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April 13th, 2022 | 17:54 CEST

Deutsche Bank, Hong Lai Huat, Vonovia - Real estate market remains hot

  • RealEstate
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The Federal Statistical Office announced on April 8: Construction prices were up 14.3% YOY in February. A nightmare for future builders. In addition, there are supply chain problems and a lack of tradesmen. The Ukraine conflict has also caused energy prices to skyrocket, which will cause additional price increases. Manufacturing, transportation, everything is getting more expensive. In March, inflation in Germany was 7.3%, the highest it has been in over 40 years. To break the spiral, the ECB would have to raise interest rates. Initially, this was planned for the 3rd quarter, but the pressure is growing as inflation rises faster and faster. Rising interest rates would be good for the banks. However, there is no relief in sight for the real estate market.

time to read: 5 minutes | Author: Armin Schulz

Table of contents:

    Deutsche Bank - Next major investor exits the market

    While the interest rate turnaround in the US has already begun, the ECB is currently still resisting. Rising interest rates could become a problem, especially for the southern European countries with government bonds. So while Europe is still pursuing a zero interest rate policy, interest rates for real estate loans are already rising again. At the beginning of the year, the conditions were still at 1%. Currently, interest rates between 2.2 and 2.4% are being asked. Good for banks, such as Deutsche Bank, which finally get more interest for their borrowed money. If the key interest rate rises, the yield curve for real estate loans will likely rise further.

    But that is a long way off. Currently, the Deutsche Bank share is under massive pressure. One of the major investors wants out of the investment and is said to have placed 116 million shares at EUR 10.98 with institutional investors. After Cerberus, this is the second major shareholder to sell its shares. Cerberus had bet on a merger between Commerzbank and Deutsche Bank. Since there is no longer any talk of a merger, other investors who have also made this bet could end their involvement. The only possible sellers are Blackrock or Capital Group.

    A Deutsche Bank spokesperson commented: "We remain confident in our strategy, which we outlined during our Investor Deep Dive in March." At that time, the Company had outlined its new targets. Return on equity is expected to increase from 8% to 10%. The cost-income ratio is also expected to improve from 70% to 62.5%. As a result, the share price moved significantly away from its low for the year of EUR 8.16 and was quoted at over EUR 12 at times prior to the placement. After the placement, the share is currently trading at EUR 10.94.

    Hong Lai Huat - Turnaround achieved in 2021

    In Singapore, the real estate price for an average apartment in the city center is over USD 20,000 per sqm. The Hong Lai Huat Group started there more than 30 years ago as a real estate developer and builder. The Group built a total of eight residential, commercial and industrial buildings in the Asian metropolis. Since 2008, the Company has also gained a foothold in Cambodia. In 2015, construction began on the D'Seaview project, which has 737 residential and 67 commercial units. The Royal Platinum project followed in 2019, consisting of 851 residential and 50 commercial units and 50% owned by the Group. While D'Seaview is built and almost fully sold, only 20% of the Royal Platinum project, scheduled for completion in late 2023, has been sold. After the Corona restrictions are removed, there should be movement in the sales.

    Movement is underway on the Group's most exciting current project, the Agriculture Hub, which is 100 sq km in size. The area, which is about 1/7 the size of Singapore, will be a small city centered around agriculture, with plantations, livestock, factories for food and building materials, and logistics centers. The whole thing will be powered by renewable energy sources such as solar power and water treatment plants. Since mid-February, the Group has been working with the Singapore Manufacturing Federation (SMF), making its network of 5,000 companies available. SMF members can thus expand their markets, and Hong Lai Huat Group is on hand as a local contact.

    On February 28, the Company announced its 2021 financial results. After a tough 2020 marked by Corona, the turnaround was achieved through strong property sales. Net profit was 6.1 million Singapore dollars (SGD) after a loss in 2020, and revenue climbed 132% to SGD 16.7 million. The gross margin increased to 62% from 38% a year earlier. Management holds over 47% of the shares, indicating a high level of commitment. In addition to the major Agri Hub project, the Company owns 2 other properties in Cambodia that are still undeveloped. Since September last year, the stock has run sideways and is currently trading at SGD 0.096. The Company is paying out a dividend of SGD 0.002 again, corresponding to 32% of net income.

    Vonovia - Three problem areas

    If you prefer to invest in a German real estate company, you can hardly avoid Vonovia. The Bochum-based company owns more than 565,000 apartments in Germany, Sweden and Austria. The portfolio value is around EUR 97.8 billion. With these sums, it is clear that debt has also been relied on. So if interest rates were to rise in the eurozone, this would directly impact Vonovia's profitability. According to the figures from the third quarter of 2021, short-term debt stands at EUR 22 billion and long-term debt at EUR 57 billion. Therefore, one can assume a certain interest rate sensitivity for the Group.

    Following the acquisition of Deutsche Wohnen, the Company aims to grow by 20% this year. Operating profit is expected to be around EUR 2 billion. Rising rents will play a part in this. In 2021, rental income increased by 2.4%. Due to the rapid rise in energy prices, CEO Rolf Buch sees a huge tidal wave of problems coming for the Company. Two-thirds of the apartments are heated with gas, and the gas price has skyrocketed, meaning that future utility bills could be a problem for many tenants.

    If one adds the calls for expropriations of large housing companies, there are currently three problem areas. Interest rates will surely not rise so quickly, and expropriations will not happen. Only energy prices can already be foreseen as a real problem. Is the sell-off of the share since August last year justified? The share has fallen by more than 30% since then and is currently trading at EUR 40.32. The current dividend yield is 4.1%. The share should rise again in the long term because affordable housing in Germany is and will remain scarce.

    The real estate market has become an expensive place. Especially if interest rates were now to rise, Deutsche Bank would benefit significantly from this - a 1% increase in the lending business would bring a 3-digit million sum. An alternative is real estate stocks. Hong Lai Huat is present in the particularly expensive Singapore but has expanded its business to Cambodia. With the Agri Hub project, it will be busy for years. Vonovia focuses only on residential real estate and has done well with this so far. In the future, the Group could face three difficulties. However, the value has already fallen by 30% and is trading below book value.

    Conflict of interest

    Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.

    In addition, Apaton Finance GmbH is active in the context of the preparation and publication of the reporting in paid contractual relationships.

    For this reason, there is a concrete conflict of interest.

    The above information on existing conflicts of interest applies to all types and forms of publication used by Apaton Finance GmbH for publications on companies.

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    Der Autor

    Armin Schulz

    Born in Mönchengladbach, he studied business administration in the Netherlands. In the course of his studies he came into contact with the stock exchange for the first time. He has more than 25 years of experience in stock market business.

    About the author

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