In its cities, many Germans prefer to rent their homes. Increasingly those who rent have grown unhappy with their landlords. Ironically, this conflict has enabled Vonovia chief executive Rolf Buch to expand his company’s portfolio. Germany’s largest residential landlord will buy rival Deutsche Wohnen in an €18bn all-cash deal, announced late on Monday. The combination creates a landlord controlling almost €90bn of property.
At €53.03 per share, Vonovia has offered a 25 per cent premium to Deutsche Wohnen’s three-month undisturbed share price. That sounds reasonable. But the price almost exactly equals the reported net asset value at the first quarter. This lack of premium reflects the market’s political concerns about listed landlords. The residential sector trades at a near-record 25 per cent discount to property values, according to Green Street research.
This is Vonovia’s third attempt to bring its smaller peer under one roof. It is well-timed. As demand outstrips supply, hostility against landlords’ efforts to lift rents has flared in Germany. Nowhere is this dispute more intense than in Berlin, the location of three-quarters of Deutsche Wohnen’s properties. Leftwing politicians in Germany introduced national checks on rents back in 2015. In Berlin, leaders went further last year by enacting harsher rent freezes. Last month Germany’s constitutional court over-ruled these.
However, plans by Deutsche Wohnen chief executive Michael Zahn to go after tenants for any lost income only added to the landlord’s miserly image. Its woes provided Vonovia with an opportunity to buy into one of Germany’s fastest-growing cities by population at nil premium to book value.
Tuesday’s 5 per cent drop in Vonovia’s share price partly reflects the political risk from upcoming elections in September, but also its plans to issue up to €8bn of equity to fund the deal. Promised annual savings of €105m provide little balm for shareholders given the share price premium paid. Rental growth at the newco’s Berlin properties will be limited to 1 per cent annually for three years.
Given the caps, rental supply seems unlikely to surge. For that reason, Vonovia could play consolidator and bide its time. Extra scale should bolster Vonovia’s own clout in any future disputes. Even so, when business takes on politics it is the former that usually comes off worse.