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Vonovia investment program on track as authorities keep choke on supply

Vonovia SE, Germany's largest listed real estate company by market capitalization, is confident it will deliver on its €1 billion investment program for 2017, with €300 million in new properties and portfolio improvements already completed this year, CEO Rolf Buch said during a first-half earnings conference call.

The residential landlord's capital expenditure plans are "well on track," Buch said, with the company set to have invested another €730 million by the end of the year at an unlevered yield of 7% on cost.

Vonovia is targeting the completion of 2,000 new apartments per year over the coming years, but is facing difficulty along with the rest of the German market as planning authorities continue to keep a tight rein on new builds.

"For the space creation program, our bottleneck is not availability of projects nor building capacity or financing, but it is the construction permits," Buch said. "You can increase the construction permissions but it will take us 19 months minimum and probably on average several years [to complete new projects].

Rising construction costs due to a shortage of skilled labor in Germany will also see Vonovia make greater use of its building resources. "We assume in the future years we can compensate inflation by efficiencies, so keep in mind there is no negative impact for in-house [operations]. For the outsourcing, yes we will see a significant increase in construction costs, but we will compensate this by more insourcing," Buch said.

Vonovia's first-half funds from operations 1, or FFO1, rose 18% year over year to €457.7 million from €387.8 million. The German company logged a 15.7% increase in FFO 1 per share to 96 cents from 83 cents in the year-ago period.

Guidance for the full year was unchanged and confirmed, CFO Stefan Kirsten said.