Morning Note: Market news and an update from property company Vonovia.

Market News

US equities fell last night – S&P 500 (-1.1%); Nasdaq (-1.7%) – as traders await more clarity around the economic outlook from the Federal Reserve policy decision later today. Investors have slashed holdings of US equities by the most on record while cash levels jumped, according to Bank of America Corp.’s latest survey. Tesla was a notable decliner on China competition concerns, while Nvidia sank 3.4% despite laying out plans to expand its AI reign with robots and desktop systems.

Gold has surged past $3,040 per ounce, hitting a fresh record high, fuelled by safe-haven demand amid heightened geopolitical tensions. Vladimir Putin rejected Donald Trump’s demand for a 30-day ceasefire in Ukraine, agreeing only to limit attacks on energy infrastructure while demanding a halt to the flow of weapons and intelligence to Kyiv.

In Asia this morning, equities were mixed: Nikkei 225 (-0.3%); Hang Seng (+0.1%); Shanghai Composite (-0.1%). The Bank of Japan left rates unchanged, as expected, with the economy recovering moderately, albeit with some weak signs.

The FTSE 100 is currently trading 0.5% lower at 8,666. Sterling trades at $1.2967 and €1.1910 on bets that UK interest rates will stay higher. The Bank of England is expected to leave rates unchanged tomorrow.

US crude inventories rose by 4.59m barrels last week, API data is said to show. That would take total holdings to the highest since July if confirmed by the EIA today. Brent Crude slipped to $70 a barrel.

Source: Bloomberg

Property News

Vonovia has today released its 2024 results, highlighting positive rental trends and property values that appear to be bottoming out. As expected, full-year growth for rent and earnings came in at the upper end of the guidance range, and the group announced a significant increase in its dividend. The group exceeded its €3bn disposal target and believes pro-active balance sheet stabilisation is no longer required and has switched back to a growth strategy. Guidance and targets for this year and 2028 have been reiterated.

The shares have weakened in recent weeks following the sharp increase in German bund yields, which have rebounded to 2.9%, the highest level since June 2011, following the country’s agreement on a debt overhaul and a significant increase in state spending. Ahead of this afternoon’s analysts’ call, the shares are little changed in early trading, leaving them on a 44% discount to NAV.

Vonovia is Europe’s largest residential real estate company. The group owns around 613k units worth around €82bn across Germany (c. 84%), Sweden, and Austria. The group also manages a further 73k units owned by others. Despite its size, in Germany Vonovia still only owns 2% of a highly fragmented market. The focus is on multi-family housing for low- and medium- income tenants in metropolitan areas. The aim is to benefit from residential megatrends such as urbanisation, energy efficiency, and demographic change.

In 2024, adjusted earnings before tax (EBT) – the group’s preferred profit metric – fell by 3.6% to €1.8bn. Operating free cash flow (OFCF) – the key figure for internal financing and thus liquidity management – rose by 34% to €1.9bn. The most recent market data for the German residential sector confirms the bottoming-out of price indices, while real estate transaction volumes picked up during the second half of the year.

The core rental segment grew revenue by 2.2% to €3,323m, despite disposals. The vacancy rate remains very low (2%) and highlights the ongoing mismatch between supply and demand. The trend towards higher rents continued, while the collection rate was over 99%. This includes all ancillary and energy costs, which management see as a strong sign of affordability. The organic increase in rent was 4.1%, with new construction accounting for 0.4%. This was in line with the guidance to be at the upper end of the 3.8%-4.1% range.

Like-for-like rental growth of 3.7% was driven by market-related factors (+2.8%) and investment in existing buildings (+0.9%). The monthly rent per square metre increased by 3.5% to €8.01. Going forward, under the regulatory system, rent growth is expected to follow inflation higher over time albeit with a lag. For 2025, rental growth of around 4% is expected. Further out, the target is >5% through the additional EUR1bn investment in modernisation (see below).

Revenue from other business streams came from the development (+43%), recurring sales (+38%), and value-add (+11%). Overall, the company is seeing the first signs of increasing traction in non-rental segments and now sees multiple organic growth initiatives to develop non-rental activities. In 2028, the group estimates a contribution from non-rental segments of €0.5bn-€0.7bn, equalling 20%-25% of adjusted EBITDA, versus less than 10% today.

The Deutsche Wohnen integration is completed, and synergies were realised as planned. Over the long term, Vonovia has enjoyed increased benefits of increased scale, with its adjusted EBITDA margin up 20 percentage points to 80% and cost per unit down by two thirds to c. €300 over the last 10 years.

Vonovia continued to sell properties of inferior quality or in non-core regions. The volume of recurring sales was 55% higher (at 2,470), although the fair value step-up, at 22.6%, was below last year (33.4%). Outside of the recurring sales segment, 5,184 non-core units were sold, at a 2.3% value step-up, as the group focused on liquidity to get deals done.

Disposal proceeds in 2024 exceeded the €3bn target. In addition, in January 2025, the company (via Deutsche Wohnen) announced the sales of 13 nursing homes to the city of Hamburg for €380m. This is DW’s last nursing operation platform and completes the disposal of the remaining discontinued operations. The company reiterated that, going forward, disposal pricing decisions will no longer be driven by leverage considerations but profitability.

Capital is being partly re-allocated toward the construction of new properties and the improvement of the existing portfolio to comply with environmental demands which can drive higher rents. In 2024, the group spent €1.6bn (+4.8%), with spend on maintenance up 5.8%, modernisation up 19.2%, and new construction spend down 22.9%. Despite higher construction costs, Vonovia completed 3,747 new apartments (+52%), 34% to hold to rent and 66% for sale. In 2025, Vonovia intends to significantly increase investments in modernisation and new construction for its own portfolio to approximately €1.2bn, with construction of around 3,000 new units scheduled to begin.

The group’s loan-to-value (LTV) ticked up during the year to 47.7%, still above the 40%-45% target range. Including potential proceeds from announced transactions, the pro-forma LTV is 45.8%, close to target corridor. However, the group’s long-term and well-balanced debt maturity profile provides a hedge against increasing financing costs: weighted average maturity (6.3 years); average cost of debt (1.9% vs. 1.7% at the end of 2023); fixed/hedged (98%); and no more than 12% of debt maturing annually. Overall, the group has said that marginal debt costs have come in lower than feared and that pro-active balance sheet stabilisation is no longer required. The volume-weighted average interest cost, after hedging, of the new bonds was 4.29% in 2024.

The strategy is to roll over secured debt and repay unsecured bonds with disposal proceeds. Vonovia has said its pro-forma cash position of €3.8bn covers all near-term maturities. Fitch rated Vonovia for the first time in March, giving the company a BBB+ rating.

The group changed its dividend policy during the year – it will pay out 50% of earnings plus surplus liquidity from operating free cash flow. As a result, the 2024 payout has been lifted by 36% to €1.22 per share (c. €1bn), equal to a yield of 4.2%.

The market value of the portfolio fell by 2.3% to €82bn. The company believes the market has now bottomed out. The net asset value (known as EPRA NTA) per share fell by 3.4% in the year to €45.23, slightly above the market expectation of €44.50.

Guidance for 2025 has been reiterated: EBT of €1.75bn-€1.85bn and adjusted EBITDA €2.70bn-€2.80bn. The company has a target for EBITDA in 2028 of €3.2-€3.5bn, although there is still no guidance on interest payment or EBT.

Greater visibility over the outlook for interest rates (and the marginal cost of new debt) and property market valuations will be required for the shares to move substantially higher. In the meantime, we are comforted by the accelerating rental growth and the ongoing substantial mismatch between Vonovia’s equity value, the valuation in the direct real estate market, and the cost of newly constructed properties.

Source: Bloomberg