Annual Report 2019

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Current Assessment of the Main Opportunities

Assessment of Opportunities Inherent in the Business Model

In the process of defining its strategy and preparing its short and medium-term plans, Vonovia identified earnings potential that has been reflected appropriately in these plans, taking the corresponding assumptions and scenarios into account. The assumptions regarding the company’s strategy, sociological and political megatrends, the regulatory environment, the financing environment and the company’s operating business are not only associated with the risks described above. Vonovia’s business development can also end up being more favorable than in the assumptions included in the company’s plans. These opportunities can arise from a scenario in which strategy-related opportunities, economic environment and market-related factors, and the company’s operating business show more positive development than that underlying the corporate plans.

Strategy-related Opportunities

Based on the sociological and economic research data published by various institutes, the population in Germany and parts of Europe is still expected to grow as a result of migration, fueling sustained demand for affordable homes, whereby even new construction activity will fail to meet the demand for housing. The main reasons driving migration, namely political and social crises, a lack of prospects and hostilities, and factors triggered by climate change in migrants’ countries of origin will remain unchanged for the foreseeable future. As a major provider of housing, Vonovia has a key role to play here with regard to integration, also by supporting neighborhood development projects.

The demand for housing must be met by measures to systematically increase the supply by building new properties. It is first and foremost our policymakers who are called upon to create the right environment to foster investment. Additional opportunities in this context arise in connection with development, new construction and vertical expansion projects that allow Vonovia to help ease the shortage of housing.

Creating a positive investment climate also means making additional land available for construction and promoting the acceptance of private-sector real estate investors. There is also a general consensus that bureaucracy has to be reduced as a supporting measure, in particular by streamlining the provisions governing construction and planning permission. The investment climate could also receive a boost from the growing acceptance of the need for modernization work due to climate change.

Looking at the internationalization strategy, the further deregulation of the residential property markets in other European countries, such as France, could give rise to further opportunities to tap into these markets, provided that the overall conditions are similar and consistent with our acquisition criteria. Other acquisition opportunities in Sweden and Austria could also have a positive impact on business development. Making acquisitions within the value chain as and when opportunities present themselves, particularly with regard to the Value-add Business, could open up additional earnings potential.

Economic Environment and Market-related Opportunities

The housing industry is currently being influenced to a considerable degree by a range of social and technological megatrends. According to analyses released by the German Federal Statistical Office, domestic migration from rural areas to the country’s large metropolitan areas will continue unchanged into the 2020s. The resulting shortage of housing in urban areas could be exacerbated even further by the effects of migration from global crisis hotspots and the trend toward smaller households. As a result, the Cologne Institute for Economic Research expects to see a shortfall of as much as 283,000 apartments a year in the first half of the decade. This development trend could benefit Vonovia’s real estate portfolio, which focuses primarily on small and medium-sized apartments in urban areas. Vonovia is in a position to actively counter the increasing shortage of affordable housing through its development and new construction business. Additional opportunities for the development and new construction business lie in the streamlining of the overall conditions imposed by the authorities and the provision of more land for construction.

However, the trend toward urbanization will not only create quantitative challenges for the residential property market. Rather, it will also be faced with challenges relating to integration that Vonovia can, and indeed must, counter using an appropriate number of additional neighborhood development projects. One key factor in this regard is the demographic change toward an aging society, resulting in what is likely to be a steady increase in the demand for senior-friendly and affordable homes over the coming years. As a result, opportunities could arise from senior-friendly modernization and investment in new and innovative housing concepts.

The megatrend attracting the most attention in the media in this fiscal year was, without a doubt, climate protection. But the Fridays for Future movement merely reflects a process of far-reaching social change that has been ongoing for years now. According to a survey conducted by the forsa Institute for Social Research and Statistical Analysis, 36% of Germans currently consider climate protection to be the most pressing and important problem in Germany. In this market environment, the decision taken very early on to focus on energy-efficiency refurbishments could prove to be advantageous. After all, almost one-third of CO2 emissions in Germany can currently be attributed to residential property. Aside from this, however, Vonovia also sees itself as a driver of innovation. In the 2020 fiscal year, for example, the Fraunhofer Society will launch a center dedicated to research into the decentralized use of energy in collaboration with Open District Hub e. V., which Vonovia hopes will yield information on how to make supplying energy to its real estate portfolio as close to climate-neutral as possible in the medium term. In order to support this process, the “1,000 roofs” program for decentralized energy generation was also launched in the 2019 fiscal year, with well over 200 photovoltaic plants already being operated as part of this program.

Increased environmental awareness could result in the Vonovia brand taking on increasingly positive connotations in the future thanks to the company’s energy-efficiency modernizations and in greater demand for Vonovia’s energy-efficient apartments. This sort of acceptance of modernization will help Vonovia in its endeavors to continue to modernize its portfolio in a sustainable manner so that it meets state-of-the-art standards, while at the same time always adhering to the voluntary social commitments that form part of Vonovia’s business philosophy. Finally, the megatrend of digitalization is also having an impact on the real estate sector (among others). Virtually every study emphasizes the considerable potential associated with this trend. At the same time, the German Property Federation (Zentraler Immobilien Ausschuss e. V.) points out that, despite what is already a marked focus on this issue in the real estate sector, significant efficiency gains can still be achieved by investing in digital business models. This is why Vonovia is making systematic investments in testing and expanding new technologies.

Predictive maintenance, for example, could allow damage to elevators or heating units to be prevented before it arises. Smart home systems could allow tenants to consciously manage their energy costs. What is more, digital communication platforms could help to improve dialogue with tenants. In light of the above, the launch of the tenant app in the 2019 fiscal year should only be viewed as the first of many initiatives in Vonovia’s digitalization campaign. Acquisition opportunities at all stages in the value chain to enable the further implementation of digital solutions within Vonovia’s processes, but also at the various interfaces, could open up further earnings potential in this area.

Digitalization could also open up further opportunities outside of Vonovia. The digitalization of public administration could promote the much-called-for streamlining of administrative and, in particular, approval processes, with a positive impact, for example, on Vonovia’s development/new construction business thanks to the quicker approval of building applications.

Opportunities Arising From the Operating 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. We also acquired our very first stake in France in 2018. The company’s expansion in Sweden continued in 2019 with the acquisitions of the Akelius portfolio and of Hembla. The continuation of this strategy could give rise to further growth opportunities in Sweden and Austria as well as in other European countries.

We also see the potential acquisition of larger portfolios in Germany, but also the 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.

Vonovia manages its housing portfolios throughout Germany using standardized systems and processes. As a result, 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. The same applies to the corresponding transfer of expertise from the property management segment, the Value-add segment and also from the development segment to other European target markets. The development segment is Vonovia’s answer to the pressing challenge associated with affordable housing in central locations. Based on the long-standing project development experience of the BUWOG team, we will be developing modern, sustainable residential properties in fast-growing locations such as Berlin, Vienna and Hamburg, allowing us to expand our development business. By expanding the development business to cover other urban areas, also supported by takeovers as and when the right opportunities present themselves, we can also tap into additional earnings potential. The provision of additional land for construction and the acquisition of additional areas for construction as a result could have a positive impact on the development business overall. The streamlining and deregulation of official processes could provide additional support to the development business. Vonovia believes that new construction and the development business can still be made more efficient and more cost-effective by using modular construction, series construction or other innovative construction methods.

Today, our own craftsmen’s organization already provides the lion’s share of the repair and maintenance services for our residential properties. We are also continually increasing the proportion of building and apartment optimizing services we provide ourselves via our craftsmen’s organization as well as new building construction. In particular due to the shortage of workers with the desired skills and the availability of corresponding capacities, we intend to extend the scope of these services to cover all kinds of technical work and thus bring added value from these services to Vonovia. We are also working on new construction concepts to facilitate both the highly standardized series construction of new properties using a modular system and flexible, individually scalable new construction that can be varied to suit the local conditions. This is being supported by corresponding HR management concepts.

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 2019 we had supplied around 298,000 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 2019, the retrofitting of more than 190,000 apartments had been commissioned. We plan to further expand these business activities in our portfolio over the next few years.

In the 2019 fiscal year, we further expanded our offering in the field of energy supplies, i. e. the distribution of electricity and gas. The market response to this has been positive. In the 2019 fiscal year, 15,930 private electricity customers were supplied with 24 GWh of electricity, with 2,220 private gas customers receiving 13 GWh of gas. We expect further opportunities to arise in this area as we expand the business volume.

Financial Opportunities

Vonovia has benefited from favorable conditions on the capital and banking market in recent years. Given the sustained low inflation rates and the recent slowdown in economic development, it is looking increasingly likely that the attractive interest rate environment in Europe will continue in the medium term. Together with the diversification strategy for liquidity procurement that we have been pursuing for many years now, we have the opportunity to optimize the structure and conditions of our financial liabilities on an ongoing basis.

The strengthening of our market share in urban areas within our target markets could have a positive impact on how our investors and ratings agencies assess our risks, resulting in a further improvement in our attractive financing conditions.

Our investments in affordable homes are associated with a cash flow that is largely independent of economic factors. The resulting stability allows us to service our financial liabilities with a relative degree of certainty, even in times of economic or political crisis.

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.
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.
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.