Vonovia's Propelling Profit Scheme Wallops on Hiking Construction Interest Rates Amidst Looming Federal Debt Package
Escalating construction efforts might impede Vonovia's aggressive strategic advancement
Instagram Snapchat LinkedIn Reddit Telegram Signal Email Copy Link Vonovia, the German real estate titan, aims to bounce back from 2024's losses by propelling its operating profit. However, the federal government's mammoth debt package might significantly jeopardize these aspirations.
Vonovia intends to leave the property quagmire behind and re-ignite its forward march after another loss in 2024. As asserted by CEO Rolf Buch, "We've flung that brake off and hit the gas once more." Vonovia is eyeing a 30% surge in operating profit (adjusted EBITDA) by 2028, reaching a range of €3.2 to €3.5 billion.
In 2022, this critical figure also eclipsed €2.6 billion due to escalating rental rates and low vacancy levels. Nevertheless, Vonovia shed €962 million in profits in 2022 due to a further 2.3% impairment of its property portfolio – following over €6 billion in 2021. CFO Philip Grosse acknowledged that the value development had substantially stabilized in the second half of the year.
However, storm clouds gather on the horizon – construction interest rates are edging upwards because of the federal government's veritable debt package. This might prompt Vonovia to procrastinate on certain projects. Upon the market's opening, Vonovia shares began to ascend but subsequently plummeted into the red.
Buch, however, continues to champion an offensive approach: "Now is our moment to vigorously tap into our potential and, as industry leaders, march ahead with fresh perspectives." Buch maintained his forecast: in 2025, operating income (adjusted EBITDA) is anticipated to peak at €2.7 to €2.8 billion, while adjusted pre-tax profit stands to hover between €1.75 to €1.85 billion. For 2024, shareholders are in line for a substantially enhanced dividend of €1.22 (compared to €0.90 from the prior year).
Double-digit spiraling interest rates and skyrocketing construction expenses have plagued the real estate sector in recent years. Real estate values have tumbled significantly, and firms have been compelled to downgrade their portfolios, leading to billions in losses. Central banks have ignited the interest rate pivot.
In order to reduce debt, Vonovia has offloaded multi-billion-dollar real estate portfolios amidst crisis years. Around €11 billion makes up the capital inflow as indicated by Buch. The debt-to-equity ratio (LTV) now stands at 45.8%, just barely within the target corridor of 40 to 45%. Buch is now betting on brighter days, with Vonovia recentling its grasp on subsidiary Deutsche Wohnen. At the end of January, Vonovia shareholders green-lit plans to acquire further shares in the Berlin-based competitor. Vonovia bagged a majority stake in the competitor in 2021.
Economic Impacts of Rising Interest Rates
The descent in real estate values appears to have halted. "The real estate value trend remains consistently positive," stated the Association of German Pfandbrief Banks (vdp) at the beginning of the year. Yet, a swift uptick isn't on the horizon. Vonovia rival LEG Immobilien expressed a more optimistic outlook: "We currently expect further stabilization of real estate values in 2025," said LEG CEO Lars von Lackum. Buch prefers to refrain from speculation about potential future developments.
Twitter LinkedIn Financial Times CNBC However, the ascent in interest rates in the bond market is causing a nosedive in real estate stocks. They depreciated due to the impending larger debt level in Germany resulting from the loosened debt brake and a special fund for infrastructure worth 500 billion euros, causing bond yields to surge. Elevated financing costs exert pressure on stocks stemming from interest-sensitive real estate sectors. Concurrently, mortgage rates hike. "The real estate market is currently experiencing a significant reaction to the announced investment plans of the federal government," said Buch: "The long-term consequences on real estate prices and financing costs remain unclear." The federal government's investment plans encapsulate both opportunity and peril, he stated. It might be possible that Vonovia would defer capital-intensive strategies such as construction projects.
[1] https://www.statista.com/statistics/1143285/germany-construction-costs/#:~:text=In%20September%202020%2C%20the%20average,a%20car%20parking%20space%20in%20Germany.[2] https://www.frankfurter-allgemeine-zeitung.de/immo/deutschland/hyt-kapital-fliegt-zurueck-zu-grundstueck-risiken-einem-investor-droht-nachlass-an-rendite-a-9518202.html.[3] https://www.bauen-investieren.de/berufliche-immobilien-bewertung-finanzierung-papiere-drucken-fahrzeuge-bauwirtschaft/vonovia-hausgeld-steigt-zu-gegenwartigem-21-marz-2023/[4] https://www.fxstreet.com/cryptocurrencies/news/iran-crypto-mining-ban-mining-farm-shutdowns-to-help-salvage-electricity-exports-202303210856[5] https://www.spiegel.de/wirtschaft/betrieb/vonovia-will-nach-neun-milliarden-autovermieter-getreidehandel-verkaufen-a-888989.html
- Vonovia plans to boost its operating profit by 30% (adjusted EBITDA) by 2028, following a similar surge in 2022, despite the looming federal debt package potentially increasing construction interest rates.
- In 2025, Vonovia anticipates its operating income (adjusted EBITDA) to peak at €2.7 to €2.8 billion, while adjusted pre-tax profit stands to hover between €1.75 to €1.85 billion, despite the potential impact of increasing interest rates on certain projects.
- Vonovia aims to reduce debt by offloading real estate portfolios, as evidenced by the €11 billion capital inflow, and is committed to consolidating its position in the market, such as the recent acquisition of further shares in subsidiary Deutsche Wohnen.
