A $23 Billion Bet on Berlin's Rent Fights

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The union of two German real-estate giants worth nearly $60 billion combined is about to happen finally, after being talked about for a long time.

Abandoning its previous intense resistance, Deutsche Wohnen SE has agreed to an all-cash takeover by peer Vonovia SE. Selling up affords the residential and commercial landlord a rapid escape from a political storm over Berlin’s lack of affordable accommodation. For the buyer, the deal’s success will rest on its ability to deescalate that tension.

Deutsche Wohnen has struggled to shake off its image as the prime villain of Berlin residential property. A housing shortage forced up rents in the city. That prompted the imposition of rent caps, which were challenged successfully in court. Victory hasn’t impressed the market much, and little wonder. Berlin landlords remain the target of a campaign to have their assets expropriated. Deutsche Wohnen’s acceptance of a 19 billion-euro ($23 billion) bid at a 25% premium to its three-month average share price must have been relatively straightforward.

For Vonovia, the deal is less expensive than it first appears. The premium over Deutsche Wohnen’s recent market value is nearly 4 billion euros — excessive-looking for a deal that will generate only 105 million euros of yearly financial benefits for shareholders. But Deutsche Wohnen’s political woes have left it trading at a marked discount to net asset value since 2019. Relative to its last reported NAV, the deal premium is just 1%. Vonovia gets a huge portfolio of prime real estate in a market that’s likely to stay hot for some time and which would probably fetch higher prices if sold off piecemeal.

It’s still a financial stretch. An all-share deal would be slower to execute and leave Vonovia’s stock price vulnerable to political winds in an election year. The offer of cash fixes the price here and now. But Vonovia needs to do a potential 8 billion-euro share sale. While disposals may lower that figure, there will be some short-term pressure on its leverage. Given that the two companies have overlapping ownership, shareholders may end up injecting cash into Vonovia only to receive cash for their Deutsche Wohnen shares.

The politics also point to the bigger strategic challenge of the tie-up. Vonovia is hugely increasing its exposure to the Berlin market. The bidder may not carry quite the same public-relations baggage as its target — and Berlin’s mayor has touted the benefits of the deal — yet it would be naive to think that new ownership will end the clamor for intervention to alleviate housing costs. Moreover, while there are clear scale economies in property management, much of the value creation here should go — rightly — to tenants. Vonovia inherits the need to make properties more energy efficient, and is pledging to limit rent increases until 2026.

Vonovia has a diversified portfolio so it won’t be as concentrated in Berlin as its target is now. Nonetheless there’s a risk that Deutsche Wohnen’s discount valuation may not have been an aberration, but more a reflection of political reality.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2021 Bloomberg L.P.

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