose]

This is just a short macro view, have not yet read the financials of the company (btw. I'm German, living in a large city there).

The residential real estate here is kind of bubbly, not so much as in e.g. Vancouver/Toronto/Stockholm/Sydney but the average asking/selling prices are too high for the average household, at least in the cities (which keep on growing). It's only affordable due to 2.x% 20y mortgages.

Cap rates are a joke. Rents are also quite high relative to disposable income, so something has to give in the future, considering the coming rising yield environment.

My best guess is that rents will rise very slowly or stay the same so wages can catch up and at the same time prices will come down or at least stay flat for a large number of years. The train has already left the station, one should have bought 10-15 years ago. But: that's what I'm saying for years, so take it with a grain of salt. I can image a lot of retail investors being in the name/sector, so watch out..

Cheers

[petec]

Whiterose

 

Thanks for the reply. What are the rules around mortgages in Germany? I believe most are fixed rate. Are there rules on LTV's and duration? For example in the UK you can get a 35 year mortgage which makes everything a lot more affordable than a 20-year.

 

German house prices seem to be up about 40% from the early 2000's (BIS index I found). In real terms that's less than 20%. Uk house prices are up about 50% and I'm not sure that's a bubble, although London is - London prices have more than doubled in that time. And if Vonovia are right that houses are currently priced below cost there may be further to run.

 

Just playing devil's advocate.

[whiterose]

What are the rules around mortgages in Germany? I believe most are fixed rate. Are there rules on LTV's and duration? For example in the UK you can get a 35 year mortgage which makes everything a lot more affordable than a 20-year.

 

Yes, almost all of them are fixed rate (>95%).

There are rules, although I'm not too familiar with the exact details.

You can easily get to 60% ltv and pay a bit more for 80%.

Sometimes 100% or 110% are possible, but then you would need a very good relationship with your bank + positive free cashflow.

One can choose between let's say 2/5/10/15/20/25/30 year, most popular is 15/20 I guess with potential rollover into a new one after expiration.

 

 

German house prices seem to be up about 40% from the early 2000's (BIS index I found). In real terms that's less than 20%. Uk house prices are up about 50% and I'm not sure that's a bubble, although London is - London prices have more than doubled in that time. And if Vonovia are right that houses are currently priced below cost there may be further to run.

 

 

The Bundesbank and the IMF raised some concerns about the price levels in large cities some time ago. Prices have risen >50% in Berlin/Frankfurt/Munich during the last few years, in Berlin some parts doubled, over 15 years quadrupled.

Averages won't tell you much since in some smaller cities or villages prices go actually down, no one wants to live there anymore, young people move away, there are no jobs etc.

 

The vast majority of newbuilds have "luxury" standards and are for sale only, because of high land prices inside the cities and higher margin for builders for "premium" real estate.

Therefore you can't really choose between buy/rent. That pushes cap rates down, the comparison to renting fades away.

 

I'd say second hand house prices are always cheaper than newbuilds, the quality and technological standards are lower + depreciation.

 

 

[petec]

That's useful. Thanks. And I agree re: averages.

[John Hjorth]

I actually looked at Vonovia when it made its bid for Swedish Victoria Park AB earlier this year. It was all over the Danish real estate related press here in Denmark then.

 

I liked the core business. Dull thing, just chugging along, doing its thing.

 

I ended up not pursuing it further, for two reasons:

 

1. Lazyness. I was simply not then in the mood to spend a lot time to get at least a basic understanding of the German real estate market. Maybe later.

2. The financing structure, combined with that the company seems a bit agressive, by its wishes to expand further.

 

The more long term you think about this company, the more reckless the financing appears to be. [Think GGP.]

 

Question for whiterose: Is this a regulated business, or is there a general market price mechanism [perhaps "local/per area/city"], that the company can "follow" while offering new contracts to potential tennants?

[Zorrofan]

Curious - did they end up buying Victoria Park AB?

 

thanks

[John Hjorth]

Zorrofan,

 

Yes Vonovia got it partly, so now a sub of Vonovia, but still listed in Stockholm. Their intent was to get above 90 percent acceptance for the bid, after which Vonovia according to Swedish company law could force the shareholders not accepting the bid to sell their shares to Vonovia, thereby delisting Victoria Park AB.

[petec]

 

The more long term you think about this company, the more reckless the financing appears to be. [Think GGP.]

 

 

Can you elaborate? I haven't followed GGP so I don't get the analogy, and Vonovia's financing seemed fairly secure to me: under 45% LTV on residential property that is easily sold, and with very spread maturities.

[whiterose]

Is this a regulated business, or is there a general market price mechanism [perhaps "local/per area/city"], that the company can "follow" while offering new contracts to potential tennants?

 

In general the german rental market is not onerously regulated, at least way less compared to sweden. However the rental law is mostly in favour of the tenants.

There are some limits on how much one can raise rents (15 or 20% every 3 or 5 years, haven't looked into it, changed recently). There is also a public discussion going on on how to cap it, considering the high rents in some areas.

The rent-level can not deviate too much from the local average level in your district/neighborhood.

 

A landlord can also levy some renovation/modernisation/insulation costs onto the tenants. All in all there are for sure economies of scale to the business. The large companies do most small repairs etc. in-house. They also bought whole blocks (thousands of units) as portfolio-transaction (sometimes from the state) -> cheaper per sqm than bought individually.

 

There are complaints from tenants of Vonovia for example, where they suggest they underinvest in the buildings and "milk" them for short term profits. Don't know how widespread or serious it is.

 

[petec]

 

A landlord can also levy some renovation/modernisation/insulation costs onto the tenants.

 

 

Vonovia are doing an increasing amount of this. I believe tenants can request a new kitchen or bathroom, including ones with facilities for seniors, and Vonovia will install these for a rental pickup. This is profitable for Vonovia as they can buy in bulk.

 

[John Hjorth]

 

The more long term you think about this company, the more reckless the financing appears to be. [Think GGP.]

 

 

Can you elaborate? I haven't followed GGP so I don't get the analogy, and Vonovia's financing seemed fairly secure to me: under 45% LTV on residential property that is easily sold, and with very spread maturities.

 

Pete,

 

I'm referring to this piece about GGP. GGP had to rely on the kindness of the strangers named BAM & Ackman to get out of that enormous friggin' mess - at a price for the shareholders! Absolute calamity, based on stupid thinking that "it will never happen".

 

The more long term you think about it, the higher is the probability that you have to refinance some bonds in a frozen bond market.

[petec]

The more long term you think about it, the higher is the probability that you have to refinance some bonds in a frozen bond market.

 

Of course. That's why they have relatively low LTV with maturities spread out over 20 years. But I will read and re-think. Many thanks.