Dear readers, residential property is usually considered a defensive investment, because everyone needs a roof over their head, regardless of whether the economy is doing well or not. Furthermore, residential real estate cannot be easily replaced by technology, because a well-located property has always increased in value in the long run. Europe’s largest landlord Vonovia, could therefore be a good investment.
Residential real estate typically sells at low capitalization rates, and the real estate investment trusts (“REITs”) that own them also have low yields. For example, popular names in the U.S. include Mid-America (MAA), Equity Residential (EQR), and Independence Realty (IRT). They all yield around 2-3 percent. However, one company currently offering a yield of 6.5 percent is, contrary to expectations, one of the largest and most respected companies in this sector: Vonovia.
The largest landlord in Europe!
With real estate assets of around € 100 billion, mainly in Germany, Vonovia is the largest landlord in Europe. The Group has all the characteristics of a blue chip company:
It is a large company.
It has a strong track record.
Its business is defensive.
It has a healthy balance sheet.
It pays a steadily rising dividend.
Vonovia also enjoys attractive growth prospects.
But even so, the group’s stock price plunged 50 percent last year, which means Vonovia is now valued exceptionally low. Previously, Vonovia was valued at a low premium to net asset value and a low yield of mostly 2-3 percent.
6.5 percent dividend
At the moment, however, the company is valued at a 55 percent discount to the value of its assets and pays a dividend yield of 6.5 percent – the lowest valuation in the Group’s history. The company’s exceptionally low valuation is due to fears that rising interest rates and the energy crisis in Germany will have a significant impact on Vonovia’s business.
You just don’t see it
Certainly, these are important short-term issues, but their long-term impact is actually not that significant. Vonovia has a strong, BBB+ rated balance sheet with a leverage ratio of 43 percent and well-staggered maturities. Only about 10 percent of debt matures annually, with Vonovia having sufficient cash from retained earnings (payout ratio of 73 percent) and the recurring asset sale program to pay off maturing debt.
In addition, interest rates are only rising due to high inflation, which is also increasing Vonovia’s rental income and the value of its assets. Operating earnings per stock rose by a further 5.5 percent in the first half of the year, reaching a new all-time high. An energy crisis is perhaps even more frightening, especially for investors in the U.S. who are not on the ground.
Tenants pay the energy bill, not Vonovia
Many investors seem to ignore that it is the tenants who are responsible for paying the energy bills. Thus, the direct impact on Vonovia is not that significant. Certainly, it could limit the company’s ability to impose rent increases in the short term because tenants can only afford so much, but it won’t suddenly destroy Vonovia’s profitability as its stock price suggests. Vonovia’s buildings are also more energy efficient than average and rents are affordable and below market levels, which should provide another margin of safety.
Last but not least, rent arrears were very low even during the worst of the pandemic. In Germany, people are more conservative about their finances, have better savings, less credit, and are less likely to default on their rent payments than in the U.S., for example, which is probably also cultural.
Vonovia: Get in now?
Therefore, this is at best a temporary crisis that will affect Vonovia’s growth in the short term, but ultimately things will be put right and the long-term outlook will not be affected. As an investor, you have a unique opportunity to buy Europe’s largest and most renowned landlord at a greatly reduced price. Interested investors should at least put Vonovia on their watch list. Let’s now take a look at the technical analysis of the Vonovia stock.
Technical analysis of the Vonovia stock
The 200-day line (GD200) of the Vonovia stock is currently at 39.10 euros. This gives the stock a “sell” rating, insofar as the stock price itself exited trading at €25.72 and has thus built up a gap of -34.22 percent. The relationship to the moving average price of the past 50 days is different. The GD50 has currently reached a level of 29.21 euros. This, in turn, corresponds to the current difference of -11.95 percent for the Vonovia stock and thus a “sell” signal. The overall finding based on the two time periods is therefore “Sell”. What does the Relative Strength Index say?
The Relative Strength Index (RSI for short) relates the upward and downward movements of an underlying over time and is therefore a good indicator of overbought or underbought stocks. The RSI for the previous 7 days for the Vonovia stock has a value of 70.71. On this basis, the stock is therefore overbought and receives a “sell” rating. We now compare the 7-day RSI with the value of the RSI on a 25-day basis (70.3). As with the RSI7, Vonovia is overbought on this basis (value: 70.3). The security is therefore also rated as “sell” for the RSI25. All in all, therefore, the RSI gives Vonovia a “sell” rating.