UPDATE: Consolidation to ‘shake up’ German resi sector next year

So far this year, Deutsche Annington has invested €2.7 bn in Germany’s residential market excluding Gagfah, Rolf Buch, CEO of Deutsche Annington, told PropertyEU.

Consolidation in Germany’s listed residential market is expected to shake up the sector next year, following a week that saw the largest residential merger since the financial crisis.

Early last week, Germany’s largest listed residential landlord, Deutsche Annington, announced that it had signed an agreement to acquire Essen-based rival Gagfah for €3.9bn in a shares and cash transaction. The deal will create the biggest residential powerhouse in Germany – and one of the largest in Europe - with a combined portfolio of €21 bn, representing 350,000 units.

‘Our acquisition of Gagfah combines the best of both worlds,’ Rolf Buch, CEO of Deutsche Annington, based in Bochum, told PropertyEU. ‘It will make us the biggest residential landlord in Europe. The attraction of Gagfah is that is has a similar culture to ours. Even our headquarters are close by! In addition, we are both the only two national residential companies, so the synergies are greater than they would be if we were combining any two regional players.’

So far this year, excluding Gagfah, Deutsche Annington has invested €2.7 bn in Germany’s residential market. ‘We will consider further acquisitions. However, we don’t have a set annual target because we think that could be dangerous, because then a listed company would have to deliver – and may overprice a target,’ Buch said, ‘We don’t have a minimum or maximum target size, with the only exception that other company shouldn’t be bigger than us,’ Buch added.

There is a trend towards consolidation in the German residential market because of the cost benefits, according to Buch. However, listed players account for just 3% of Germany’s 40 million apartments. ‘Residential is popular because it’s stable and more resistant to economic cycles than other real estate asset classes,’ he said.

According to Konstantin Kortmann, national director and team leader of residential investment at JLL in Germany, the Deutsche Annington/Gagfah merger is ‘a very significant deal for the market’. ‘It’s the largest deal of its kind for many years. Essentially, Germany’s Number 1 is taking over its Number 3. It will create a nationwide platform,’ he said.

Deutsche Annington has already been very active on the acquisitions front this year. In February, it acquired Vitus Immobilien and homes owned by DeWAG in separate deals for around €2.4 bn, boosting its residential portfolio at the time by 24%. Together, the residential companies have more than 40,000 units. Its acquisition of Gagfah follows a year of escalating rumours that Gagfah was on the brink of being taken over by one of its larger competitors.

There has been a sizeable amount of activity elsewhere in the sector this year. Listed real estate firm Adler Real Estate bought a majority stake in housing association Jade in Wilhelmshaven, northern Germany - totaling 6,750 units - in October for around €200 mln. Listed housing firm Westgrund bought the Phoenix portfolio comprising 13,300 units from Berlinovo, which is majority owned by the state of Berlin, for €390 mln in July.

Now, further consolidation is looking like a given, said Kortmann. ‘Companies such as Gagfah have reduced their inherited debt piles since their IPOs in 2005-2007, refinanced their debt at much better conditions, so they can now pay higher prices. Subsequently, we’re likely to see further consolidation in the sector going forward.’

Analysts are having a field day trying to predict the next merger. One possibility is that Berlin-based Deutsche Wohnen will merge with Hamburg-based real estate investor and manager TAG Immobilien. ‘TAG has been perceived to be dressing itself up as a bride – or potential takeover partner - but there haven’t been any takers yet,’ said one analyst who asked not to be identified. Westgrund and Adler Real Estate could also merge, either with each other or other parties.

The rationale for economies of scale and cost savings in the residential sector is the comparatively high leakage of roughly a third between the net income and the net operating income, according to Kortmann. ‘This is a higher share than in the commercial real estate sector, where it is 15% to 20%. Cost benefits are the main drivers behind these mergers, as are economies of scale. There’s a multiple game at play – real estate returns and stock dividends, too.’