ANALYSIS Deutsche Wohnen, LEG to hit acquisition trail following merger

German residential groups Deutsche Wohnen and LEG Immobilien plan to hit the acquisition trail, following the announcement this week of their planned merger.

'At the moment we have firepower of €1 bn,' a spokesperson for Deutsche Wohnen told PropertyEU. 'The combined entity with its best-in-class financing structure and a low LTV of around 42% would have a huge firepower in both the loan capital market and the capital market,' she said.

The firm does not have a target in terms of when it would like to invest the capital, she said.

Deutsche Wohnen announced earlier this week that it plans to merge with German rival LEG in an all-shares deal worth around €8 bn, including debt. LEG shareholders were offered 33 Deutsche Wohnen shares for every 10 LEG shares. After all shares are exchanged, the pre-deal Deutsche Wohnen shareholders will hold 61% of the shares and the former LEG owners will have 39%.

Deutsche Wohnen has called an extraordinary general meeting for October 28 to approve the capital increase, with a view to concluding the merger by the end of December.

'It's the right term for Deutsche Wohnen and LEG to merge,' a spokesperson for Deutsche Wohnen said. 'Combined, we will be stronger. It’s a time of great growth in the sector and combined we have a very strong presence country-wide.' Deutsche Wohnen is very active in Berlin, Frankfurt and Hannover, whereas LEG is very strong in Nordrhein Westfalen.

Following the merger, the new group will hold 250,000 residential apartments in Germany, narrowly trailing rival Vonovia – formerly Deutsche Annington - which has grown its portfolio to 350,000 apartments through a series of acquisitions, including its takeover of rival Gagfah earlier this year.

This week, Vonovia became the first real estate group to be represented in Germany's blue-chip DAX index. With a combined market value in excess of €13 bn, Deutsche Wohnen-LEG now stands a real chance at becoming the number two real estate group listed on the DAX, just behind Vonovia with a market cap of €13.87 bn.

'It's interesting that Germany's number two and three - which didn't share Vonovia's mainly volume driven approach - have merged,' said Konstantin Kortmann, team leader, residential investment Germany at JLL. 'The merger is good news for the market,' he added. JLL did not advise.

BUSY YEAR
Deutsche Wohnen has already been on the acquisition trail this year, acquiring 7,500 apartments in Berlin from unnamed institutional investors for an undisclosed sum in the second quarter.

Consolidation and acquisitions in Germany’s residential sector have been rife this year. In June, German real estate group Patrizia Immobilien sold the Suedewo Group portfolio from a fund that it manages to what was then still known as Deutsche Annington for €1.9 bn. In May, residential group Adler Real Estate completed a friendly takeover of fellow residential specialist Westgrund.

The merger of the two companies created the fifth largest residential operator in the country. Deutsche Annington’s takeover of German rival Gagfah also got the green light in February. Combined, the two groups own around 350,000 residential units with a combined value of around €21 bn.

Further consolidation is also likely, said Kortmann of JLL. 'There has been a lot of consolidation in the residential sector this year and I think we could see more. Potentially, some of the smaller companies holding between 30,000 and 50,000 units could be acquired by the likes of Deutsche Wohnen/LEG or other larger players or even merge among themselves.'

NO IMPACT FROM NEW LAW
Interest in Germany’s residential sector has soared because capital values for asset and portfolios in A and B locations are increasing by around 7% a year, according to Kortmann. A few years ago, very few investors would consider properties in C and D locations but today there is a window of opportunity for selling properties in those locations, even in the former East Germany.

In a further sign that the sector is booming, Germany’s residential market posted record half-yearly figures of €17.2 bn in the first six months of 2015, more than double the volume for the same period in 2014, according to research by NAI apollo.

Interestingly, a new German law - the Mietpreisbremse law (rental price brake law) - that came into effect on 1 June and which is designed to cap residential rents in Germany's biggest cities has yet to make an impact, according to Roman Heidrich, team leader, residential valuation advisory Berlin at JLL: 'This is mainly because demand is so strong and supply is tight. It has been estimated that Berlin needs 20,000 new apartments a year – with the refugees coming, we will need more than that. This year, around 10,000 will be built, compared to 7,300 last year –it is still not enough.'

Under the new Mietpreisbremse law, residential landlords are not permitted to charge more than the 'Mietspiegel' (rental index rent) + 10%. In practice, many are ignoring this, according to Kortmann at JLL. 'Many landlords are charging what they can achieve. They are willing to take on litigation risk and test their chances in the courts to see if they can get away with it. It's so hard to find good apartments that a lot of tenants would rather pay to get the apartment they want. Subsequently, some landlords are charging rents of around €10 per m2 in Berlin– 50% more than they should be charging.'

PORTFOLIOS FOR SALE
For investors still looking to boost their exposure to the sector, there are some sizeable portfolios on the market, including the BGP portfolio owned by BGP Investment. (BGP started out as a joint venture between Australian companies Babcock & Brown and the GPT Group before being restructured in 2009 as an independent company in Luxembourg.)

‘Interest has been international from the outset,’ said Mark Dunstan, managing director of BGP Investment in Luxembourg. BGP is selling our German residential assets because it has shareholders who inherited them following the company restructuring in 2009 and the plan was eventually to sell them.

Dunstan is hoping to offload the portfolio - which comprises around 16,000 units spread out across Germany - by the year-end. It has a reported property book value of €1.1 bn, although analysts expect it to sell for a premium, given strong interest in the sector.

Could one potential buyer be Deustche Wohnen? Given that 40% of the portfolio comprises assets in Berlin, it could be a good fit. The spokesperson declined to comment on specific deals but said: 'Everything is interesting to us, particularly if a sizeable chunk of the portfolio is in Berlin.'