Vonovia/German property: stately pile of debt needs underpinning

Financial instability means rate rises may now be slower and gentler than expected. Indebted businesses are feeling the strain, nevertheless. Consider Germany’s Vonovia. The residential landlord loaded up on debt to buy rival Deutsche Wohnen in 2021. Recent full-year results reflect a hangover from that house party.

The deal created Europe’s largest-listed landlord with more than €90bn of residential assets. It also left Vonovia with an additional €20bn of net debt.

The cash cost of servicing the €43bn debt pile rose by more than €100mn last year. Falling property prices are an added woe. Shares have fallen more than 60 per cent in the past year. They are worth just 30 per cent of the published net asset value.

Boss Rolf Buch has halved the dividend payment for 2022. He has put expansion plans on hold and sold a stake in French property group Vesta. Vonovia plans further disposals of non-core assets valued at €2bn during 2023.

Andres Toome at Green Street thinks that will be harder than it sounds: “Transactions are sparse but even the highest bids indicate steep discounts,” he says.

A company stress test specifies a “bearish” 10 per cent decline in property prices and no further disposals. Loan to value would then rise by just a few percentage points above last year’s 44 per cent.

That represents a reduction in values that may already be out of date. Spot valuation estimates point to an LTV of 54 per cent, according to Green Street. The covenant limit is 60 per cent. 

But although German rents are heavily regulated, they have been growing at almost 10 per cent a year. Buch should have little trouble attaining consensus free cash flow of €1.3bn this year.

This would not be enough to pay down €2.2bn of unsecured bonds that mature in 2023 without some proceeds from asset sales. But Vonovia also has cash on the balance sheet — some €1.3bn at the end of 2022. That suggests the company has just enough wriggle room to avoid an equity fundraising for the moment.