Recent trends and outlook: BUWOG recently received an initial long-term corporate credit rating of “BBB+” with a stable outlook from ratings agency S&P. S&P considers BUWOG’s portfolio quality to be average and said the company’s contracted rents are below market level; S&P makes similar comments about most of its peers. The main driver for the portfolio’s rental growth will, according to S&P, be generated primarily from the apartments in Germany (51%), as rental levels in Austria (49%) are highly regulated and are not expected to move much. While S&P described the overall size of the letting portfolio of c50,000 units as “solid”, it believes that BUWOG’s business is is “constrained by trading and development activities”, which the agency considers to be a more volatile business line. Accordingly, S&P adjusts EBITDA to reflect the results from property sales. It also noted that BUWOG could easily stop the sale of properties in Austria and adjust the development pipeline by increasing the number of develop-to-hold units and lowering the develop-to-sell units if the currently favourable market environments changed. Nevertheless, S&P assesses BUWOG’s underlying strategy as “riskier compared with peers like Vonovia, Deutsche Wohnen or Grand City, which focus mainly on rent generation from standing assets”.

Key questions for management: Why is BUWOG’s regional focus for expansion in German buy-to-let apartments mostly in the northwest of the country, when competition has been on the rise almost everywhere? How will rising construction costs affect the disposal margin of new-builds?

Valuation: We regard BUWOG’s current valuation levels, which will deliver an earnings yield of about 5% next year, as fairly attractive.