The key strategic value drivers
The following aspects have been elaborated as the key value drivers of our business:
- The highly efficient management platform
- The optimized capital structure and advantageous costs of capital
- Investment focused on megatrends
- The Value-add business as a way to create value
- The value contribution made by the Development business
- The efficient capital allocation
The Value Drivers of Our Strategy
(1) The scalable management platform featuring highly digitalized processes, allows for the optimized management of around 500,000 residential units, organized in five business units with 24 regional business areas and 90 regions. This system is directly associated with a clear reduction in fixed costs and, at the same time, ensures consistent service quality to guarantee customer satisfaction.
Further advances in digitalization will also open up additional efficiency potential in the future, both with regard to processes and in the use of building master data and dynamic building data. The “digital twin” allows buildings to be broken down and mapped in digital form for further use throughout the company.
The range of further processing options for digital building data includes enhanced service for customers, tailored descriptions of sustainable investment measures and predictive maintenance, particularly for heating units and elevators.
(2) An optimized capital structure and, as a result, advantageous cost of capital secure the Group’s equity and debt financing in the long run, thereby supporting the capital-intensive business of a residential real estate company in the long run to ensure risk-adjusted yields.
The primary objective of strengthening the company’s internal financing provides the basis for investments to address the challenges arising from the megatrends. Maintaining an investment grade rating remains a key objective. The company opts for debt or equity financing depending on the opportunities that arise under the prevailing equity or debt capital market conditions.
(3) When it comes to making investments based on megatrends, a distinction has to be made between
- investments in new construction to ease the shortage of apartments,
- investments to optimize existing properties through modernization and senior-friendly refurbishment,
- Investments in climate protection to reduce CO2 and in neighborhood projects to promote tenant satisfaction.
All of these investments have to take account of the new return criteria.
(4) The value-add business gives Vonovia the expertise to perform technical construction services, modernization measures and residential environment services. Vonovia uses standardized processes to ensure availability while maintaining a consistently high level of quality throughout the Group.
The Value-add business, our “neighborhood workshop,” generates added value for the company by bundling multi-utility services. The aim of the neighborhood workshop is to create an integrated system of housing-related infrastructure services. This includes the ongoing establishment of additional services to complement conventional rental services, the further development and expansion of the existing main product lines, multimedia, energy supply and meter reading technology services, as well as the further implementation of IoT systems, for example for elevator and heating unit monitoring. Further innovations are in the development stages and will be offered once they have been reviewed for their marketability.
(5) The Development business is aimed directly at alleviating the shortage of housing through the targeted expansion of the company’s own portfolio, as well as the direct generation of income from business with third parties.
The product range includes the sale of individual condominiums and the sale of projects to investors (to sell) on the one hand, and the construction of rental apartments for Vonovia’s own portfolio as well as the construction of new properties on existing land held in the portfolio (to hold) on the other. The Development business is also geared towards the concept of the neighborhood and sustainability aspects.
Efficient project implementation based on the development platform along the entire value chain guarantees the value contribution made by the Development business. The value chain ranges from the acquisition of land to build on to project development, planning, realization and marketing.
The Development business also has to consider greater obstacles to returns and the challenges of efficient capital commitment.
The Development business is managed from five locations in Germany, from Vienna, Austria, and Malmö, Sweden.
(6) Another key value driver is efficient capital allocation. Given the current return requirements based on the increased cost of capital, strengthening the proportion of equity and focusing on internal financing has been identified as a key value driver that optimizes the opportunities for return-oriented sustainable investments. Decisions on the actual capital allocation are made based on the return and Vonovia’s internal financing power.
In the period following the IPO, capital allocation focused on external growth through acquisitions and economies of scale given the favorable prevailing capital market conditions.
Due to the current capital market conditions, which are dominated by inflation and rising interest rates, as well as the resulting higher cost of capital, Vonovia is in the process of streamlining its portfolio through sales and the establishment of joint venture structures. The aim is to create an optimized capital structure and sustainable internal financing.
The next phase will be characterized by dynamic portfolio management. What is more, each business activity will have to generate adequate returns and cash surpluses in the interests of efficient capital allocation.
The nursing care activities performed under the Deutsche Wohnen umbrella were subjected to a strategic analysis as part of the merger, with the outcome that these activities will no longer be part of Deutsche Wohnen’s strategy and, as a result, will no longer be part of Vonovia’s strategy either. In the Group reporting, the nursing care activities are shown as discontinued/abandoned operations.
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