Europe’s New Property Giant Is Built on Shaky Governance
German housing landlord Vonovia seems likely to get its $22 billion deal for sector peer Deutsche Wohnen away, but at the risk of confirming the sector’s reputation for weak shareholder protections
Investing in German housing is usually boring, predictable and lucrative. But when the time comes for mergers and acquisitions it can turn into a sketchy neighborhood.
Frankfurt-listed residential landlord Vonovia is closing in on a roughly $22 billion takeover of its peer Deutsche Wohnen. The latest version of the deal is Vonovia’s third attempt to buy its smaller competitor and seems likely to succeed. It will unite Europe’s two largest listed property companies by market value to create an industry behemoth rivaling the largest U.S. real-estate investment trusts for scale.
But the acquisition has raised the hackles of some shareholders, including New York-based hedge fund Davidson Kempner, which has owned a stake in Deutsche Wohnen for three years. An initial offer collapsed in July after it failed to reach the 50% approval threshold. The bidder reacted by upping its offer slightly and later scrapping the threshold. Unlike in the U.S. or U.K., this is legal under German rules for voluntary takeovers, which give the bidder discretion as to the bar.
Deutsche Wohnen’s board also agreed to issue primary shares without pre-emption rights and sell them directly to Vonovia if it needed help to get the deal over the line. As it turns out, this deliberate dilution of existing shareholders won’t be necessary: On Monday, Vonovia said it now owns slightly more than 50% of Deutsche Wohnen’s stock. It was the first time that such a tactic was considered in a German takeover and raises a red flag for investors.
There was an easier way to woo Deutsche Wohnen shareholders: offering them more money. Vonovia does appear to be getting a good deal. The target’s stock had been weak before the offer because of a rent freeze in Berlin that was eventually overturned. Vonovia’s offer implies a portfolio value 4% below where real estate analytics firm Green Street believes Deutsche Wohnen’s assets would trade in the private market. Several shareholders say they would have backed a deal if the price was a little higher than the current €53 a share, equivalent to $61.99 a share, offer.
German residential real estate has been a good bet in recent years. Over the past half decade, Vonovia and Deutsche Wohnen have both delivered annual shareholder returns of around 14%, compared with 9% for Germany’s blue chip DAX index.
However, this isn’t the only example of shaky governance in the sector. In late 2019, another German residential landlord, Adler Real Estate, bought a 33% stake in its competitor Ado Properties and installed new board members. Ado’s rejigged board then announced plans to take over its indebted new top shareholder, prompting a fallout with Ado’s other investors. A previous Vonovia bid for Deutsche Wohnen in 2015 also ended in drama and suggestions that the companies weren’t paying due attention to shareholder interests.
Even after their strong performance in recent years, German housing stocks offer the prospect of slightly higher returns than U.S. ones in terms of rental yields relative to local government bonds. The trade-off for investors may be that the shelter in Germany feels slightly less safe.