Real Estate Monitor

Real Estate Monitor, November 2021

Latest Trends

The index for residential property portfolio holders continues to fall. The main reason is that Adler Group’s value has significantly declined by around 50 percent in the last two months. In addition, further index constituents have shown significant declines.

For Commercial, the situation is on the upswing again. The index reached 351 points, the highest level since the beginning of the COVID-19 crisis.

The WACC for German portfolio holders decreases by 0.2 percentage points, whereas it increases by 0.2 percentage points for global real estate companies.

Stock price data per company within the respective peer group is collected using the S&P Capital IQ Data Idem „IQ_ClosePrice_Adj“. Capital IQ defines the Close Price as: The closing price of the day, calculated once per day after the market close. Close prices are adjusted for stock splits, cash dividends, rights offerings, and spin-offs. The underlying peer groups are revised and adjusted once per year on 31 December. New players on the German real estate market are thus identified and included, while delisted companies are excluded.

Real Estate KPIs

Residential's market-based valuation level is below last year's level

In order to gain insight into the changes in value of 19 major players in the German real estate market, we have analysed the sector-specific Real Estate KPIs FFO 1 and EPRA NAV from the financial periods FY2019, FY2020 and TFQ2021, i.e. Q3 2020 to Q2 2021 (TFQ: Trailing Four Quarters). We have put the share prices as of the balance sheet dates 31 Dec 2019, 31 Dec 2020 and 31 Oct 2021 in relation to the above-mentioned key figures from the corresponding financial periods. The resulting average ratios by segment are shown in the figures below.

FFO 1 multiples and Price/EPRA NAV ratios by segment

The table below shows the individual FFO 1 multiples and Price/EPRA NAV ratios of our peer group by segment. The key figures relate to the financial periods FY2019, FY2020 and TFQ2021 and the share prices as of 31 December 2019, 31 December 2020 and 31 October 2021.

Reading example: Vonovia was valued by the market at 25.1x of its FFO 1 as of 31 December 2020, whereas on 31 October 2021 it was valued at 21.0x of its FFO 1.

Residential's valuation level is below previous year's level, Commercial slightly above

Compared to the end of 2020, Commercial's current valuation level (as of 31 October 2021) has increased by +9.8 percent (FFO 1 multiple) and +7.9 percent (Price/EPRA NAV ratio), while the current valuation level of Residential has decreased by -9.3 percent (FFO 1 multiple) and -8.6 percent (Price/EPRA NAV ratio).

Compared to the last edition of this monthly newsletter, the valuation level of Residential has decreased in particular, based on both the FFO 1 multiple and the Price/EPRA NAV ratio. For Commercial, on the other hand, the valuation level has risen.

Risk free rate

The chart below illustrates the risk-free interest rate relevant for the derivation of the WACC over time, starting on 31 December 2013. The derivation is based on Bundesbank data in accordance with the methodological recommendations of the IDW.

In most economies, risk-free interest rates have dropped to historically low levels in recent decades. They are particularly important because they are the basis for the determination of other interest rates and thus affect financing conditions in the economy.

On 31 December 2013, the risk-free interest rate was still 2.75 percent. Since then, the rate has continued to fall and was even below the 0 percent threshold a few months ago. One of the main reasons is the central banks' expansive monetary policy. Due to rising inflation rates in recent months, the US Federal Reserve has meanwhile initiated a turnaround in monetary policy (tapering). Accordingly, it wants to successively reduce its multi-billion bond purchases. Consequently, also interest rates could rise again in the future.