Current Assessment of the Main Opportunities
Economic Environment and Market-related Opportunities
The demand for accommodation is 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 several decades now, and their combined 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 one- to two-person households, while the number of households in Germany with three or more members will drop on the whole between 2015 and 2035. Given recent trends towards more marriages and births, the sharp decline witnessed to date in the number of households with three or more members is likely to slow in the future. This development will 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%. In view of these trends, demand and market opportunities are likely to increase for existing small- and medium-sized apartments, which represent Vonovia’s core product.
The German population has been growing for several years now, albeit with different growth rates from region to region. At local level, population growth fueled by migration from abroad is being supplemented by internal migration within Germany. Major cities and large metropolitan areas, as well as the areas surrounding them, are the winners of this trend. According to information supplied by the German Association of German Housing and Real Estate Companies (GdW), Germany’s 66 large independent cities grew by a total of 1.35 million inhabitants between 2010 and 2016. Despite a recent drop in internal migration, population levels in Germany’s major cities are still increasing considerably, bolstered by migration from abroad. The trend towards the reurbanization of the country’s major cities continues unabated, but as the capacities available to absorb the increasing influx of people are becoming increasingly scarce, individuals looking for a home are turning to areas on the outskirts. As a result, migration to areas located just outside of major cities has increased considerably in recent years.
As large parts of Vonovia’s residential real estate portfolio are located in major cities and metropolitan areas, Vonovia could also benefit from these trends.
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
With the acquisition of BUWOG and Victoria Park in 2018, Vonovia started to expand its business activities to include attractive markets in other European countries. The continuation of this corporate strategy could open up further growth opportunities in these and other European countries. Our acquisition strategy is aimed at observing the markets, evaluating specific acquisition opportunities and tapping into new markets. We pursue our acquisitions as and when opportunities present themselves. Acquisitions have to be expected to increase value before they are conducted. Such increases in value are generally assessed in terms of strategic suitability, increases in FFO per share and a neutral impact on the NAV per share. Furthermore, an acquisition must not pose any risk to the stable BBB+ long-term corporate credit rating.
Our new Development segment creates further expansion opportunities for the company. With the long-standing project development experience of the BUWOG team, we will be developing more contemporary apartments with a promising future in high-growth locations, further expanding our development business. As part of these efforts, we will be forging ahead with both project developments for sale to third parties and construction for our own portfolio. We also believe that new construction on our own properties using modular construction or conventional construction methods, as well as measures to add extra stories, offer additional opportunities for further expanding our portfolio.
We provide a significant proportion of the repair and maintenance 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 craftsmen’s 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 upkeep and the modernization of a building’s surroundings. We plan to continually increase the proportion of work we carry out ourselves in this area, too.
By offering our tenants the option of targeted modernization measures 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 2018 we had supplied around 297,000 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 submetering, the radio-based recording of heating costs, is progressing as planned. By the end of 2018, the retrofitting of more than 130,000 apartments had been commissioned. We plan to further expand these business activities in our portfolio over the next few years.
Our initial experience in the field of energy supplies, i.e. the distribution of electricity and gas to our customers, was positive in the 2018 fiscal year. The market response to our offering has been positive. We expect further opportunities to arise in this area as we expand the business volume.
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. 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/increase the value of its properties in these neighborhoods.
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 rating 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.