A German property blue-chip going cheap

Germany didn't get to join in with the fun of the property boom, but it's suffering from the bust all the same. So is there anything still worth buying? Sven Lorenz thinks there is.

Poor Germany. It didn't get to join in with the fun of the property boom, and now it's suffering from the bust all the same. Is there anything still worth buying?

Anyone claiming that the German psyche is uniquely geared for depression would have had this suspicion confirmed by taking a look at the recent performance of the country's property market. Germans didn't participate in the Anglo-Saxon property madness (i.e. they missed out on all the fun) when the boom was in full swing. Therefore, one might have expected the German market to remain untouched by the price crash that is haunting Britain and America. But things didn't work out that way. Despite never having experienced a property bubble, German property stocks have fallen by 90% across the board.

The most striking example is IVG (Dax:IVG), Germany's largest property company. Even outside the country, the firm is widely accepted as the bluest of blue chips when it comes to German property plays. Yet compared to its early 2007 peak of €37, IVG's share price has now fallen by 92% and is currently trading at around €3.40. The market seems to be anticipating an all-out collapse of the company. Its bonds are trading at 34% of face value and are yielding more than 17% a year until they mature in 2017. Is IVG on the edge of bankruptcy, or has the market simply lost the plot? Well, Germany's economy has entered a recession and, as a result of the global crisis, its banks have also had to tighten lending. IVG reacted by writing down some of its investments, thus hitting the shares' net asset value (NAV). But even accounting for that move, the most recent NAV was €23.59. In other words, at the current share price, the market is trading these assets for 15 cents on the euro.

So will the NAV hold up, or are further write-downs ahead? The company's management seems to believe that its NAV figure is on firm ground. During the first nine months of 2008, IVG's own portfolio of investment property had rising rental income, the vacancy rate stood at 7.5%, and two-thirds of the rental contracts are due to run at least until 2011. Meanwhile, the property-fund division successfully placed 93% of a €240m fund; the firm launched a fund aimed at selling half of the company's oil caverns (it leases space in these out to energy groups and oil stockholding firms) to institutional investors; and the property development division sold property worth €280m. For the time being at least, life in Germany hasn't come to a total standstill.

And even the much feared debt covenants don't look quite as fearsome as the share price would have you expect. IVG has a debt burden of €5.5bn, of which more than €3bn has a remaining duration of more than three years. During the next 12 months, the firm needs to refinance €1.2bn, but this can easily be handled by using IVG's unused credit facility of €1.25bn. Because it only owns high-quality assets, the company can also carry out asset sales. The sale of the oil caverns has yielded €600m to date, with the other half yet to be sold. IVG also runs an asset-management division, from which it earns fees for managing property funds. This business has €14.3bn in client assets under management, making it large enough to cover a good part of the entire current market cap which has shrunk to just €400m if it were sold separately.

Yet such a sale isn't going to happen. For a long time now, IVG has preferred an approach of integrating several property-related divisions; the company's management intends to keep the group's structure intact. Will it succeed, despite banks taking an increasingly aggressive stance towards anyone with outstanding debt? One bank seems already to have made up its mind. Sal. Oppenheim, one of Europe's largest private banks (for a long time closely associated with IVG), has recently upped its stake. By buying more shares in the open market, the 219-year-old banking institution raised its stake to 15%.

In business since 1789, Sal. Oppenheim takes a long-term investment approach. Is the bank onto a great bargain? Or will Sal. Oppenheim be another case of a venerable institution being on the wrong side of the market, Lehman-style? Only time will tell. But it looks a rational decision to me and having just seen that the sellers of IVG include Janus, an Anglo-Saxon fund group, I'd much rather side with Sal. Oppenheim.

Any property-related investment has to be seen as speculative just now, but if you do want to dip into this area, IVG is as safe a bet as you're going to get.

Sven Lorenz is author of the investment blog Undervalued Shares and CEO of the Swiss fund management firm ARBB.

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