Leading in developments: We gained a positive impression from our roadshow with BUWOG to Edinburgh and Paris, where the company provided a detailed update on operations and strategy. It was encouraging to hear the company reiterate its intention to spend the c€300m proceeds from the capital increase in June over the next 12 months to grow the development pipeline. While BUWOG is actively involved in several negotiations to purchase development land and/or projects in Berlin, Vienna and Hamburg, it also reiterated its target to achieve at least a net initial yield of about 4% for develop-to-hold apartments. We think that one of BUWOG’s key success factors in residential developments is that it can manage the whole value-chain – from sourcing land and applying for zoning and building permits to managing construction, letting and disposals – in-house. This means it takes longer for the positive impact to materialise in the company’s earnings levels from residential developments rather than, for example, if it was buying a portfolio that contained rented apartments. However, by ramping up the volume of properties that require development from its current c10,000 apartments, BUWOG’s future earnings will, we believe, accelerate.

● Strong financials: BUWOG’s group loan-to-value was 39% as of July and its average debt maturity is about 12 years, with 1.8% as the average cost of debt. As a result, it remains financially disciplined. Nevertheless, we think that the positive impact from the Standard & Poor’s investment grade rating (BBB+, stable outlook, which was assigned in November) should not be underestimated. We understand that the company is keen to widen its sourcing for debt financing so it can increase its exposure to senior unsecured debt within the context of a rising project development pipeline.

● Good momentum: As we expected, BUWOG confirmed the outlook for recurring funds from operations, which include capital gains from the disposal of single apartments, for the current fiscal year at €125m and €150m thereafter. We regard this as achievable and see a good chance that BUWOG will surpass this target as the programme for improving efficiency and lowering the cost base should bear fruit in the next year. Having somewhat adjusted our estimates for the portfolio performance, we derive a marginally higher target price of €30.50 and reiterate our Buy rating.