Buwog to build 5,000 apartments in Germany and Vienna 'in next five years'

'We will focus on Berlin, Hamburg and Vienna and will hold the apartments after completion,' Segal said. 'We already have 1,350 units under construction in Berlin and Vienna, which will generate a strong contribution to Buwog's recurring FFO,' he added. 'With our develop-to-hold strategy, we will create a new type of portfolio, with which we will produce significant rent-roll growth. By adding development-to-hold to our strategy in Germany, we are enhancing this unique selling proposition even further.'

Buwog currently owns 51,000 apartments, of which 55% are in Germany and 45% in Vienna. Going forward, the group intends to sell down the Austrian assets outside Vienna ‘as a form of capital recycling', Segal said. 'Our plan is to sell down around 1,000 units a year outside Vienna from our existing Austrian portfolio. We have about 23,000 units in Austria, of which 6,500 are in Vienna, so this could take a long time, as long as 15 years.'

Growth via external acquisitions has become more complicated in the past year, due to the lack of product, coupled with higher prices and increased competition in the market, according to Segal. Nonetheless, Buwog acquired 700 units in the past 14 months, which represents fewer units than it sold in the period.

'We expect to invest between €100 mln and €150 mln in German acquisitions this year, plus an additional €25 mln to €35 mln in capex investments there,' Segal said.

City Apartments scheme is now underway
In December 2016, Buwog began construction on its new 'City Apartments' project in the 12th district of Vienna, in which it will invest around €33 mln. The project comprises 144 apartments ranging from 46 m2 to 107 m2, with an average size of 75 m2. Typically, the apartments are priced at around €4,500 per m2. The project is due to be completed by the spring of 2018. According to Segal, between 20% and 40% of the apartments in a Buwog development are sold off plan before construction starts. The group has a target development margin, before tax, of 19% to 20%.

Buwog raised capital by placing a €300 mln, five-year convertible bond in September last year, with the aim of using the proceeds to invest in property development in Germany. Around €200 mln of this was earmarked for development land and has since been invested, although Buwog still has around €30 mln to invest, Segal said.

'Our current development focus is very clearly on the cities of Berlin, Hamburg and Vienna. We're interested in developing apartments in cites with strong demographics where the number of inhabitants is on the rise, which is true for these three cities. In addition, household income in these markets is increasing. We'd like to increase the density of our assets there because they are our three "hotspots" and we view them as low-risk, stable cities.'

Despite the Berlin Christmas market terror attack in December, Segal said that geopolitical risk doesn’t have a notable impact on Buwog’s investment strategy: ‘Our kind of business is very local, so demographics tend to be independent of geopolitical risk,’ he said.

Buwog is also eyeing other German cities, Segal said, noting that for now his group feels 'very comfortable with our strong and growing project pipeline in the three biggest German-speaking cities'.

Buwog to seek investment-grade rating
Buwog is currently in talks with ratings agencies with a view to obtaining a good investment grade rating, Segal said. 'Once we have the rating, bond placements will become a significant part of how we refinance in the future and of our general corporate refinancing strategy. I anticipate getting the rating within the next 12 months and look forward to our talks with the ratings agencies,' he said.

The group favours a conservative funding structure, limiting LTVs to 50%. 'LTV targets are always moving, though, depending on interest rates and credit spreads. We think that interest rates will increase over the next 18 to 24 months, so a more conservative balance sheet structure is favourable,’ Segal said. Buwog typically prefers LTVs of 45%, he said, noting that this would be positively viewed by ratings agencies which require low LTVs.

'Finding opportunities at the right price is a challenge but our development pipeline and debt refinancing platform will give us enough product to enable us to reinvest our capital in three years’ time in development land. Around two-thirds of our FFO will be generated from our asset management and unit sales business, with the remaining third generated from our development business,' Segal said.