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 sustainability 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.
Vonovia’s new sustainability strategy could create further opportunities extending beyond the corporate targets already defined in the 2021 budget. Vonovia’s long-term climate journey requires it to come up with new concepts for measures and financing to underpin its ecological, technological and economic objectives. In addition, the strategy, which is based on our newly defined neighborhoods, offers a whole variety of opportunities with regard to those modernization measures that relate directly to the existing portfolio and measures relating to new construction, but also measures relating to the residential environment. The creation of a new “Sustainability” division reporting directly to the CEO and the establishment of a new sustainability committee that will meet three to four times a year to discuss the latest sustainability issues enabled us to firmly anchor the new sustainability strategy within our organization, which allows us to identify new opportunities that arise in this area.
Our decision to focus our business activities on sustainable and ecological action could well create further opportunities for Vonovia and society. The aim is to improve quality of life and significantly reduce the CO2 emissions originating from our residential properties. Vonovia is using sustainable, ecological building materials and sustainable energy concepts to help conserve scarce resources and make targeted use of renewable energy. Within this context, we see our residential neighborhoods as a strong link for sector coupling. We expect opportunities to arise from potential efficiencies in the neighborhood due to the targeted digital networking of electricity, heat and mobility. We are currently working on corresponding neighborhood-specific concepts. As far as electricity is concerned, we are looking at approaches involving, for example, green electricity generated on a decentralized level (solar electricity or electricity from decentralized cogeneration units). The distribution of tenant electricity within the neighborhood will also become increasingly important in this regard. Possible approaches related to heating include, for example, hybrid heating systems and neighborhood heat storage facilities. Mobility concepts include charging stations and wallboxes installed in response to tenant requests as well as solar electricity generated within the neighborhood. Further opportunities are also arising from the ecological transformation of the residential environment, such as the creation of tenant gardens and flower meadows and the installation of insect hotels. By focusing our new construction activities on the latest ecological standards in a targeted manner, we can make a further contribution to alleviating the shortage of housing and improving our ecological footprint. This will allow us to make our neighborhoods more attractive places overall.
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 also 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.
Creating a positive investment climate also means making the required ecological construction and modernization measures cost-effective, 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, Austria and the Netherlands could also have a positive impact on business development.
Making acquisitions within the value chain as and when opportunities present themselves, also with regard to the Value-add Business, could open up additional earnings potential. The Value-add Business offers considerable scope for extending the range of housing-related services on offer. By way of example, the expansion of our business activities relating to tenant modernization and apartment design request packages and the expansion of “fiber to the home” (FTTH) services, metering services and measures to develop residential surroundings could create further earnings potential. Additional care or support services for our older tenants also offer potential when it comes to expanding the range of services we offer.
Our updated corporate strategy also focuses on our employees’ further development and on employee satisfaction. We aim to make use of new HR development concepts and actively shape the recruitment of new staff to fill vacant positions. We are also aiming to increase the proportion of women at the first and second levels of management. All in all, further opportunities could arise for Vonovia due to the advantages associated with diversity and as a result of our increased appeal as an employer.
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. Climate protection can still be seen as 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 launched 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, which was launched in the 2019 fiscal year, was continued in 2020. Vonovia had around 400 photovoltaic plants in Germany by the end of 2020.
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.
Opportunities Arising from the Operating Business
The megatrend of digitalization is also having an impact on the real estate sector. This is why Vonovia is making systematic investments in testing and expanding new technologies, e.g., in the “customer app”, “artificial intelligence” or “robotics”. The first few projects were implemented successfully in 2020. We expect the systematic rollout of these technologies in several areas of the company to create additional opportunities.
“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 can help to improve dialogue with tenants. The tenant app that was introduced in 2019 is a good example. The response to the app has been very positive and it was used extensively in 2020. 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 approval processes in particular, with a positive impact, for example, on Vonovia’s development/new construction business thanks to the quicker approval of building applications. With the acquisition of BUWOG and Victoria Park back 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 Akelius portfolios and of Hembla. In 2020, we acquired a minority stake in the Dutch company Vesteda Residential. The continuation of this strategy could give rise to further growth opportunities in Sweden, Austria, France and the Netherlands 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 new construction and 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.
Our own craftsmen’s organization is responsible for repair and maintenance services for our residential properties. We are aiming to continually increase the proportion of building and apartment optimizing services we provide ourselves via our craftsmen’s organization as well as new building construction and reduce the proportion of third-party services that we need to purchase. 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 2020 we had supplied around 300,000 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 2020, the retrofitting of more than 195,000 apartments had been commissioned. We plan to further expand these business activities in our portfolio over the next few years.
In the 2020 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 2020 fiscal year, 20,400 private electricity customers were supplied with 27 GWh of electricity, with 2,700 private gas customers receiving 13.6 GWh of gas. We expect further opportunities to arise in this area as we expand the business volume.
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.