MAGAZINE Vesteda homes in on mid-rental housing segment

In what has been dubbed the ‘deal of the year’ in the Dutch residential sector, institutional investor Vesteda clinched the acquisition in June of a €1.5 bn portfolio from insurer and asset manager NN Group. The 6,777 units, including 794 still to be developed, are part of the former Delta Lloyd Dutch residential portfolio. They mainly comprise assets in the mid-rental segment, Vesteda’s target market where demand is strong but properties are in short supply. Vesteda, which invests on behalf of institutional investors and is the biggest residential investor in the Netherlands, plans to invest €31 mln between now and 2020 in upgrading the assets, which will boost its overall portfolio to 27,000 units valued at €6.3 bn.
The acquisition has been structured largely as a bricks-for-shares deal, with NN gaining newly issued participation rights in Vesteda in exchange for the assets. Around one-third (€429 mln) of the purchase price is being paid for in cash. To finance this, Vesteda has secured a bridge facility, in turn financed by the proceeds from a €500 mln bond issue.
The deal follows the sale earlier this year of 1,872 rental homes across the Netherlands to DWS (formerly Deutsche Bank Asset Management) for over €265 mln. In an interview with PropertyEU’s Dutch parent publication PropertyNL, Vesteda’s CEO Gertjan van der Baan details his plans for the NN portfolio and explains the rationale behind selling smaller packages of properties while at the same time buying up chunky portfolios.

Was Vesteda an easy choice for NN? There are not many parties that offer a construction allowing NN to come in as a shareholder. Amvest could have been an option, because it now also admits other shareholders alongside Aegon and PGGM, but it is much smaller. Bouwinvest, CBRE GI and Syntrus Achmea also have housing funds, but they would have to adjust their organisation considerably for the addition of 6,700 new homes and could not easily afford €400 mln.

‘I think we were indeed the only ones who could offer a ‘bricks-for-shares’ deal of this magnitude.’

Why did the purchase take so long then? In February it was predicted that the deal would close in April but it didn’t happen until the summer.

‘We started with a data room in February when exclusive negotiations got under way with NN. All the investors in Vesteda - 19 shareholders including NN - were provided with simultaneous information from that time. NN’s entry meant not only that the portfolio increased from more than 20,000 to 27,000 homes, the relationship between the shareholders also shifted somewhat due to the expansion with the NN interest. Apart from that, it was a case of thorough due diligence, which applies to every deal we do. Actually, this large transaction is not even all that different in that respect - in a way it is more efficient because of its size. Sometimes we go through a similar process for just one building, such as the Amstel Tower with 192 apartments, while the effect on our portfolio is not measurable.’

Now the deal has closed, is it time for the real work to begin: investing in the portfolio and disposing of homes that don’t fit into it?

‘Well, we’re talking about a carefully composed, institutionally managed portfolio. Delta Lloyd employed similar standards to us. We will sell off some assets, but less than 10% of the total. We currently have slightly more apartments, and with the deal we will get more single-family homes. We are currently overweight in Rotterdam and the southern Netherlands, with the new portfolio we will gain more exposure in the north of the country and Utrecht. We both have a strong presence in Amsterdam. That all fits perfectly. In the coming years up to 2020, we will invest extra money in sustainability measures (€31 mln). With this investment we will be able to get 80% of the stock into category C (energy use) or higher. There is no question of overdue maintenance.’

Is it possible to achieve synergies on the management side?

‘I see that portfolios of less than 10,000 homes work less efficiently. We do all our management in house. That is something Delta Lloyd did not do. We will also do that for this portfolio going forward. We always strive to outperform, but we are now on an average €250 management costs per year per unit. That will not really drop significantly. Our expertise is focused on adding more quality on the management side. That pays in terms of greater tenant loyalty and faster rentals when mutations occur.’

Being the biggest, like Vesteda, has its advantages, so why sell, as you did two months ago, 1,872 homes to a fund managed by DWS, one of the largest asset managers in Europe with AUM of €700 bn?

‘We did not disclose the identity of the buyer, but apart from that this was a package of assets that did not fully meet our objectives. A package is a different proposition to a carefully constructed portfolio, such as Delta Lloyd’s. The package sold to DWS consisted mainly of social rental housing whereas we focus on the middle segment. They were also homes located in areas with less potential in our view.’

What do foreign investors in the social housing segment see that Dutch players do not?

‘I don’t know. What I do know is that we have to pay a landlord’s levy for our share of social housing. That is a reverse incentive to do something in the social housing sector, even for corporations.’

Are there opportunities to grow in the middle segment?

‘Certainly, we now own 27,000 of the 150,000 homes that are managed institutionally. There are more portfolios around because parties like NN want to switch to shares or they see that we manage them more efficiently. The housing corporations also own 140,000 properties in the middle segment. They are not willing to sell at the moment, but I think that will change in due course.’

BOND ISSUE
To pay for the €1.5 bn Delta Lloyd portfolio, Vesteda resorted to a proven financial instrument: a bond issue. In early July, it issued a €500 mln bond with a term of eight years and a coupon of 2%. The proceeds will be used to refinance the bridge facility related to the NN purchase as well as to improve Vesteda’s capital structure. It is the company’s third corporate bond issue under its €2 bn EMTN programme and followed roadshows in Amsterdam, Frankfurt, London and Paris. Vesteda has received a BBB + rating from Standard & Poor’s.

Profile Vesteda
Vesteda was established as a result of restructuring the real estate portfolio of civil servants pension fund ABP, the largest pension fund in the Netherlands. ABP’s residential real estate, held at the time in its Woningfonds (Residential Fund) was spun off into an independent fund (Vesteda Residential Fund FGR) internally managed by Vesteda. Today, there are 19 institutional investors in Vesteda Residential Fund FGR. Following the acquisition of the Delta Lloyd portfolio from NN, Vesteda owns 27,000 rental properties in the Netherlands with a total value of €6.3 bn. The portfolio consists of single-family homes and private-sector apartments with a monthly rent of €700 to €1,100.

Personal Profile
Gertjan van der Baan was appointed CEO of Vesteda four years ago. Before that, he was management board chairman of Dutch residential property investor Nationaal Grondbezit ‘Nagron’. Nagron is part of Rotterdam-based Van Herk Group, where he also served as CEO from 2009. Prior to joining Van Herk Group, Van der Baan worked nearly nine years at merchant bank Kempen & Co in the field of corporate finance.