A mega-merger of landlords sparks fears of soaring rents in one of Europe’s hottest real estate markets

May 25, 2021, 2:49 PM UTC

Germany’s largest listed real estate group launched a $34 billion cash-and-debt takeover bid for a domestic rival that would cement its role as the largest residential landlord in Europe with more than half a million apartments.

Vonovia’s acquisition of smaller blue-chip peer Deutsche Wohnen threatens to upend Berlin’s red-hot property market in particular. Coming a month after the country’s highest court ruled the city’s cap on rent price hikes was illegal, the deal stokes fears that housing in Germany’s trendy capital could soon become unaffordable with a single dominant player now calling the shots.

The two justified the mega-deal with the enormous renovation costs they must shoulder to modernize their buildings, making them more energy-efficient as part of the EU’s plans to meet its Paris climate accord obligations. According to an estimate from the German Housing Association GdW, the overall burden for the country to green-proof buildings could rise to €800 billion by 2030. 

While the climate crisis typically conjures images of industrial smoke stacks belching thick clouds of black fumes into the sky, residential buildings collectively account for more than a third of emissions in the bloc. To wit, the EU Commission next month is expected to present a package of measures specifying how it will slash carbon dioxide emissions over 1990 levels by 55 percent come 2030.

A blockbuster deal

After rejecting a hostile bid five years ago, Deutsche Wohnen CEO Michael Zahn said Vonovia’s cooperative approach this time helped win internal support for an offer that values his company at 27.8 billion euros ($34 billion) in equity and debt. 

“We invested a lot of energy by fighting each other. Now we can channel our efforts in one direction,” Zahn told reporters in a briefing on Tuesday. “We’re facing enormous challenges that we can better manage together, such as all the investments needed to ensure our buildings are energy efficient.”

Shares in Deutsche Wohnen soared to the top of Germany’s DAX30 blue-chip index, gaining 15%, to trade just below the €52 all-cash offer. Vonovia shares, meanwhile, tumbled to the bottom, down 4.3% after the company said it would refinance a part of the bid by tapping investors for up to €8 billion via a rights offer. 

To soothe fears the merger would create a lone, dominant landlord in Berlin, Germany’s largest city, the duo agreed to sell 20,000 apartments back to the city of Berlin for a price expected to exceed €2.1 billion. 

Local officials argued this would allow them to better put a floor on rent prices by controlling a pool of close to 400,000 units, or roughly 20 percent of the residential market. By comparison, Vonovia and Deutsche Wohnen own roughly 150,000 combined.

Vonovia CEO Rolf Buch said he understood people’s fears about rising cost of living, pledging the two would initially limit through 2026 any rent hikes to only adjust for inflation at most. Nor would they attempt to pass on price hikes to tenants in the form of legal exemptions for renovated homes. 

“Raising rents at a rate that exceeds income growth doesn’t work over the longer term. Forcing people to spend more and more on their housing is not a sustainable business model,” the CEO said, sitting next to Berlin’s mayor at a joint announcement.

With the federal election scheduled for late September, a number of center-left parties like the Greens are campaigning for votes with new ideas on how to combat the rise in rents.

Buch’s attempt did little to allay the fears of Reiner Wild, managing director of the Berlin Tenants’ Association. Speaking to Fortune, he said it remains unclear how the two would fulfill their pledge to build 13,000 new apartments to ease pressure on housing prices.

“It’s questionable whether they will be able to pack more units into their existing properties, for one, and the appetite from authorities for granting stock-exchange-listed companies the right to develop on new land over smaller, local competitors is likely minimal,” he said. 

“The court ruling on the rent cap probably opened the door to this deal. As long as the ceiling existed, a refinancing of this enormous sum would have been difficult under those circumstances,” Wild concluded.

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