Bloomberg News

German Landlords Rally Seen Cooling On Fewer Deals

December 18, 2012

German residential landlords, the best-performing stocks on the country’s mid-cap index this year, will cool off in 2013 as acquisitions become more expensive and rent increases are curbed.

The biggest apartment owners, Deutsche Wohnen AG (DWNI), GSW Immobilien AG (GIB), Gagfah SA (GFJ) and TAG Immobilien AG (TEG), bought more than 74,000 properties this year. The stocks will become less attractive as acquisitions drop, the government caps rent growth and initial public offerings by competitors put more shares on the market, said Peter Papadakos, an analyst at Green Street Advisors.

“Share prices already reflect the look-forward growth,” said Papadakos, who’s based in London. “The peak is probably going to be next year.”

Soaring home prices in cities including Berlin and Munich, combined with rising rents, fueled the biggest stock gains by German property owners since 2006, according to data compiled by European Public Real Estate Association. Investment funds are buying groups of German homes seeking a safe investment as interest rates hover near record lows amid Europe’s sovereign- debt crisis.

The four publicly traded residential landlords climbed 51 percent in Frankfurt trading this year, as measured by Brussels- based EPRA’s weighted-average index. The stocks are among the 15 best performers in the MDAX, which has added 34 percent.

Deutsche Wohnen and GSW shares are now priced at more than the underlying value of their real estate, which may prompt investors to look elsewhere for better returns.

Biggest Gain

The year’s biggest gainer has been Gagfah with an increase of about 127 percent. GSW, a Berlin-based company that first sold shares to the public in April 2011, advanced 50 percent.

GSW has the highest consensus analyst rating of the four firms, with eight ranking the shares buy, nine recommending hold and two advising sell, according to data compiled by Bloomberg. The stock’s 12-month consensus target price was 32.57 euros.

Gagfah, based in Luxembourg, had the lowest consensus rating with five buys, six holds and four sells. The 12-month consensus target price was 9.02 euros, compared with a closing price of 8.90 euros on Dec. 17.

“We can’t keep growing at 50 percent a year,” GSW Chief Executive Officer Thomas Zinnoecker said in a Dec. 4 interview. “For real estate shares, the growth isn’t limitless when they start trading at a premium to net asset value.”

Asset Values

Residential stocks rose partly because they were undervalued compared with their net asset value, or NAV, Zinnoecker said. GSW’s share-price gains will probably be weaker in 2013, he said.

GSW’s NAV, a measure of the value of a property company’s buildings, is 27.95 euros a share, compared with yesterday’s closing share price of 32.65 euros a share. Deutsche Wohnen’s NAV is 11.59 euros a share, according to the company’s third quarter earnings report. Its shares closed at 14.36 euros yesterday.

Papadakos said he expects share prices in the industry to gain 10 percent to 15 percent next year.

“The momentum will continue for a while, but then there’ll be a shift,” said Thomas Martin, an analyst at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf. He expects the shares to be little changed in 2013.

Acquisitions helped lift rental income and share prices this year, Martin said. TAG grew its number of apartments by 83 percent through purchases and Deutsche Wohnen expanded its holdings by almost 50 percent. Deal activity was fueled by sales of apartments by private-equity firms and other investors that had to pay debts racked up before the credit crisis.

Overpayment Risk

Fewer housing assets will be for sale next year, Jones Lang LaSalle Inc. (JLL:US) said yesterday. That’s going to make expansion more difficult for companies in the industry. As supply shrinks, there’s a risk that companies will overpay, said Papadakos.

“There is some optimism that as you grow the portfolio, you capture a lot of cost savings,” said Papadakos. “We fundamentally disagree with that notion; they’ve reached a critical size where further synergy savings are quite minimal.”

Improving operational profit is also becoming more complicated. Gains will be limited after the German parliament passed a law this month that allows state governments to cap rent increases in certain areas at 15 percent in three years, from the previous 20 percent. A growing number of politicians and advocacy groups are also proposing rent-stabilization measures.

“The rent topic is becoming increasingly politicized,” said Andre Adami, a residential analyst at BulwienGesa AG. Rents in Germany’s large cities are outpacing inflation for the first time in two decades, stoking concern among middle-class Germans that they won’t be able to afford their homes, he said.

Rent Index

Rents for existing leases can only be raised in line with an index compiled by a municipalities with help from local owner associations and tenant groups, said Commerzbank AG analyst Thomas Rothaeusler in Frankfurt.

Companies like Deutsche Wohnen, Gagfah and GSW must charge below-market rent in most of their apartments and on average can only raise rents by about 2.5 percent a year, said Papadakos.

The outlook for German residential stocks is still favorable, Commerzbank’s Rothaeusler said. Germany will be viewed as a haven as Europe’s sovereign-debt crisis continues and European interest rates, which are near record lows, will probably stay low enough to make it difficult for investors to earn attractive yields in other assets, he said.

‘Not Cheap’

“The stocks are not cheap, but the fundamentals are supportive,” said Vicky Watson, an investment director at Scottish Widows Plc, which started buying German residential stocks in 2010. “They may still do better than average, which is what we’re all looking for.”

Still, initial public offerings planned in 2013 from two of Germany’s largest residential landlords will weigh on stock prices across the industry, according to Martin.

Deutsche Annington Immobilien AG, Germany’s largest apartment owner, plans an IPO next year. Annington, owned by Guy Hands’ Terra Firma Capital Partners Ltd., has 186,000 homes valued at about 8.4 billion euros. LEG NRW GmbH, with 90,000 apartments valued at 4.7 billion euros, is also planning an IPO next year. LEG is held by Goldman Sachs Group Inc. (GS:US)’s Whitehall Street Real Estate Funds.

To contact the reporter on this story: Dalia Fahmy in Berlin at dfahmy1@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.


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