Current Assessment of the Main Opportunities

Economic Environment and Market-Related Opportunities

The demand for affordable accommodation remains largely determined by demographic factors and the economic climate. In general, households in Germany are becoming increasingly smaller. One- to two-person households have made up the largest group for more than three decades now, and their share is increasing almost continuously. While the number of one- and two-person households is growing virtually constantly, the number of households with more than two people is declining. According to the 2035 Regional Planning Forecast of the German Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), the population will have decreased slightly by 2030 compared to 2012 but the number of private households will have risen. Developments are also expected to vary considerably from region to region. While the number of households in the old German federal states (former West Germany) and Berlin will increase by 2030 compared to 2012, a decrease is to be expected in the new German states (former East Germany).

With the high influx of refugees from the crisis-ridden areas of the Middle East, immigration to Germany has further exacerbated the situation on the residential real estate market. Although not all asylum seekers will remain in Germany in the long run, we have already identified a rise in demand as a result of these developments in the 2016 fiscal year. If we also consider that many families are likely to move to join their relatives in Germany at a later date, the country could benefit increasingly from higher immigration in the years to come.

In view of these trends, demand and market opportunities for existing small- and medium-sized apartments may increase. Vonovia could benefit from this trend in the future.

Vonovia could also benefit from migration flows within the German population. According to a study conducted by the German Association of German Housing and Real Estate Companies (GdW) in 2016 on migration patterns within Germany (High Influx Cities, so-called “Schwarmstädte”), migration movements within the population are resulting in above-average population growth in various large and medium-sized cities in western Germany, and in selected cities in eastern Germany. 68 % of Vonovia’s portfolio of residential properties is located in these magnet cities, meaning that Vonovia could also benefit from this trend.

In addition, the continued strained situation on the housing market in certain conurbations may lead to government decisions to extend housing or rent subsidies. This may have positive effects on Vonovia’s business activities in some regions.

Opportunities Arising from the Business

Today, we already provide a significant proportion of the repair and services for our residential properties with our own craftsmen’s organization. We intend to extend the scope of these services to all kinds of technical work and to our entire residential portfolio and thus bring added value from these services to Vonovia. We are also coordinating our new construction activities via our craftsmen’s organization and working on new construction concepts such as modular construction solutions.

We have also extended the range of services provided by our own employees in the Berlin, Dresden and North Rhine-Westphalia regions to cover the maintenance of a building’s surroundings, and will be expanding this service to cover further regions in 2017.

By offering our tenants the option of targeted in their own homes, we can boost customer satisfaction and help promote longer-term loyalty to the company. This also allows us to further improve the quality of the homes we offer.

We already supply around 270,000 households with a direct cable TV signal. We expect to further extend this business in the coming years and also provide broadband data access.

Moreover, there might be potential for additional added value resulting from other housing-related services that provide benefit for our customers such as heat and power generation and metering directly on-site. In 2016, we started reading our customers’ heating and energy meters ourselves and preparing the data required to bill this consumption. At the end of 2016, we ensured that the costs for 30,000 of our apartments were billed, and we plan to expand this business activity to include all apartments in our portfolio with central heating over the next few years.

Vonovia manages its housing stocks throughout Germany using standardized systems and processes. The acquisition of further residential real estate portfolios offers the opportunity to generate additional value through economies of scale on the property management side by reducing the costs per residential unit. Therefore, we watch the market very closely for acquisition portfolios and assess them on the basis of our strict success criteria.

We also see targeted small-scale “tactical” acquisitions of single or multiple buildings in specific locations as well as targeted measures in the residential environment as an opportunity to improve the nature and quality of whole residential districts and thus increase the appeal of our apartments for our customers and the value of our residential properties. There is also the option of constructing new buildings on land that we own and adding additional floors to existing buildings in order to expand Vonovia’s housing supply in metropolitan areas, which also allows us to help reduce the short supply of housing in urban locations.

Financial Opportunities

Vonovia’s financing depends on the conditions on the capital market, which are very favorable at the moment due to the low interest rates. Furthermore, we strive to improve the financing costs while maintaining our credit performance indicators and the desired financing structure. The internal determination of the fair values of our residential properties not only takes account of building-specific parameters but also location features in the valuation. Given the possibility, described above, of a further increase in demand with the supply of affordable accommodation remaining virtually the same, our fair values could increase further beyond the increase in the value of our properties seen in this fiscal year. This would have a direct positive impact on the results of operations and our company’s stated level of debt.

Maintenance
Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.
Modernization Measures
Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or handicapped-accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.
Rating
Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.