Lack of supply: The Berlin property market saw about 14,400 transactions in the first six months of the year, which is a 5% yoy reduction, according to the committee of experts for property values (Gutachterausschuss für Grundstückswerte). This committee, which was established by all the federal states, is a public institution that collects data about transactions on the property markets, as these have to be certificated by a notary. Interestingly, despite the lower number of transactions on the Berlin market, the value has risen by 25% to about €8bn. For residential properties the average value increased by 10% to €5,038 per sqm for newly built apartments. The committee said that the increase in prices is a result of insufficient supply for construction land.

●  Supporting fundamentals: In relation to its investment portfolio of about c50,0oo units, BUWOG is the only German residential property company that also has a sizeable development pipeline of apartments, with an investment volume of c€3bn split into “developed for sale” (c6,450 units) and “developed for hold” (c3,700 units). With this the company is well positioned, in our view, as prices in Germany for newly built properties since 2000 have shown a 37% rise compared to existing properties at 24%, according to the Federal Bureau of Statistics. The rise in prices for construction land over the same period has been even stronger at 46%, while developments in the larger cities, including Berlin, have been even more pronounced. Regionally, BUWOG’s focus has so far been on Berlin, Vienna and Hamburg, so we welcome the company’s approach to strengthen its local market share rather than looking to expand into other Metropolitan areas.

● Low-risk profile to be maintained: Having adjusted our estimates and lowered our assumptions for cost of capital, we increase our price target to €29.70 from €26.50. While the company has not been overly successful in growing its letting portfolio since the spin-off and listing in 2014, we think the growth potential of BUWOG is attractive, coming mainly from the completion of the development pipeline. Arguably, build costs have been rising along with prices for construction land, so BUWOG’s to-be-built lettings in attractive locations offer some potential for higher prices and rents. Also, with the loan-to-value remaining at about 45% the financial profile still looks defensive. BUWOG’s current valuation levels look supportive, in our view, taking into account the predicted growth in recurring FFO as the company’s key earnings, including the proceeds from the sale of condominiums of c7% for this year and c20% for the year after.