LEG is a bet on German property, good and bad

Friday’s flotation of LEG was  the first big German IPO of 2013. While the German residential landlord won’t be cheap, investors are keen on the business. LEG’s long-term outlook is muddier, though. One-third of the portfolio’s apartments are in poor and declining areas.

Investors seem to have been queuing up for shares of LEG Immobilien. The German residential landlord has its initial public offering on the Frankfurt stock exchange this Friday. At an offer price of 44 euros – right in the middle of the price range of 41 to 47 euros – the shares were several times oversubscribed. LEG’s current owners, primarily Goldman Sachs, cashed in 1.3 billion euros in exchange for 57.5 percent of the group, which operates in North Rhine-Westfalia, Germany’s most populous state.

The IPO was deemed attractive partly because German residential real estate outperformed the country’s stock market in 2012. The appeal is simple: managing apartments in Europe’s strongest economy is a low-risk business with stable returns. True, German demographics are dismal, and strong laws protect tenants and limit rent increases. But incomes and household-numbers are growing in many parts of Germany. Property prices and rents have recently been on the rise.

The LEG issue price is in line with external appraisers’ estimate of the company’s net asset value: 2.37 billion euros, or 44.80 euros per share. That puts the company in the middle of the listed pack. Some of its peers trade well below their NAV. Those which trade at a premium – Deutsche Wohnen and GSW Immobilien – are buoyed by attractive portfolios in Berlin. The national capital is one of the hottest German property markets.

LEG’s geographic mix isn’t appealing. Of its 90,000 apartments, 39 percent are in the poor and economically declining Ruhr region. Apart from famous football clubs such as Schalke 04, the area is best known for its high unemployment, rapidly shrinking population and social deprivation. The future does not look bright for a property market which already suffers from above-average vacancy rates.

Goldman Sachs is the biggest winner from LEG’s IPO. It bought the company in 2008 from the government of North Rhine-Westfalia for 787 million euros, a third of the current value. Since then, rents have increased and management has been overhauled, but the portfolio remains the same. For Goldman, LEG was a smart investment. The deal for taxpayers, who were on the other side of the transaction, was disastrous.

This article was initially  published as a Reuters Breakingviews comment on 1  February 2013.

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