Analysis: Can Vonovia-Deutsche Wohnen merger shape Berlin’s residential market?

The proposed merger of listed German residential property investor Vonovia and Deutsche Wohnen could create a company with a market share capable of shaping residential real estate in Berlin, a city calling for affordable housing.

Vonovia has offered to buy Deutsche Wohnen, which has around 70% of its real estate portfolio located in Berlin, for €18bn.

The proposed merger announcement can be seen as timely as it follows last month’s decision by the German constitutional court to overturn the controversial residential rent cap introduced last year by the city of Berlin. The ruling creates legal clarity and could lead to an uptick in investment activity, institutional residential investors said at the time.

Vonovia and Deutsche Wohnen’s latest merger proposal is in stark contrast to the hostile takeover of Deutsche Wohnen attempted by Vonovia in 2015.

Among other provisions, the latest deal proposes a “future and social pact” to control prices in Berlin’s real estate market.

Under the agreement, rent prices would increase by a maximum of 1% per year over the next three years, until 2024, to adjust to inflation over the following two years, until 2026.

“We will build 13,000 new apartments, at least a third social housing,” Vonovia’s CEO Rolf Buch said at the press conference.

Vonovia and Deutsche Wohnen will contribute to expanding the municipal housing stock by offering to the city of Berlin to acquire 20,000 apartments. The acquisition would give the city of Berlin control on the housing market and in turn on prices.

“Today is a very important day,” the city mayor Michael Müller said in the press conference. “I think it is important to regulate the development of the rents”, he said, adding that the city of Berlin manages a housing stock of around 350,000-360,000 apartments.

“The companies are trying to bring greater stability and predictability to Berlin residential tenants by reducing the burden of housing costs and thereby minimise the risk of further political intervention which led to the 2019 rent freeze,” Philipp Wass, executive director at rating agency Scope, said.

Equities research firm Jefferies said the desire to alleviate political pressure on affordable housing in Berlin was a factor in the decision of the management teams of Vonovia and Deutsche Wohnen to combine forces.

Finishing the deal

The hostile takeover in 2015 failed with only 30.4% of the shareholders of Deutsche Wohnen tendering the share to Vonovia. This time round conditions are different.

According to an analysis of real estate intelligence firm Green Street, only a simple majority of Deutsche Wohnen’s shareholders will need to tender the shares to bring the deal to the finishing line, while Vonovia does not require an explicit approval from its shareholders.

The majority (77%) of Vonovia’s shareholders already approved at the AGM in April a right issue of up to €8bn to finance the acquisition.

Jefferies also sees high deal likelihood on management backing and supportive shareholder overlap.

The transaction is subject to competition clearance.

The left-wing party Die Linke has demanded antitrust authorities to halt the merger. For Marcel Fratzscher, president of the German Institute for Economic Research, the combination in Germany is “problematic” from an antitrust standpoint. It could result in a reduction of the competition and stronger market power of the new group, he said.

The German Federal Cartel Office, Bundeskartellamt, approved the merger in the first phase of the investigation in 2015. At that time, according to the president of the Leibniz-Centre for European Economic Research Achim Wambach, the companies had a small share of the total housing stock in the respective markets.

“It’s is not just one housing market, but many regional markets [and] a [competition] review of the takeover will look at these individual markets to see to what extent a merger would impair competition,” said Wambach, who is also a member of the Monopolies Commission, an independent body advising the government on competition policy, competition law and regulation.

“In Berlin, the only single market relevant for this case, we would by far not have a dominant market share after the merger. I’m completely relaxed,” Buch said.

The merger would create Europe’s largest group for residential real estate with around 550,000 apartments worth over €80bn and a market value of €48bn.

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