Plans by Germany's new coalition government to tackle the abuse of the country's real estate transfer tax system will make mergers and acquisitions in the listed property sector more expensive and could be a factor in preventing potential deals going ahead, according to local industry analysts.
The country's second largest party, the Social Democrats, finally agreed on March 4 to re-establish a "Grand Coalition" with its main rival, the Christian Democrats, after months of negotiations on the terms of the partnership and its policy program. The German federal election took place Sept. 24, 2017, returning the Christian Democrats with 311 of 631 seats and the Social Democrats with 193 seats. Among the terms of the coalition agreement is a plan to "implement an efficient and legally sound regulation to end abusive tax structures via share deals," according to a translation of the document by S&P Global Market Intelligence.
Germany levies a real estate transfer tax of between 3.5% and 6.5% on a property's purchase price or the asset's value, with rates varying between the country's federal states. The tax can be avoided by executing a share deal for a company owning real estate rather than an asset deal for the property itself, as long as a 94.9% ownership limit is observed. The remaining shares are often transferred to a third party specifically set up to hold the shares and allow the acquiring company to avoid paying the transfer tax.
"The [listed real estate] sector saved billions of euros over the last couple of years with all the transactions in big consolidation deals," Thomas Rothaeusler, Frankfurt-based real estate equity analyst at global investment banking firm Jefferies, said in an interview. "[Abolishing the real estate transfer tax exemption] will have an impact on future [M&A] deal activity and corresponding acquisition returns."
Germany's real estate sector has seen several large M&A deals since 2014, and the country's largest listed landlord, Vonovia SE, has been particularly active. Vonovia bought rival GAGFAH SA for €3.9 billion in 2014 and conwert Immobilien Invest SE for €1.8 billion in 2017. The company is in the process of buying Austria-based landlord and developer BUWOG AG for €5.2 billion.
"If you really have to pay 6% or 7% more on a transaction, then it would definitely reduce [M&A] activity," Georg Kanders, real estate equity analyst at Germany-based private banking firm Bankhaus Lampe, said in an interview.
Kanders said he expects to see further consolidation in the listed German real estate sector in the coming year. A deal between Germany's two largest listed property companies, Vonovia and Deutsche Wohnen, is not on the cards at the moment, he said, but the two residential landlords were likely to consider a deal once they ran out of other acquisition opportunities. Vonovia failed in a €14 billion takeover bid for Deutsche Wohnen SE in 2016. Deutsche Wohnen CEO Philip Grosse told the Financial Times in May 2017 that his company would be open to an improved offer from Vonovia.
The high level of M&A activity in the German residential space in recent years makes consolidation in the other parts of the country's real estate sector more likely, said Rothaeusler. "There's a lot of stuff outside the listed space in [German] commercial [real estate], much more than residential. If you have attractive capital markets and good valuation still, then definitely there will be a trend towards consolidation there. We've got a lot of key shareholder changes recently at some of the [companies], so it all seems like the sector is preparing for consolidation."
A previous attempt to abolish the real estate transfer tax
Any change to the transfer tax
