German real estate market: Recovery of work, stagnation in financing and ‘households’ outside Germany

More and more companies are reporting a rise in new jobs. Many market experts consider that the conditions for financing the real estate market in Germany, however, are at least static and not even more restrictive. At the same time, for the first time in January, one of Germany’s largest real estate companies, the DaX Group issued a bond to British pounds. “In total, we see a slight improvement in the climate in the financial real estate market, though from a bad level,” says Fabio Carrozza, CEO of the BF Real Estate Finance, assessing the situation. This week, investors are watching with great interest the future statements of large companies. The focus is everywhere the same questions: Has the business model proved durable in times of crisis and the restructuring measures introduced come into force? LEG Immobilien, with more than 166. 000 apartments in its portfolio, recorded a high net loss of around EUR 1.5 billion in 2023. The main reason for this was the high depreciation and depreciation of the real estate portfolio. Operationally, however, operations went according to the plan. The Adjusted Funds from Operations, which represents free cash flow, increased by more than 66% to EUR 181,2 million. A dividend of EUR 2,45 per share must therefore be paid to shareholders, since no dividend was paid last year. LEG focuses on housing for small and medium-sized incomes LEG CEO, Lars von Lackum, is optimistic about the future and states that “for the new financial year 2024, we expect a further increase in profits and an increase in trading activity in real estate markets”. Unlike some of its competitors, LEG Immobilien benefits from the fact that its business model focuses mainly on affordable housing for low and medium-income people. In this section, price pressure was significantly lower than in so-called developing markets in demographic and economically strong locations. On average, LEG charged an average basic rent of 6,58 euros last year, which corresponds to 420 euros for an average LEG apartment of 63 square meters. Rents increased on an average of 4%, while the Group expected a range of 3.8 to 4%. CEO von Lackum had already announced last year that he would increase rents “as much as possible from a regulatory point of view”. He has justified this with strong inflation and a significant increase in material costs over the last three years. For this year, von Lackum expects rent increases by 3.2% to 3.4% on average. Competent Vonovia, No1 on the German market with about 548,000 apartments in her portfolio, averaged 7.58 euros per square meter in her existing rentals last year and, according to analysts, is likely to largely confirm this number on Friday (08.03.2024). Then there will also be new data on the housing shortage. Experts expect that Vonovia’s vacancy rate will be as low as the LEG. There, it was 2.4% last year, 30 basis points under the already tense situation in 2022. TAG may pay a dividend again This trend is also likely to be confirmed by TAG Immobilien, which will present its data for last year (12.03.24). The MDAX company, which has over 85,000 apartments in Germany and a smaller portfolio in Poland, reported a decrease in the vacancy rate in Germany to 4.6% in the third quarter, since the previous two quarters were slightly higher. Pending better operation of the work this year and the restart of dividend payments, Warburg Research analysts had recently set their target price for TAG shares at EUR 15.10, almost 30% above the current price. New leases are much more profitable than revenue from existing leases. Here, the average level has now reached the two-digit range of the euro in many places. Therefore, Leg von Lackum’s boss had already warned of freezing the housing market, because many people who want to move prefer to stay in their current apartment due to the price difference between existing and new rents. LEG has sold apartments Apart from rent income, housing companies, which are often over-indebted, have reduced the risks of financing in recent years of the crisis. To this end, LEG changed its strategy in November 2022. The Group sold about 2,000 real estate units last year. To this end, around EUR 155 million entered the funds. The LTV index, which shows net debt relative to real estate, increased to 48.4% last year – compared to 43.9% last year. The main reason for this was the increase in interest rates. Thus, the goal of a maximum leverage ratio of 45% was not achieved. Therefore, further sales of real estate are possible this year. But even without it, LEG aims to achieve EUR 180 to 200 million in the principal AFFO profit index. With regard to refinancing, the challenges remain great. The significant rise in interest rates significantly affects real estate groups, which depend on high debt financing indicators. In LEG, the average funding cost at the end of the year was 1,58%, compared to just 1.26% a year earlier. However, the LEG no longer has related loan maturity until mid-2025. A 500m-euro bond ending in January of this year was also refined. New funding channels: Vonovia launches pound bond for the first time Competitive Vonovia had already sold EUR 3.7 billion worth of property by autumn, thus reducing its debt ratio within the desired range of up to 45%. This strategy is to continue this year, according to Handelsblatt. Regarding the type of funding, the company based in the city of Bochum (Bochum) recently opened new roads. In order to gain access to further groups of investors, the Dax group issued a bond to British pounds for the first time in January. The bond with a volume of over £400 million and a coupon of 4.5% after currency compensation was exceeded 8.3 times, according to the company. Fabio Carrozza, CEO of BF Real Estate Finance, is therefore convinced: “Although the crisis is far from over, financiers and borrowers adapt to persistently difficult market conditions and now face them better”.