GAGFAH S.A. (fka GGFHF)

[Enterprising Investor]

Deutsche Annington to Buy Gagfah (12/01/14

Deal Creates Europe’s Second-Largest Listed Real-Estate Group

By Chase Gummer

FRANKFURT—Real-estate company Deutsche Annington Immobilien SE on Monday offered to buy rival Gagfah SA for €3.88 billion ($4.83 billion) in cash and shares in a move to build its position in vibrant markets like Berlin, Dresden and Hamburg.

The deal would create a company with roughly €21 billion worth of assets and 350,000 residential units, making it the largest landlord in Germany. The offer values Gagfah at €18 a share with shareholders getting €122.52 plus five new Deutsche Annington shares for every 14 Gagfah shares they own.

With Germany’s housing market on an upswing, analysts called the tie-up a logical step for both companies. Gagfah management supports the deal, which pays a premium of 16% over Friday’s closing price, and shareholders are expected to approve it.

Financial institution Berenberg called the terms “reasonable,” given its €17 price target for Gagfah, saying Deutsche Annington is paying a fund-from-operations yield of 5.5% and 18% premium on net asset value for Gagfah.

“We see still more upside for further portfolio improvement because the number of noncore units remains rather high, but the portfolio split—with the focus on Dresden (23%), Berlin (10%) and Hamburg (7%) – is clearly attractive,” Berenberg analyst Kai Klose said.

Cities like Berlin and Dresden were once considered a paradise for students and artists looking for affordable housing in rundown, older neighborhoods. But as in other cities across Germany there has been a surge in demand for urban apartments and a wave of new residential developments. The housing market has been booming in recent years, driven by demographic changes and Germany’s strong economy.

A report by the rating agency Standard & Poor’s said it expects nominal prices in the German housing market to grow by 4% in 2014 and 3.5% in 2015, due to a combination of high demand, low unemployment, and relatively low price-to-income ratios.

Germany’s housing market has been growing faster than every other Eurozone country for the last three years running, and looks set to do so again this year, according to Standard & Poor’s Ratings Services report.

But fragmentation in the residential sector has led analysts to expect consolidation for some time. Last year Deutsche Wohnen AG bought GSW Immobilien, creating the second-largest property group in Germany.

Deutsche Annington said it expected to realize €84 million in synergies in the area of property management, portfolio management, extension services, and financing.

The company’s portfolio is weighted toward western and southern Germany, and the Gagfah acquisition will strengthen Deutsche Annington’s presence in cities like Berlin, Dresden, and Hamburg, where growth has been robust.

Since 2010 residential prices have increased by an average of over 20% in major cities, according to a February report by the Deutsche Bundesbank.

Germans and foreigners alike have been investing in German housing as a hedge against future uncertainty, made possible by low financing costs, even lower returns on bank deposits, and the perception that German real estate is a relatively safe, undervalued asset at a time when the eurozone remains unstable and underperforming.

But the rising price of housing in German cities has also sparked a political backlash, with renters’ and social welfare associations complaining that the elderly and low-wage workers were getting priced out of their neighborhoods.

The German government has responded to the furor, and in October proposed a “brake” on rent prices to limit increases.

The Deutsche Bundesbank has also warned the housing market was in danger of overheating in urban zones, seeing 15% to 20% over-valuations in certain neighborhoods, but that overall price increases in the German housing market hadn’t led to a “destabilizing interdependency” with the credit markets.

—Monica Houston-Waesch and Matthias Goldschmidt contributed to this article.

http://www.wsj.com/articles/deutsche-annington-to-buy-gagfah-1417425838