Morning Note: Market news and an update from German property company Vonovia.
Market News
Global stocks are falling amid growing concerns over elevated valuations. In the US last night, the main markets fell – S&P 500 (-1.2%); Nasdaq (-2.0%) – and continued to do so in the futures market overnight. The losses continued in Asia this morning: Nikkei 225 (-2.5%); Hang Seng (-0.1%). The FTSE 100 is currently 0.2% lower at 9,692.
Gold prices rose to $3,970 an ounce, paring losses from the previous session, supported by a broad risk-off sentiment that boosted the appeal of safe-haven assets. However, gains were limited by fading expectations of US rate cuts, as several Fed officials echoed Chair Powell’s hawkish tone suggesting the recent cut could be the year’s last. Markets now assign a 69% probability of another rate cut in December, down from 90% before.
Sterling remains weak – $1.3025 and €1.1335. – after Chancellor Reeves’ speech signalling upcoming tax hikes, while investors await tomorrow’s Bank of England meeting. Markets now see about a near 50/50 chance of a 25-basis-point rate cut, up from near zero after softer inflation and other weak economic data. Reeves, preparing to unveil her budget on 26 November, said the UK has endured “years of economic mismanagement” and stressed that fiscal discipline would be central to her plan. She pledged an “iron-clad” commitment to fiscal rules, a message aimed at reassuring investors amid concerns about the size of the fiscal gap. Her comments reinforced expectations of tighter fiscal policy.
The US government has reached a major milestone of dysfunction as Congress has allowed a federal shutdown to drag into its 36th day — the longest in history — amid a stalemate over healthcare and spending priorities. The 10-year Treasury yields 4.08%.
Brent Crude trades at $64.50 a barrel as traders weighed a sharp rise in inventories against signs that US sanctions on Russia are starting to take effect.
Source: Bloomberg
Property News - Vonovia
Vonovia has released results for the first nine months of 2025 which highlight the company is growing as strongly as before the crisis. A significant increase operating free cash flow means debt is close to the group’s target range. Guidance for the full year has been reiterated and a new target for 2026 has been introduced that is slightly above market expectations. The shares have been volatile this year, tracking the movement in bund yields, which have been impacted by the new German government’s economic stimulus programme which will lead to a debt overhaul and a significant increase in state spending. Ahead of this afternoon’s analysts’ call, the shares are little changed in early trading, leaving them on a 43% discount to NAV.
Vonovia is Europe’s largest residential real estate company with a market cap of around €22bn. The group owns around 608k units worth around €83bn across Germany (c. 85%), Sweden, and Austria. The group also manages a further 76k units owned by others. Despite its size, in Germany Vonovia still only owns 2% of a highly fragmented market. The focus is on multi-family housing for low- and medium- income tenants in metropolitan areas. The aim is to benefit from residential megatrends such as urbanisation, energy efficiency, and demographic change.
Following a number of acquisitions, Vonovia now enjoy the benefits of increased scale – over the last 10 years, its adjusted EBITDA margin has risen by 20 percentage points to 80% and its cost per unit has fallen by two thirds.
Luka Mucic is due to take on the role of CEO at the end of the year. Mucic is currently the CFO of Vodafone and was previously the CFO and COO of SAP – with long-term experience in the technology and telecommunications industry, on the face of it the appointment appears a strange one.
In the nine months of 2025, all economic indicators developed positively. Adjusted earnings before tax (EBT) – the group’s preferred profit metric – rose by 6.8% to €1,456m. Operating free cash flow (OFCF) – the key figure for internal financing and thus liquidity management – rose by 27% to €1,475m.
The most recent market data for the German residential sector has seen a positive development of key performance indicators and confirmation of a trend reversal in property values. There is a high level of demand for rental properties and positive rent trend. Thanks to the market recovery, the company can now realise the prices in sales that it has targeted.
The core rental segment grew earnings by 2.5% to €1,847m, despite having 9,000 fewer homes due to disposals and higher maintenance expenses. The vacancy rate remains very low (2.2%) and highlights the ongoing mismatch between supply and demand. The trend towards higher rents continued, while the collection rate was over 99%. This includes all ancillary and energy costs, which management see as a strong sign of affordability.
The organic increase in rent was 4.2%, with new construction accounting for 0.4%. Like-for-like rental growth of 3.8% was driven by market-related factors (+2.8%) and investment in existing buildings (+1.0%). The monthly rent per square metre increased by 4.3% to €8.28. Going forward, under the regulatory system, rent growth is expected to follow inflation higher over time albeit with a lag. For 2025, rental growth is now expected to be 4.1%, versus previous guidance of ‘more than 4%’. Further out, the expectation is now ‘around 5%’ driven by an additional €1bn investment in modernisation (see below).
The company’s other business streams reported significant increases in earnings: development (moved from breakeven to a profit of €61m), recurring sales (+45.5% to €56.6m), and value-add (+2.9% to €150m). Overall, the company is seeing continued signs of increased traction in these segments and is targetting multiple organic growth initiatives to develop non-rental activities. In 2028, the group estimates a contribution of €0.5bn-€0.7bn, equalling 20%-25% of adjusted EBITDA, versus 13% currently.
Vonovia continued to sell properties of inferior quality or in non-core regions. The volume of recurring sales was 2.4% higher in the period (at 1,553), with the fair value step-up, at 31.2%, well above last year (25.3%). Outside of the recurring sales segment, 7,485 non-core units were sold, up 91%.
Other disposals in 2025 include the sale of 13 nursing homes to the city of Hamburg for €380m. This is the group’s last nursing platform and completes the disposal of the remaining discontinued operations. The company reiterated that, going forward, disposal pricing decisions will no longer be driven by leverage considerations but profitability.
Capital is being partly re-allocated toward the construction of new properties and the improvement of the existing portfolio to comply with environmental demands which can drive higher rents. In the first three quarters of the year, the group spent €1,357m (+29%), made up of maintenance up +8%, modernisation +44%, and new construction +71%. Vonovia completed only 1,555 new apartments (down 35.5%), 34% to hold to rent and 66% for sale. In 2025, Vonovia still intends to significantly increase investments in modernisation and new construction for its own portfolio to approximately €1.2bn. Encouragingly, the government coalition agreement means subsidies for modernisation of building and heating systems will continue and initiatives to reduce construction costs are being put in place.
The company’s balance remains stretched – loan-to-value (LTV) declined from 47.7% to 45.9% but is still above the 40%-45% target range. Including potential proceeds from announced transactions, the pro-forma LTV is 45.7%, just above the top end of the target corridor. However, the group’s long-term and well-balanced debt maturity profile provides a hedge against increasing financing costs: weighted average maturity (5.9 years); average cost of debt (1.9% vs. 1.9% at the end of 2024); fixed/hedged (99%); and no more than 12% of debt maturing annually. Overall, the group has said that marginal debt costs have come in lower than feared and that pro-active balance sheet stabilisation is no longer required.
The strategy is to roll over secured debt and repay unsecured bonds with disposal proceeds. Vonovia has said its pro-forma cash position of €3.5bn covers all near-term maturities. So far this year, the company has issued €2.7bn of bonds at an average interest rate of 1.93% – including €1.3bn in convertible bonds and the first two Australian dollar bonds.
The dividend policy is to pay out 50% of earnings plus surplus liquidity from operating free cash flow. In 2024, the payout was raised by 36% to €1.22 per share (c. €1bn; 4%) and paid in June. The 2025 dividend will be declared at the time of the full-year results next March.
The like-for-like market value of the portfolio rose by 1.5% to €83.2bn in the first three quarters of the year. This follows a 0.5% increase in H2 2024, supporting management’s view that the market has now bottomed out. The net asset value (known as EPRA NTA) fell slightly from the start of the year to €44.72 due to the increase in number of shares.
Guidance for 2025 has been reiterated: EBT of €1.9bn (in the middle of the €1.85bn-€1.95bn range) and adjusted EBITDA of €2.8bn (at the upper end of the €2.7bn-€2.8bn range). Operating Free Cash-Flow is expected to be slightly below last year. Guidance for 2026 has been introduced, with EBITDA expected to be up €200m at €2.95bn-€3.05bn. The company has also reiterated its target for EBITDA in 2028 of €3.2bn-€3.5bn.
Greater visibility over the outlook for interest rates and property market valuations will be required for the shares to move substantially higher. Clearly, plans by the new government to ease its fiscal rules are unhelpful, with bund yields rising in anticipation of an increase in government debt. Not only does this increase the group’s borrowing costs (and reduce free cash flow) but it also has a negative impact on property values and makes bond proxies such as real estate relatively less attractive. In the meantime, however, we are comforted by the outlook for rental growth, the improved transaction market, and the ongoing substantial mismatch between Vonovia’s equity value, the valuation in the direct real estate market, and the cost of newly constructed properties.
Source: Bloomberg
