SBM-1 – Strategy, Business Model and Value Chain

Vonovia’s business model is based on the provision and rental of good-quality and, most importantly, affordable living space at the right time, as well as the management of these properties in Germany, Sweden and Austria. Vonovia manages a portfolio of around 480,000 of its own apartments in a large number of Germany’s attractive cities and regions. It also manages a portfolio of around 40,000 residential units in Sweden and approximately 20,000 in Austria. This means that our main customer group consists of our (potential) tenants in these countries.

This business model is based on a highly digitalized management platform and a similarly highly digitalized development platform allowing all stages in the value chain to be managed.

An established in-house craftsmen’s, residential neighborhood and caretaker organization, coupled with extensive back-office functions, support us in our management and further development of our housing stocks. Vonovia continues to develop its real estate portfolio through active portfolio management. In addition to acquisition, sale and modernization, this also includes developing and building new apartments for our own portfolio and for sale to third parties. The business model is rounded off by the housing-elated services we offer. The focus here is on offering energy supply services for electricity and heating, as well as automated meter reading.

Vonovia focuses on megatrends such as climate change mitigation, urbanization, demographic change and the shortage of housing. Together with advances in digitalization, these megatrends determine the corporate strategy. Going forward, everything that Vonovia does as a company, and the strategic focus that it adopts, will be based around responding to these megatrends.

The aim is to make the business model future-fit in the long run by using sustainable new construction and refurbishment approaches and CO₂ reduction in the real estate portfolio to contribute to solutions for the current climate protection objectives. Vonovia focuses on the ESG aspects of sustainability, namely climate protection and the environment (E) by contributing reduction in carbon emissions; society (S) by acting responsibly towards all stakeholders; and governance (G) through sustainable, reliable and responsible corporate management.

From day one, Vonovia’s tried-and-tested strategy has been divided into the subareas of portfolio management strategy, property management strategy, Value-add strategy and financing strategy – supported by the opportunistic elements of the company’s acquisition and internationalization strategy.

For the purposes of managing the company, we make a distinction between the segments Rental, Value-add, Recurring Sales and Development.

The Rental segment combines all of the business activities that are aimed at the value-enhancing management of our own residential real estate. It includes our property management activities in Germany, Austria and Sweden. Around 77% of Vonovia’s strategic real estate portfolio is located in contiguous urban quarters, i.e., neighborhoods that generally include more than 150 apartments.

The Value-add segment bundles all of the housing-related services that we have expanded our core rental business to include. These services include both the maintenance and modernization work on our residential properties and services that are closely related to the rental business. We allocate the activities relating to the craftsmen’s and residential environment organization, the condominium administration business, the multimedia business, metering services, the energy service, including tenant electricity, and our insurance services to the Value-add segment. By insourcing these services, we aim to ensure availability and high-quality service. At Vonovia, high-quality service, which promotes a high level of customer satisfaction, is characterized first and foremost by accessibility, speed and transparency for our customers.

The Recurring Sales segment includes the regular and sustainable disposals of individual condominiums and single-family houses from our portfolio.

The Development segment includes project development to build new homes. This covers the value chain starting with the purchase of land without any development plan/dedicated purpose, to completion and sale (to sell) or integration into Vonovia’s own portfolio (to hold). The Development segment deals with projects in selected attractive locations.

Aspects of Sustainability at Vonovia

The Management Board has broken the strategy down into key value drivers. The main value drivers for Vonovia’s business are:

• 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

Further information on our value drivers can be found in the “Strategy” chapter.

We disclose the number of employees in Germany, Austria and Sweden in section S1-6.

In light of capital market conditions over the past few crisis-ridden years, which have been characterized by inflation and rising interest rates, and the associated higher cost of capital, Vonovia has streamlined its portfolio by making disposals and establishing joint venture and fund structures in order to achieve an improved capital structure in tandem with sustainable internal financing. Within this context, the care activities under the Deutsche Wohnen umbrella were also subjected to a strategic analysis that resulted in the decision to sell them.

Now that interest rates are returning to normal, Vonovia believes it is well positioned for new growth based on its optimized capital and portfolio structure. The necessary specific initiatives have been incorporated into the company’s existing strategy.

New Strength and Performance in Core Business

The expansion of the development business is an important part of this strategy. Vonovia’s new construction activities are focused on a product portfolio that is geared toward market requirements with flexibility in how the properties are used (Development to hold/Development to sell). In light of the ongoing need to optimize construction costs, Vonovia is focusing on the “Basic House” approach, among other things, in order to build sustainable and affordable housing for different target groups. The emphasis is on new projects employing serial modular timber construction methods together with the company’s joint venture partner Gropyus.

The company is forging ahead with the optimization of its craftsmen’s organization, the “Vonovia Technischer Service” (VTS). VTS and its specialists ensure that refurbishment and maintenance work can be carried out reliably and in line with high quality standards. The ongoing development of a standardized product catalog will be expanded further.

Given the positive market trend that is emerging, our sales program will continue to focus on the Recurring Sales segment and sales in the Non Core portfolio.

Investments Using Innovative Policies

Investments to upgrade energy efficiency and decarbonize our portfolio will be expanded over the next few years with the help of innovative concepts and smart technologies in line with Vonovia’s climate pathway. Implementation of energy-efficiency modernizations has to be efficient, fast and cost-saving in the interests of cost-effectiveness. We are pursuing this strategy using the concept of “serial modernization,” an industrialized system that bundles and standardizes all steps in the refurbishment process. Forging ahead with, and investing in, heat pump technology are also part of the investment strategy. In this area, we are focusing on the new “EnerCube” heating solution, a heat pump center that combines all the necessary components in an external module and is installed on-site outside the building.

New Business Models at All Stages in the Value Chain Using Management Platform

Further growth in the Value-add segment at all stages in our value chain will secure additional earnings potential. The existing energy business and the use of photovoltaics are being expanded on a large scale. The focus is on establishing and expanding a full product portfolio covering all steps in the value chain – from the generation of electricity using photovoltaic modules to the sale of this electricity as tenant electricity, the use of heat pumps, and energy storage and management. The aim is to increase market penetration in all product groups.

The purchase of buildings that have not yet been modernized, their subsequent modernization and resale are to be integrated into Vonovia’s business model as a new initiative. This also applies to the initiative to make Vonovia’s management platform available to third-party customers so as to establish the company as a full-service management service provider.

Catalysts driving the successful implementation of the strategy remain the active dynamic management of efficient capital allocation, the availability of employees with the necessary skills, efficiency in the value chain and in procurement, social and sociopolitical acceptance of Vonovia’s business model and the targeted use of new technologies, including artificial intelligence.

Our Sustainability Strategy for the Future

Vonovia’s sustainability strategy has been integrated into its overall strategy and business model. Our business model – the development and rental of modern and affordable living space – means that our relationship with social and environmental change processes is one of great interdependence. Sustainability is thus a key component of our corporate strategy. Vonovia is working towards specific targets in the three areas of environmental (E), social (S) and governance (G):

As far as its environmental targets are concerned, the aim is to make the business model future-fit in the long run by using sustainable new construction and refurbishment approaches and CO₂ reduction in the real estate portfolio through innovations to contribute to the achievement of the current climate protection objectives.

When it comes to social concerns, we take responsibility towards tenants and society by providing housing that meets people’s needs and being committed to future-fit neighborhood development. At the same time, we believe that diversity presents us with a huge opportunity to increase satisfaction levels among our employees and to position ourselves as an attractive employer, which is why we are striving to promote diversity and equal opportunities within our organization. Vonovia aims to be an attractive employer for its employees, offering fair working conditions and supporting staff members in their personal and professional development.

With regard to governance, our aim is to ensure sustainable corporate management and responsible business practices with a reliable compliance system. These targets have a positive impact on the working atmosphere and, as a result, directly affect our employees, as well as being consistent with the objectives of the capital market.

Vonovia’s business model addresses the socio-political challenges of housing shortages, affordable housing and climate protection. When we talk about affordable housing, we mean that our rental prices are based on local rent prices, and, if available, on certified rent indices. We base our approach on the ratio of the average warm rent in our portfolio to the average net income of tenant households, which was below 30% at Vonovia during the reporting period. Our sustainability targets address precisely these sociopolitical challenges, to which we want to make a key contribution.

With this efficient organizational model, satisfied and high-performing employees, optimized processes, a clear focus on service, and, as a result, on our customers, and a clear investment strategy focusing on climate protection, we are laying the foundation for a sustainable business while safeguarding our legitimate interests as a private-sector company. The importance of our sustainability targets and their achievement is reflected in the fact that they have a direct impact on the remuneration paid to our Management Board and top management via our internal key performance indicator SPI.

Information on our progress as we work toward achieving our objectives can be found in ESRS 2 GOV-3.

Sustainable conduct is at the heart of Vonovia’s identity as a company. We are making continuous improvements to our sustainability agenda in order to reflect changes in society, the world of politics, the environment and the economy. Through the first-time preparation of the materiality assessment in accordance with the ESRS and identifying the opportunities and risks, as well as the impacts that the company’s activities have on stakeholders, transparency has been enhanced, laying the foundation for integrated business activities.

The cornerstones of our sustainable strategy are:

• Contribution to climate protection and reducing CO₂ (E)
• Social responsibility for our tenants, customers and employees (S)
• Trustworthy, reliable and transparent corporate governance based on the best-practice guidelines set out in the Corporate Governance Code (G)

E: We are faced with the challenge of achieving a climate-neutral housing stock by 2045. To rise to this challenge and ensure that the implementation is successful, we require both a higher level of refurbishment than in the past and increased, decentralized use of renewable energies for heating and powering neighborhoods. The neighborhood is the main implementation level for climate protection targets and carbon reduction in the housing portfolio. The use of renewable energies and sustainable materials plays an important role in new construction and conversion.

S: We are confronted with the challenge of providing affordable housing for as many people in society as possible, despite sustained excess demand and high new construction costs. To rise to this challenge and achieve our targets, we rely on socially responsible, transparent rents. We see the expansion of a social infrastructure incorporating innovations and new technologies, and tailored to meet people’s needs, as an integral part of community development projects. We aim to design urban, environmentally friendly and affordable housing in a socially responsible manner. We offer subsidized and independently financed homes for people on low incomes in numerous cities and municipalities and are responding to location-specific challenges with services tailored to people’s needs. The supplementary voluntary agreements that we conclude with municipal authorities include, for example, provisions governing fair rental conditions, the construction of new apartments and joint neighborhood development.

We are also faced with the challenge associated with a growing shortage of skilled workers driven by demographic change. We offer our employees an attractive working environment characterized by diversity and scope for personal development in order to ensure a sufficient supply of qualified expert staff.

G: Another challenge facing us lies in ensuring that our compliance and corporate cultures are always consistent with current (legal) requirements. In this context, we stand behind our reliable, transparent and trust-based corporate management, which is based on the German Corporate Governance Code. We comply with all applicable laws and internal and external guidelines. This is an integral part of being a reliable and trustworthy partner.

In terms of the direction of its sustainability strategy, Vonovia is guided by national and international standards and frameworks, such as the German Federal Climate Change Act (Klimaschutzgesetz), the Paris Agreement, the Sustainable Development Goals, the UN Global Compact and the United Nations Guiding Principles on Business and Human Rights.

As a company with international operations, we aim to contribute to achieving these goals with our business in Germany, Austria and Sweden. We have used our materiality assessment (see ESRS 2 IRO-1) to identify priorities in this respect as well. This also serves as the basis for our sustainability reporting in accordance with the ESRS.

Our value chain can be split into the upstream supply chain, our own business and the downstream stages in our value chain. Our business activities comprise the following core activities: construction, rental and management activities, including neighborhood development and customer service, as well as the provision of housing-related services.

Accordingly, relevant inputs include construction products and materials as well as (human) capital. The output of our value creation is access to affordable housing for our tenants, to neighborhoods offering real quality of life and to other housing-related services such as the condominium administration business, the multimedia business, metering services, the supply of energy and solar power to our tenants, and our insurance services. As part of our insourcing strategy, we employ specialists in our own business areas, for example in the caretaker organization, in modernization projects or in green space maintenance. This allows us to generate synergy potential, make ourselves largely independent of external service providers and offer a consistent level of quality. Our central, multilingual customer service department acts as the first port of call for our tenants, whereas our caretakers and craftsmen look after the needs of tenants on location. This allows us to ensure fast and reliable service. We run our own customer service centers in Essen, Dresden, and Berlin.

Upstream of our own value chain, our supply chain starts with the production of raw materials. Vonovia works with over 9,000 direct suppliers and business partners. Almost all of our direct suppliers are based in Germany, Austria or Sweden. An important supplier group is the material suppliers who supply Vonovia’s craftsmen’s organization (VTS and Residential Environment Service) with construction products, among other things. The contractual partners who implement maintenance measures, for instance, on our behalf are another relevant group. The sale of our buildings, building demolition and the disposal of our tenants’ waste and wastewater form part of our downstream value chain.

As part of our stakeholder dialogue, we maintain regular contact with the most important players in our value chain using a range of formats for each stakeholder group. We have also taken their concerns and perspectives, as well as our impacts on these stakeholders, into account as part of the IRO assessment.

In line with our target of ensuring the company has good access to the capital market, ensuring that it focuses on sustainability and generating attractive returns for our investors relative to risk, Vonovia uses a broad range of financing instruments, such as bonds, promissory notes, secured real estate loans, commercial papers, working capital facilities and subsidy loans from the German government-owned development bank Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB) (see also the chapter entitled “Financing”). Our eight sustainable bonds, one of which we placed successfully on the capital market for the first time in 2024, meet the demand for both green and social bonds – and play a crucial role in our financing strategy. All of our green bonds are aligned with the EU taxonomy.

With our Sustainable Finance Framework, we have also laid the foundation for the definition and selection of social assets in the real estate sector on the Swedish market. The criteria we selected in this context have already been adopted by at least three other issuers on the market. We have published our Sustainable Finance Framework, the annual impact report evaluating the effectiveness of our measures and further information about our sustainable financing strategy on our Group website.