ANALYSIS: Strong demand for property stocks spurs German IPOs

The booming stock market is encouraging German real estate companies to go public, but experts believe the flood of new IPOs could cause a temporary dip in the share prices of established listed firms. That would offer buyers a window of opportunity, PropertyEU has learned.

German real estate stocks are hot. 'Last year, the Prime Real Estate index gained 38%, while the German key index, the DAX, only returned 2.98%,' noted Stefan Mitropoulos, analyst at Landesbank Helaba in Frankfurt.

Institutional investors in particular have been gorging on property stocks. 'With bond yields close to zero, property stocks with dividend yields above 2.5% are very attractive to have,' added Georg Kanders, sector analyst at Bielefeld-based private bank Bankhaus Lampe.

The strong demand for listed German stocks is tempting local real estate companies to go public. Three large real estate firms - Ado Properties, Aurelis Real Estate and BGP Investment - are at an advanced stage with preparations for initial public offerings due later this year, according to investment bankers in Frankfurt familiar with the cases.

'The owners want to rake in a combined sum of more than €1.5 bn,' sources told PropertyEU. Spokespersons at Aurelis and BGP neither confirmed nor denied the information, but Moshe Lahmani, chairman of Israeli builder Shikun & Binui Ado, has stated publicly that the IPO of its German subsidiary Ado is scheduled for the second half of this year.

Hunt for yield
Experts are certain that the IPOs will a success. 'With investors desperately searching for attractive yields, there could not be a better time for property firms to go public,' according to Kanders. 'Because of their strong dividends, real estate stocks are highly sought after by pension funds and insurance companies in need of constant cash flow to fulfill their obligations towards their clients', said Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum.

The recent successful capital increase by Hamborner REIT is evidence of the strong demand. In February, the Duisburg-based company increased its capital by 10% through the issue of 4.5 million new shares worth a total €40.9 mln. They were fully subscribed in an off-market deal by RAG-Stiftung, a foundation set up to ensure that the RAG corporation can discontinue subsidised coal mining in a socially acceptable manner in the Ruhr Valley.

However, there is uncertainty about the impact the new stocks will have on the share prices of established listed companies. 'Not all institutional investors have enough liquidity to acquire the new shares without dumping some sector stocks already in their possession,' said Vornholz.

'Some market players will most likely lock in profits on top performers in order to get their hands on new shares,' added Dieter Thomaschowski, owner of Erkrath-based analysis firm Thomaschowski Research & Advisory.

'The IPOs will probably lead to a dip in the share prices of existing listed property companies,' agreed Kanders. However, those falls will last only a few days until other market participants move in to snap up the stocks, he added. 'Buying on those declines will be an opportunity for investors to get their hands on the shares of property companies at a discount,' agreed Vornholz.

Aurelis and BGP
The largest property company currently preparing its IPO is Aurelis. The project developer, formerly part of Deutsche Bahn, is held by funds of New York-based investment group Grove International which is looking for an exit. In 2013, Aurelis earned €358.2 mln through the sale of new developments and generated rental income of €70.2 mln through its portfolio of commercial properties with a combined 11 mln m2 in large German cities. Investment bankers claim the IPO should value Aurelis at well over €1 bn.

Number two in size is BGP, an investment vehicle spun off by Australian property group GPT at the low point of the global financial crisis to hold its stake in European property assets. The company was valued at more than €4 bn at one point, but many assets have been sold off. Currently BGP owns apartments worth €1.1 bn in Berlin, North Rhine-Westphalia and Schleswig-Holstein.

BGP managing director Mark Dunstan announced at the group's latest annual meeting that preparations are well under way for the final exit, adding that this is the time to 'realise the highest return possible.' 'With all the problems around the world, real estate within Germany is seen as a safe haven,' he said.

Meanwhile Ado owns 14,600 residential units in Berlin. By selling a stake in Ado through an IPO, parent company Shikun & Binui expects to raise about € 350 mln for its drive into infrastructure projects. The Israeli builder is part of a consortium which has just secured a €755 mln project to build toll roads in Texas.

Richard Haimann
German correspondent