ANALYSIS: Resi takeover battle signals end of German property stock bull run

After a six year bull run, the German property stock market may be near its climax in the current up-cycle, according to experts contacted by PropertyEU.

A key indicator of a 'market close to it's zenith', market watchers say, is the €14 bn takeover bid floated in mid-October by Germany's largest residential landlord, Vonovia, for its rival Deutsche Wohnen.

Property stocks in Europe's largest economy have been generous to investors. Since 2009, the German real estate stock index Dimax, compiled by private bank Ellwanger & Geiger in Stuttgart, has risen by 196.5%.

And just in the last couple of days investors could have earned more than a 10% uplift with shares of Vonovia and Deutsche Wohnen. The two listed residential giants are entangled in a fierce takeover battle: Düsseldorf-based Vonovia, which has a portfolio of 350,000 housing units worth €21 bn, is trying to swallow up the smaller rival with it's 160,000 units.

Vonovia is likely to press the case to Deutsche Wohnen's shareholder further during its results announcement next week.

Red flag
While the bidding war is getting shareholders excited, it's causing analysts to wave a red flag. 'Takeovers are a sign that real estate companies can not grow profits any longer through increases in rental income and the value of their properties but only through acquisitions of rivals,' says Claudio Saputelli, head of global real estate at Swiss bank UBS.

'Large-scale acquisitions only happen near the end of an up-cycle when share prices have risen so strongly that they can be used as a currency to buy other listed companies,' adds Georg Kanders, Düsseldorf-based analyst at private bank Bankhaus Lampe.

Helmut Kurz, real estate fund manager at Ellwanger & Geiger, is of the same opinion: 'Takeovers are a sure indicator for a mature market.'

Consolidation
Vonovia's bid for Deutsche Wohnen is the latest in a series of portfolio transactions and corporate merger and acquisition activity. At the end of last year, Deutsche Annington took over rival Gagfah to create Vonovia which became the first residential company listed in the German stock market prime index Dax in this year. This summer, Vonovia acquired 20,000 housing units in Baden-Württemberg from Augsburg-based Patrizia.

At the same time, Frankfurt-based Deutsche Wohnen tried at first to take over Austria residential landlord Conwert Immobilien. After the deal fell through, Deutsche Wohnen prepared a friendly merger with listed LEG Immobilien, owner of 107,000 housing units in North Rhine-Westphalia. The move came to a halt when Vonovia stepped in with its offer to buy Deutsche Wohnen.

The much smaller listed office sector in Germany has also seen consolidation this year as Alstria Office REIT, the Hamburg-based owner of a €1.7 bn portfolio, merged with Deutsche Office, which was valued at €800 mln.

Even though the bull run on the German property stock market may be near its end, Kanders does not believe share prices will tumble any time soon. 'The massive interventions of the European Central Bank have driven bond yields so low that institutional investors are forced into property shares with their attractive dividends.' Kurz is of the same opinion. 'While property share prices may not rise much further, they are stabilised against a down turn as long as bond yields remain as low as they are today.'

Richard Haimann
German correspondent