Fundamental Information About the Group

Challenging overall conditions for the residential real estate sector in 2023

Overall conditions for the residential real estate sector remained challenging in 2023. The gap between demand for, and the supply of, housing has widened further, with sociological and demographic factors having a particular impact on housing demand. This means that up to 400,000 new residential units will have to be built every year over the next 20 years to meet demand. Although this is also what policymakers are striving to achieve, the number of completions is likely to remain well below the target figure in the coming years, as it did in 2023 with a figure of around 242,000 apartments. As a result, the current completion level will only exacerbate the shortage of housing, meaning that upward pressure on rents will persist.

The supply side has been confronted with an ongoing rise in construction costs over the last few years. Driven by the uptick in general inflation over the past two years to as much as 8.8%, i.e., beyond the level of around 6% witnessed back in the early 1990s in the wake of German reunification, the construction cost index rose from a baseline of 100 in 2015 to around 160 in 2023. The increase in construction costs was also exacerbated by increasing regulation, with political uncertainty and bureaucratic obstacles also hindering faster implementation of investment projects.

The higher construction costs are compounded by the rise in interest rates. Coming in at over 3% in 2023, the 10-year swap rate had risen to a level last seen around twelve years ago.

Upward trends in interest rates and inflation, macroeconomic volatility and less reliable supply chains led to increased costs of capital and therefore higher yield requirements, with an additional dampening effect on investment behavior. This led to mounting pressure on property values, significantly restricting transaction activity on the real estate market, although Vonovia was largely able to buck this trend.

These overall conditions triggered increased pressure on profitability and fair values in the real estate sector, with increased capital discipline the only feasible response. Vonovia strengthened its internal financing power, exercised cost discipline and made changes to its investment approach. At the same time, it did not pursue any further acquisitions and offered housing stocks for sale or inclusion in joint venture structures.

The capital market response to these measures has proved to be encouragingly positive, allowing us to secure our investment grade rating while also fueling a visible recovery in our share price in the last few months of 2023.

With the key megatrends facing us – urbanization, demographic change and sustainability – remaining unchanged, and in light of the current overall conditions, Vonovia elaborated the key value drivers of its strategy and business model in greater detail and analyzed them with regard to the current overall situation in order to define clear options for action.

The merger with the Deutsche Wohnen Group was completed successfully in 2023 and the planned synergy potential was realized by making joint use of the management and development platform and leveraging harmonization effects and economies of scale together. The principles of good corporate governance are being upheld within this context with a view to the Deutsche Wohnen Group’s independent status. This is also ensured by corresponding contractual agreements.