A radical proposal to confiscate large portfolios of residential properties is once again on the table in Berlin, threatening to deepen losses for real estate companies’ stocks, according to local reports.
Vonovia and Grand City Properties’ stocks have plummeted 20% this quarter, registering the worst sell-off in the sector, driven by rising interest rates.
The party needs the support of others to govern and faces significant hurdles in implementing its expropriation plan, but the prospect of prolonged political and legal battles is weighing on major property owners like Vonovia, which owns over 130,000 apartments in the city.
German residential real estate is likely at the bottom of investors’ wish lists, comments Pierre-Emmanuel Courteau, an analyst at Jefferies in Paris. German real estate companies are faring worse than their European peers.
Other companies, such as Swedish Heimstaden, French Covivio, and Grand City Properties, also own thousands of properties in the city.
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The proposal to expropriate apartments is not new, with Berlin residents voting in 2021 to nationalize portfolios with over 3,000 apartments, but the city authorities did not take action. Since then, pressure for change has been mounting, driven by population growth in the German capital, the sharpest rise in rents for new leases of any city in the country, and a decline in construction due to rising costs.
A proposed initiative by activists, dissatisfied with the lack of action, would transfer around 220,000 apartments into state ownership. If “Die Linke” forms a government and implements large-scale expropriation, the consequences will be felt far beyond Germany.
Analyst Thomas Rotteler at Deutsche Bank wrote in a note before the election that prolonged regulatory uncertainty would be damaging for the real estate sector, although the likelihood of expropriation is low. While the current political rhetoric remains active, it is likely to continue weighing on the sector’s performance, Rotteler notes.
Companies that would not be directly affected by expropriation in Berlin, such as TAG Immobilien, have also been dragged into the sell-off, with its stock plummeting 22% this quarter, pressured by interest rates and the prospect of further rate hikes.
Based on the average price targets of brokers tracked by Bloomberg, the potential return from stocks of Grand City Properties, its parent company Aroundtown, TAG Immobilien, Vonovia, and LEG Immobilien is 53%.
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Courteau comments, “If you don’t hurry, this is a very good time to invest. The sector hasn’t been this interesting from a valuation perspective since 2012.”
Heimstaden stated that it is monitoring events in Berlin closely, while taking a long-term perspective when considering decisions that may affect its apartments and new construction.
Vonovia pointed out that it expects Chancellor Friedrich Merz not to allow provinces to introduce laws for expropriation of properties, which the company considers unconstitutional. Nevertheless, it is ready to work constructively with the next Berlin government, noted CEO Luca Mucic in an emailed comment to Bloomberg.
Although the risk of expropriation is limited, “the renewed political debate about the housing sector may weigh on investor sentiment and stock prices,” comments analyst Francesca Ferragina from ING Groep.
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