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  • Klaus Meitinger

The real estate puzzle.

(Reading time: 2 - 3 minutes)

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Real estate is considered a safe haven - especially in times of inflation. And indeed, experts from the industry do not see any significant risks for price development due to the rise in mortgage rates. The demand for housing is still high, they say, the increased construction prices make existing housing more attractive and even now the financing conditions are historically favourable. In the worst case, they expect a sideways trend in property prices.

Interestingly, while the housing market is supposed to be stable, the shares of German listed real estate companies are trading 40 to 60 percent below their highs.
A particularly striking case is Deutsche Wohnen. It owns more than 140,000 residential and commercial units. At the end of March 2022, these had - according to the company's quarterly report - a market value of 55.17 euros per share after deducting moderate debt financing. But the share itself fell by 60 per cent in recent months and is now trading at 22.35 euros, only about 40 per cent of the value of its properties.
The puzzle: Are the flats in Deutsche Wohnen's portfolio trading far too cheaply on the stock exchange? Or does the real estate market outside the stock exchange need a massive downward correction?

Something is definitely wrong here. With a debt ratio of 28.3 per cent, Deutsche Wohnen is probably more relaxed in its financing than many a private property buyer and therefore probably more immune to interest rate increases. The vacancy rate is low at 1.6 per cent, and the average contract rent is 7.34 euros per square metre, according to the company. Since most of the properties are in Berlin, we did a quick check. In the state capital, the 2021 rent index showed net cold rents between 5.29 and 13.03 euros per square metre, depending on age, location, size and condition. Deutsche Wohnen's contract rents are therefore not overly ambitious.

Perhaps this constellation will result in an arbitrage opportunity for the owners of owner-occupied residential properties. It could make sense to sell flats in Berlin and buy the Deutsche Wohnen share. The stock of properties could thus be more than doubled.

Yours sincerely,

Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided in private wealth is for informational purposes and is not an invitation to buy or sell securities.

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