Editor's Choice: A new shopping list

French mall operator Klépierre joined its French peer Unibail-Rodamco this week by turning in a better-than-expected earnings performance over 2015.

While Klépierre failed to match the strong 8.3% growth in earnings per share reported earlier in February by its larger rival, it did see full-year earnings per share come in just ahead of its target thanks to an increase in rents driven by stronger sales at its shopping centres.

The two companies have more in common. Both are dominant in their home market France and both have expansive European portfolios thanks to their tie-up with a Dutch concern and chunky development pipelines. In 2007, Unibail became the biggest listed real estate player in Europe following its takeover of Amsterdam-listed Rodamco. More recently, Klépierre repeated the act with the acquisition of another Dutch listed retail specialist Corio, which was fully consolidated during 2015.

These two Dutch deals have helped both French rivals to significantly expand their assets under management and diversify their sources of income in recent years. There are also many parallels in terms of their geographic diversification. Both retail specialists have a strong presence in the Nordics and CEE, two regions which generated robust rental growth figures in 2015 for both companies.

In Spain, too, the pair saw their retail sales buoyed by the return of economic growth throughout the country. Thanks to Corio, Klépierre now also has a foothold elsewhere in Southern Europe, in particular in Italy and Turkey where it booked rental increases of 6% and 15% respectively. By contrast, Klépierre's French operations turned in an increase of just 2%, virtually on a par with the figure booked by its larger rival Unibail-Rodamco.

With their home market France still showing signs of weakness, both Klépierre and Unibail-Rodamco have definitely benefited from the geographic diversification of their business. Indeed, the pair are widely viewed as stable sources of rental income and capital growth in Europe’s listed real estate universe. And even though parts of the portfolios they acquired via their Dutch takeovers did not tick all the boxes at the time, these have largely been dealt with via disposals to smaller specialists in the sector such as Wereldhave.

Acrimonious takeover battle
In retrospect, both these European retail real estate giants seem to have orchestrated a very orderly expansion programme of their operations. Over in Germany by contrast, Vonovia is having a tougher time building its residential business amid a wave of capital flooding into German real estate in search of higher returns.

Earlier this week, Germany's largest listed property group was forced to abandon its long and acrimonious takeover battle for sector peer Deutsche Wohnen. The move came after Vonovia failed to get enough shares to acquire the company, even after lowering the acceptance threshold for its hostile €14 bn takeover bid in January. The announcement effectively ends what would have been the biggest ever deal in the country’s real estate industry.

The collapse of the deal means that ‘a value-enhancing opportunity for market consolidation has not come to fruition,’ said Vonovia's disappointed CEO Rolf Buch.

Despite failing to win a mandate to take over Deutsche Wohnen, Vonovia did succeed in thwarting Deutsche Wohnen’s own plan to buy its smaller domestic rival LEG Immobilien which will now remain an independent, listed company. That is a source of some solace to Vonovia’s Buch who described LEG - Germany's third largest listed residential owner - as ‘an important partner’. In November Vonovia sold LEG a portfolio of 13,800 units centred on North Rhine-Westphalia.

LEG owns 110,000 rental properties in Germany and the proposed merger with Deutsche Wohnen would have created a combined group with 250,000 flats valued at around €17 bn. On the other hand, if Vonovia had succeeded in acquiring Deutsche Wohnen, it would have boosted its portfolio of apartments to 514,000 from 370,000, making it Europe’s second-largest listed property company after Unibail-Rodamco by market value.

Deutsche Wohnen has its base in the northern states of Germany including the federal capital Berlin. Vonovia's Buch said his company had not been willing to raise its offer for Deutsche Wohnen because it did not believe rents would continue to rise as steeply in Berlin as they have recently. ‘Berlin is not London or Paris,’ he said during a conference call following Vonovia's admission of defeat.

While there are synergies to be gained from internationalisation in the retail real estate business, residential has traditionally been more of a local game. German residential giant Patrizia is a notable exception to that rule, but Vonovia has not indicated that it has plans to venture abroad in its quest for greater scale. In any case, Buch has said he will put acquisitions of other possible listed takeover targets on the back burner for now.

With global stock markets currently in turmoil and real estate stocks continuing to slide in tandem with the broader listed universe, it’s unlikely that Vonovia’s takeover engine will be re-ignited any time soon. Indeed, the company has seen its share price shed roughly 10-15% of its value since announcing the takeover bid and 30% in the last nine months, although it did end slightly higher on Thursday.

That said, geographic diversification remains a goal for Vonovia, even if only at a national level. It’s just a matter of time before the company's management draws up a new shopping list.

Judi Seebus
Editor in Chief