Built on hope
Several fundamental economic factors underline the attractions of German residential property. First, values and rents in key cities are rising. Second, more than half of all Germans choose to rent domestic accommodation. Third, their real incomes are increasing.
If investors look no further, shares in Germany’s largest residential landlord, currently lining up a float that will give it a total equity value north of 4 billion euros, might be snapped up quicker than one of its most desirable pied-a-terres. But there are drawbacks. Deutsche Annington Immobilien operates in one of the least attractive segments of the housing market. Its lowish-income tenants are among the most sensitive to economic strains. Its exposure to better markets such as Berlin and Munich is limited. Almost 40 percent of its 180,000 flats are located in the Ruhr region, the former industrial powerhouse that has been in economic decline for decades.
If Annington shares are priced in a manner matching its thrift-seeking clientele, investors might be able to look past the flaws. In fact, the pre-float range puts the stock at 86 to 101 percent of its net asset value. Many listed peers trade at 70 to 90 percent of NAV. Residential landlords with a clear focus on attractive markets like Berlin achieve more, but Annington is not one of those.
The shares may fare better if CEO Rolf Buch – a former Bertelsmann manager hired only three months ago – meets some pretty high-flying expectations. The hope is that operating profit excluding property disposals will rise by 100 million euros to about 260 million euros between 2012 and 2014. A refinancing of 3.8 billion euros of debt, lowering annual interest payments by 80 to 90 million euros, will help. Meanwhile, if profit targets are met, and shares are sold at the midpoint of the 18 to 21 euros per share range, the stock will give a decent yield of 4 percent in 2014.
Yet the IPO pricing leaves precious little room for disappointment. In February, LEG Immobilien, a comparable peer, floated at about its net asset value. It barely traded above its offer price and is now consistently down 10 percent. The risk, in the medium if not the short term, is that Deutsche Annington is another German property IPO that falls flat.