Germany-based residential landlord Vonovia SE's proposed €5.2 billion takeover of Austria-based BUWOG AG is a logical step and one that could allow Vonovia to invest heavily in development in the coming years, analysts said.
The deal gives Vonovia "probably the best-performing development platform in the German-speaking region," CEO Rolf Buch said on a Dec. 18 conference call presenting the deal. Investors should be excited at the prospect of Vonovia developing thousands more properties for its portfolio, Thomas Neuhold, head of Austria research at financial services firm Kepler Cheuvreux, said in an interview.
"Their already attractive cash flow growth profile could become even more attractive in the long run if they manage to increase it organically via the execution of internal development projects they have in the pipeline or are able to generate in the future," he said.
Strong demand for residential property in Germany means now is a good time to scale up development, one analyst speaking on the condition of anonymity said. "It's a hot business. ... It's the perfect product for a low-interest-rate environment. Supply-demand is very favorable. It's all the right thing."
Germany needs to build around 350,000 homes annually until 2020 to meet demand, according to a May 2017 German housing report by the European Commission. The country has only produced between roughly 150,000 and 250,000 homes each year since 2005, European Commission data shows.
Still, potential gains from large-scale development come with considerable risk for Vonovia if the market turns, the analyst warned. "If the cycle should turn then this kind of business would be the first to suffer significantly," he said. "With development, you are most exposed to a potential downturn."
The analyst also noted that the deal's financing, which is entirely through debt, poses its own problems in relation to the real estate cycle. The acquisition will bring Vonovia's loan-to-value ratio to as high as 49%, he said, beyond its 40% to 45% target range. "Given the cycle of German residential, which is now in the eighth year, it's a relatively high level," he said.
Neuhold dismissed concerns over leverage. He said that expected gains from asset revaluations in the final quarter of 2017 and in 2018 should easily bring the company's LTV ratio back down to a manageable level. "To leverage up the balance sheet a little bit, and acquire a platform with an attractive development pipeline and the interesting standing assets portfolio, which generates nice cash flows, is the right thing to do if you are as big as Vonovia," Neuhold said.
The deal also works well for Vonovia's Austrian assets, which the company acquired when it bought conwert Immobilien Invest SE in 2016 for around €1.8 billion, J. Moritz Rieser, an equity analyst at Hamburg-based Warburg Research, said in an interview.
"Now they don't have to sell the [conwert Austrian] portfolio, they can combine it with the Austrian part of the Buwog portfolio," he said, referring to CEO Buch's statement during the conference call that Vonovia would have had to off-load its Austrian portfolio if the Buwog deal had not come through.
"[Vonovia] wants to become the metropolitan play, expanding its reach to other European cities, so I think that came pretty handy [with this deal]," Rieser said. Buwog's portfolio is split between Austria and Germany, with around €2 billion of residential assets mostly in the German cities of Berlin, Hamburg and the Kiel-Lubeck region, and almost €1.9 billion of assets in Vienna and other smaller Austrian cities.
However, Vonovia is unlikely to enjoy the same success in the Austrian market as it has done at home, the anonymous analyst said. "Yields are already pretty low, rental growth is less than in Germany, vacancies are very low, [and] rent regulation is very high," he said. "I think it's a tough market for rental products."
