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. Single-and two-person households have made up the largest group for more than three decades now, and their share has increased almost continuously. According to the 2017 household forecast performed by the Federal Statistical Office (Destatis), the number of private households will continue to increase between 2015 and 2035. In the future, this development will also be driven by an increase in single-and two-person households, while the number of households in Germany with three or more members will drop on the whole between 2015 and 2035. This development will, however, vary considerably from region to region: while the number of households in the western German federal states is likely to increase by 7%, and by as much as 13% in the city states, between 2015 and 2035, the number of households in the eastern German federal states is set to drop by around 3%.

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 housing market. Although not all asylum seekers will remain in Germany in the long term, we have already identified a rise in demand as a result of these developments in the 2017 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 may increase for existing small- and medium-sized apartments, which represent Vonovia’s core product.

Vonovia could also benefit from the current migration flows within the German population. According to a study conducted by the German Association of German Housing and Real Estate Companies (GdW) in 2015 on migration patterns within Germany (high-influx cities in Germany), 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. Significant portions of Vonovia’s portfolio of residential properties are located in these high-influx 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

Targeted monitoring, the early involvement of tenants and cooperation projects with social, cultural and city institutions allow Vonovia to make ideal use of the economies of scale available to it in order to achieve sustainable neighborhood development and maintain and increase the value of its properties in these neighborhoods.

We provide a significant proportion of the repair and services for our residential properties with our own craftsmen’s organization. We are also continually increasing the proportion of building and apartment upgrading services we provide ourselves via our 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 craftsmenʼs organization and working on new construction concepts such as modular construction solutions.

In addition, we have expanded the range of services provided by our own employees to cover maintanance and modernization of a building’s surroundings.

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.

At the end of 2017 we had supplied around 290,000 households with a direct cable TV signal. We expect to further extend this business in the coming years and also provide broadband data access.

The expansion of smart metering, the radio-based recording of heating costs, is progressing as planned. By the end of 2017, the retrofitting of more than 80,000 apartments had been commissioned. We plan to expand these business activities to cover all apartments with central heating in our portfolio 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 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.