Morgan Stanley (MS) recently published an update on the German Residential Property Sector.
MS comes to the conclusion that Berlin has the strongest rental growth in Germany. Berlin’s new lettings rent were up 9% last year, followed by Stuttgart with 5% and Munich at 4%. Berlin’s rental levels remain relatively low at EUR 8,65 compared to Stuttgart’s average at EUR 11,50 and Munich at EUR 15,55, according to the investment bank. Other strong cities in Germany showed rental growth of up to 3%, with the German average at about 1%. MS says that JLL’s German residential valuation practice expects an 8-10% uplift in Berlin’s “Mietspiegel”, the local government’s estimate for in-place rent, when it is published in May.
MS continues in its report, saying that Berlin’s transaction yields range from 4% for top city centre product to 6,7% for standard buildings built in the 1950s to 1970s. Refurbished prefab in East Berlin is said to now transact at 5-5,5% yields.
JLL believes, that the largest cities in Germany have a gap between housing demand and supply. Berlin has had housing demand for about 20 000 new residential units per year, mainly driven by positive net migration of about 40 000 people per year, while only 3 000 – 4 000 apartments were built. Some local city governments are starting to take some initiatives to kick-start construction volumes. An example is Munich authorities selling land to house builders below market value in exchange for lower sales prices.
Morgan Stanley concludes its report by saying that fundamentals in the German residential market remain strong and that Berlin stands out as a particularly strong market. Therefore, MS ranks “Deutsche Wohnen” at “Overweight”, which has a 70% exposure to Berlin and whose portfolio is still valued at a relatively high 6,5% despite much tighter transaction yields.
For investors looking at the Nordic equity markets, we have an even better idea: Berlin IV (www.berlin4.dk) listed in Denmark. As the name already suggest: Berlin IV gives investors 100% exposure towards the Berlin residential market. To be precise, Berlin IV owns and operates a portfolio of 135 properties with a total of approximately 2,737 residential and commercial leases located in Berlin. Berlin IV shares have since 2007 been listed on NASDAQ OMX Copenhagen. The strategy is to optimize operations and leverage the properties in order to improve the value of the portfolio and the company’s profit.
We like the following recent developments:
- On February 2nd 2015, Berlin IV announced that it has refinanced EUR 127.5m (ca 85% of group loans), exploiting the current attractive interest rates. The initial impact on the company’s free cash flow will be around EUR 5m p.a..
- Management stated that the improved cash flow will be used to pay dividends and/or buy back shares.
- There has been aggressive insider buying following the announcement at 7 different occasions between end of February and end of March 2015.