Good morning, ladies and gentlemen, welcome to the conference call regarding TAG Immobilien AG to enter the residential-for-rent market in Poland. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Now, I hand the floor over to your host, Mr. Martin Thiel.
Yeah, many thanks, good morning, everybody. This is Martin from TAG. Many thanks for dialing in for our conference call today. Today with a new topic. You surely have seen the acquisition that we announced last Friday, the acquisition of all shares in Vantage Development. Of course, it's not only an acquisition of another property company. It's of course, what's more important, our entry in the Polish residential rent market. I think you have seen that we have published a presentation on our website. Let's go through it, and afterwards, of course, as always, we have enough time to answer your questions. Let's start on page two, where we show the executive summary of the transaction. We'll focus on this slide that's just on the transaction scope and the key transaction terms.
After that, on the next slides, we can discuss the strategic rationale and why we entered the Polish residential market and why now. Talking about the transaction scope, what have we accepted, what kind of company, what kind of product? We acquired, or we signed a contract to acquire all shares in Vantage Development S.A. Vantage Development S.A. is a Wrocław-based developer within the residential business, within this development business now since exactly 2007. It employs approximately 100 employees, developed and handed over approximately 4,000 units so far. To give you some main data, some main figures from the last full financial year, so that you get a rough understanding of the size of the company. Turnover, the sales revenues last year in 2018, so in the last full financial year, was EUR 112 million.
The EBIT amounted to approximately EUR 28 million, and the net income was EUR 18 million. To make it short, a well-established and very well in the market-known mid-size developer with very good financial numbers. The company itself is still listed on the Warsaw Stock Exchange, but there's basically no trading in the shares, as all the shares are held by just three companies. That means technically we have to run a tender offer process for the shares in Vantage Development, but we already have a 100% tender commitment secured from the selling shareholders. This tender offer that will be announced in Poland starting on Thursday is more or less something technically, we already have the commitment of 100% of the selling shareholders to tender their shares. Talking about the purchase prices, the key transaction terms. The full total consideration for the tender offer is approximately EUR 131 million.
This EUR 131 million contain, in the amount of EUR 46 million, the purchase price for the commercial real estate business of Vantage. This commercial real estate business is not taken over by TAG. This will be sold back-to-back to the selling shareholders. That means of the EUR 131 million, EUR 46 million will directly be repaid to the company, to Vantage Development, and that means also to us. Therefore, the net consideration, the total purchase price for the residential business that we acquired in Vantage Development amounts to EUR 85 million. It's not just the residential business, and that's important for us, the whole platform that we acquired. That means all the employees stay in the company. What is sold via the commercial business is just the assets.
We also acquired the cash that is in the company, and we expect that the cash amount in the company will be more than EUR 30 million by year-end. Just to give you an idea, the really net consideration after the cash that we acquired is perhaps a little bit more than EUR 50 million. Therefore, we think the whole terms of the transactions are very effective for us. This is some introductory words on the transaction scope and the key transaction terms. Let's turn to the next page, where we show the portfolio map of the regions that you already know, our regions in Northern and Eastern Germany, and then the new region, Poland. Looking at the portfolio map, it's quite clear that we're doing here perhaps something natural.
Yes, we are entering a new market, yes, we go outside Germany, but we're going really direct into a neighborhood country. We add a new region to our existing portfolio. That's also important to point out already here, the decision or the transaction that we're doing here is definitely nothing where we say, "Well, in Germany, there are less opportunities to acquire," or, "In Germany, we have some concerns about our future business." That's definitely not the case.
We simply see that the Polish residential rent market is something that allows us to grow in very attractive terms in the future, and therefore, we add a new region to the existing portfolio. Looking at the distances, if you compare some cities in Poland, like for example, Wrocław, in German Breslau, where the main focus of Vantage Development is today, that's even closer to Berlin, or of course, even closer to Dresden than other regions that we currently have in Salzgitter or in the Rhein-Ruhr area. Turning to page number four, what's the strategic rationale behind it? As I said, it's an evolution of TAG's acquisition strategy. That means we expand into a directly neighboring region. What is special about the market that we enter and special about the product that we will offer in the future in Poland is that we're talking about new developed products.
That means newly developed apartments. Compared to what we are buying in Germany, this is now really something different as we're buying and with the help of Vantage, developing newly constructed apartments. Why is that the case? If you look at the Polish residential market, first of all, it's very fragmented, and also you have a quite substantial number of older apartments. Apartments that are now 30, 40, perhaps 50 years old, not anymore in good shape. Therefore, what is coming new to the market, the new constructed apartments, is very attractive, also very attractive to future tenants. Perhaps the only way that makes sense from our point of view to build up a new residential for rent portfolio is to build this up via newly constructed apartments. The nucleus for this, the starting point, is Vantage Development.
We secured a pipeline of 5,300 units that Vantage Development is currently working on. Out of which we think that more than 3,000 or up to 3,400 units are already available for the residential for rent business. Our midterm growth target for the next three to five years is to have 8,000 to 10,000 units in Poland available for the residential for rent market, and the first step is already done with Vantage Development. As I said, out of the 5,300 units, our estimates are that up to 3,400 units are really available for the residential for rent business. Vantage Development is offering definitely a high quality product. If you look at the apartment, if you look at the buildings, that's of course nothing luxury, but we would consider or we would estimate it's more the mid to upper end of the market.
For us, the interesting thing about this step to Poland is that, of course, we are then quite quickly one of the largest landlords in Poland. Clearly, we are having a kind of early mover advantage going into the Polish residential for rent market, which is at the moment very fragmented. There is, of course, already residential for rent business. For example, looking at the business that Vantage is currently doing, they are currently just selling the apartments. Also they have already a share of approximately 30% of their disposals that go to private individuals that are renting out the apartments afterwards. These are just private persons owning perhaps 5 or 10 apartments and renting them out quite successfully.
Of course, that's then not comparable with a large landlord with business like we are doing in Germany with economies of scale we want to create by doing this much more professionally. Important for us, of course, is that we see an attractive risk-return profile. We're expecting strong cash returns from our investment in Poland. The yield on costs, so that means the rent that we expect compared to the investments we do, for example, via the investments in Vantage Development, are between 7% and 8%. If you compare the 7% or 8% gross yields with gross yields to newly constructed apartments in Germany, that's clear that this is of course much more attractive. Coming to page number five, of course, the question is, why are we going to Poland and why are we doing this right now?
First of all, as I said, definitely nothing against the German market. We simply see in Poland not only very good macroeconomic developments, like a very low unemployment rate of 3.5%, like a very strong GDP growth rate of currently 4.2%. We especially see a mismatch between supply and demand in the Polish residential market. There's a supply shortfall in all the larger cities in Poland. As I said, many of the buildings constructed after the Second World War now reach a certain age. Therefore, the demand for higher quality product is definitely there. Secondly, within the society of Poland, there's a certain change. Currently, Poland has a home ownership rate of approximately 85%, which is that 15% of the people are renting their apartments. There's a clear trend, especially concerning younger people, that they are renting apartments simply to get or to have more flexibility.
Also in Poland, it is the case, like in many other countries in the world, that perhaps after two or three years, people move to other cities, move to other countries to work. Therefore buying an apartment, also in Poland, is not anymore the thing everyone does. This residential-for-rent market segment is clearly upcoming. Looking at the customers of Vantage Development already today, we're talking here about young people who finish their education, who started to work in the age between 25 and 35 on average. In many cases, young couples, perhaps with one child, that are simply searching for an attractive apartment in a larger city. That's also something which is different concerning our strategy in Poland compared to our strategy in Germany. Where in Germany, we are going more to the so-called B or C locations.
That means not the big cities, but cities like, for example, Chemnitz and Halle and so on. In Poland, we will concentrate on the larger cities. For example, like Wrocław, but also other cities are attractive for us. Cities like Poznań and perhaps mixed to long-term, also cities like Łódź, Kraków, or the Tricity in the northern part of Poland. Another advantage in Poland, that's, of course, an intensive discussion in Germany today, is the regulatory environment. Basically, in Poland, there's no special tenant or rent law. Everything that landlords are doing in Poland is just governed by the normal civil law. Therefore, in Poland, as a landlord, you've got a lot of freedom how to create the rents, how to design the contract of all your tenants' contracts. I already said the risk-return dynamics are very attractive.
Gross rental income yield between 7% and 8% we expect. Not only an attractive gross yield, also the EBITDA margin that we expect is higher than in Germany. Why is that? The operating costs in Poland, the salaries, the costs of the SG&A are of course much lower than in Germany. Of course, and that's not included in the EBITDA margin, the CapEx needs in the future are very, very small as we're talking here about a product for new constructed apartments. Every time we're talking about, for example, potential FFO effects, this nearly equals completely expected AFFO effects as you don't expect to have large CapEx needs in the future. On page number six, you see again an overview of the transaction scope, as I already mentioned.
Vantage has a current secured pipeline of approximately 5,300 units, out of which approximately 1,900 units are earmarked for sales. Why is that? Why is there a number of 1,900 units already earmarked for disposals? First of all, a larger part of this 1,900 units, approximately 60%-70%, are already sold. The remaining part, it doesn't make sense from our view to take this to the residential-for-rent business because then that's the typical scenario where you have an apartment building, you already sold apartments, and then it doesn't make sense, as it is the case in Germany, to rent out just some apartments in a full apartment block, and you end up with a kind of Swiss cheese for the renting business. Therefore, what we are trying to bring to the residential-for-rent market, of course, more completed full apartment blocks.
Therefore, we have to have this 1,900 units that are earmarked for individual sales, and then the remaining up to 3,400 units are potentially available for the renting business. On page number seven, you see some more figures on our platform and our plans in Poland. Looking to the top right, you see the key figures for the long-term renting business. These figures, these results, will kick in from the year 2021 onwards. Our investment in Poland is definitely something for the mid to long term. In 2021, it is the case because what we will rent out in 2021 will be constructed right now. Then we have the usual construction time of one and a half years. We will have the first effects on our FFO 1 from the letting business from 2021 onwards.
I said, the midterm target in Poland is to have between 8,000 and 10,000 apartments. Already secured by the acquisition of Vantage are approximately 3,400. If you apply the estimated gross yield on cost and the estimated EBITDA margin, we're talking about really for the mid to long term perspective, looking at the 8,000 to 10,000 units, about net rents in Poland between EUR 60 million and EUR 75 million per annum. Already secured, already available via the Vantage business is an approximately EUR 25 million of rents. The short term outlook for Vantage is also very attractive. Referring to this 1,900 unit that I mentioned for the selling business, Vantage has achieved in the past EBIT margins of approximately 20% and net income margins, so really after all taxes, after financing, of approximately 15%.
From these disposals of 1,900 units, we expect estimated net cash flows of EUR 30 million. Out of which, in the financial years 2020 to 2021, will be approximately EUR 20 million, EUR 10 million already included in the financial year 2019 numbers. In the first two years, what we think is a quite attractive cash flow from net disposals, and afterwards when we build up the platform step by step, attractive cash flows on the renting business with gross yield on cost between 7% and 8%. On page eight, you see highlighted a summary on the impact for our shareholders. As I said, and it was always important for us when we thought about entering the Polish residential market, we really have here a strong cash flow profile.
Yes, of course, you can discuss where the risk profile is different in Poland, and of course, compared to the German residential market, nearly everything else in the world has a high-risk profile. We think looking at the growth units that we achieve with the acquisitions in Poland, with newly constructed apartments in the large cities in Poland, this is definitely something that gives us a very strong cash flow and an attractive risk-return reward. The transaction will for sure be FFO accretive in the first years, as I said, accretive to the FFO 2. That means the disposal business. From 2021 onwards, of course, we will have a significant and attractive impact on our FFO 1. An advantage for us is that currently Vantage Development has, as it is very natural in Poland, of course, higher financing costs than we have.
For example, Vantage Development has issued in the past also bonds to finance their activities. Currently, the total volume outstanding regarding the bonds is approximately EUR 14 million, and the average interest rate of these bonds is around 6%. That makes it clear that every refinancing we do in here in Poland will create financial cost synergies. Therefore, we're doing here business in Poland at attractive gross yields with financing costs that are then perhaps very similar to what we are doing here in our German business. The transaction will definitely not change our LTV targets, our LTV assumptions. The current LTV target of a maximum of 50% will stay in place. We're paying the total transaction amount from our cash position.
Looking at the numbers, this will of course not change our financial metrics in a negative way, and the LTV also after the acquisition will stay well below the current target of 50%. Coming to page number nine, some last words on the timetable and the timeline for the tender offer. I already mentioned that we have to run this tender offer more technically, although we already have the commitments of 100% of the shares outstanding. The tender offer will be announced formally on the 14th of November, so that's this week on Thursday. We're running the usual process. That includes also an anti-monopoly clearance filing. We clearly expect that this will cause not any problems. The subscription period and the tender offer period will end end of January or beginning of February next year.
That means the closing of the transaction payment and settlement will be perhaps early in the first quarter of 2020. After that, the clear plan is to delist the currently still at the Warsaw Stock Exchange listed shares, so that we have a non-listed company afterwards. That's it from my side as a short overview of our transaction regarding the acquisition of Vantage Development, about what we are planning in Poland mid to long term. Of course, now I'm happy to answer your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and the star key to state your question. First up is Andre Remke from Baader Bank. The floor is yours.
Yeah. Good morning, Martin. Thanks for the presentation. A couple of questions, please. First one, you mentioned the motivation to step into the Polish market. Maybe some indications on the process itself. When did you start to consider regional expansion abroad? Or was it simply that you have been getting aware of the opportunity in Vantage, to step into this market?
Yeah. Thanks for the question, Andre. This was not the way that we simply had the opportunity to acquire Vantage and then thought about the possibility to enter the market. It was the other way around. Basically, I would say one year ago, we start to think about entering foreign markets, quite quickly we figured out, well, the perhaps only country that makes short-term for us sense is Poland. We started to look at the market, we quite quickly found out, well, what's the difficult thing about the market? The numbers are attractive. Poland, the whole economical development is very attractive. What is good, what is a step that makes sense to enter the market?
If you look what is on the market traded as portfolios, and as I said, we are always talking about new developments, you can buy perhaps portfolios of 200 units, 300 units. Therefore our doubts were, can we really enter the market with a size where we really have a secure pipeline, where we really can get at least midterm into a size that makes sense to invest? This size is basically to add another region. That means another 8,000 to 10,000 units. Vantage came to the market via a structured process some months ago, and then of course we worked intensively on that and said, well, there's secured pipeline of Vantage of more than 5,000 units. That could be the nucleus for us.
On top, that's something that you should expect to follow, can then add 200, 300-unit portfolio step by step to create the targeted size of 8,000-10,000 units.
Your midterm target of 8,000 to 10,000, you mentioned this in the presentation via development. Will this be not directly via Vantage Development? You also consider further the acquisition of other projects or completed properties from other developers. Is that right?
Yeah, that's the case. Of course, both ways will be continued. We will develop also other projects via Vantage. It should not only stay at this 5,300 units. Of course, the plans are to acquire further land banks via this company and then to build them via Vantage for our own pipeline. Yes, we're also looking at other project developments to acquire directly from other developers.
In general, the potential via Vantage Development, what is the track record for the 4,000 units, in terms of timeline? How many years did they need to build this up?
Perhaps to give you some current numbers. What they announce, what they expect to sell this year, 2019, is approximately 900 units. In the financial year 2018, I think they've sold 700 to 800 units. Given the, let's say, it's not limited financial power, but given, let's say, what was doable for them, of course, with the financial funds that we have, even more is possible. For us, it's very clear we need to follow here a targeted approach. To add on top another, let's say, 1,000 units year by year via Vantage, that should be absolutely possible.
Okay. Thank you. Another question. You mentioned a growth yield of 7%, 8%, at least on the rent portfolio. I assume that this is the development yield on cost. How does this compare to yields for existing properties in Poland in comparable regions? What do you expect from, let's say, appraiser's point of view, how to value such newly built properties after completion?
Yeah. To give a concrete number and to talk in round numbers, we're currently talking in the Vantage case about a rent multiple of 13x rent. The expected rent of, as we said, EUR 25 million in the future is then based on total construction cost, total investment cost, including the land of approximately EUR 330 million. If we divide that's 13x rent and a little bit more than 7.5% growth yield. Yes, of course, if we acquire directly from another developer, the rent multiple, the in-place multiple is nothing at 13%, but perhaps a little bit more than Not 13%, sorry, 13x rent, then it's perhaps 14x rent or 14.5x the rent. These are approximately the differences.
For new construction.
For new constructions. We're always talking about new constructions and always talking about cities like, for example, Wrocław or like Poznań or like Kraków. Really the large cities in Poland.
Yeah. Okay. Coming back to the offer price of, let's say, EUR 85 million. How is this being calculated? What is the basis for this calculation, and Because the missing point is, what is the amount of CapEx you do have to pay to develop the at least 3,400 units?
Translating this into our quite simple numbers that we use for German portfolios, basically the key numbers are like what I just said. 13x rent. That includes then all CapEx. 7.7% cost yield on total investment costs. If you look at it from the other way around, how are, for example, prices for developers? We're talking here about a EBITDA, and in relation to the purchase price of, if you really deduct the cash that is in the company or perhaps 5x the EBITDA. So that gives you an idea what the pricing of this transaction is.
Mm-hmm. This also excludes the amount you gave for the commercial properties. You gave us some figures for last year of an EBITDA of, let's say, EUR 21 million, but this includes also the commercial segment.
That's right. The impact from the commercial portfolio is quite moderate. The commercial portfolio of Vantage that is now sold to the current shareholders consists of land banks, so without any debt, developed projects, and three office parks, small office buildings, which are currently rented. As it does not disclose, I can't give you exactly the figures for the residential segment only. When I'm talking about total turnover of EUR 112 million, let's say 95% of that applies to the residential business, and therefore out of the EUR 18 million net income, also the very largest part of that applies to the residential business.
Okay, perfect. The very last question, you mentioned to expect FFO 2 contribution of EUR 30 million from the disposal of the assets. You mentioned 2019 to 2021. For 2019, will this belong to your accounts as the closing will only happen in 2020?
You are right. The cash flow already belongs to us, but as the first-time consolidation will be just in the first quarter of 2020 in the FFO 2 figures for 2019, we will have no impact. Out of this EUR 30 million total cash inflow, approximately EUR 10 million we expect already in 2019. That means, yes, the cash is ours, but no contribution technically to the FFO 2 because we are not consolidating in 2019 Vantage. The remaining approximately EUR 20 million will be then in the years 2020 and also a little bit in the year 2021, then also affecting positively our FFO 2. What we have not looked at so far are any exact outcomes and consequences from the IFRS purchase price calculation. Therefore, this EUR 30 million is a simple cash flow approach.
Okay. That's from my side. Thank you.
Welcome. Thank you.
Now we're coming to the next questioner. It is Sander Bunck from Barclays. Over to you.
Hi, good morning. Various questions from me as well, please. Just first on the acquisition price, can you give a bit more detail on what it exactly is you acquire? What is at the moment in the business, what are your annual operating costs within the business? Is it mainly land that you're acquiring or options to land, or is it mainly planning consents? Just a bit more comments on that, please. That's the first one.
Thanks, Sander. To make it simple, we are acquiring the whole company, what is sold to the existing shareholders are basically these plots of land and these three office buildings, plus the respective bank loans. What is sold are purely assets or purely SPVs, we keep everything else. That means we are acquiring really the whole platform, everything what is really, let's say, the value of Vantage. As I said, the company employs approximately 100 employees. The business model is currently, of course, to acquire land banks and to develop, at the moment, residential apartments for sale. In the future, that's our plan, to develop residential apartments to rent it out.
Okay. These 100, what are broadly the run rate in terms of the costs of this business?
Well, as I said, the last figures from the financial year 2018, the turnover was approximately EUR 112 million, the EBIT was EUR 21 million. About future platform costs that we have in mind to run the current pipeline, so the approximately 3,000 to 4,000 units, we pencil in approximately platform costs for, let's say, EUR 1.5 million- EUR 2 million a year. That should be quite moderate, at least definitely less than in Germany. We're talking about an NOI, so that means rent after directly attributable operating costs for NOI margin of more than 75%, more around 78%. Also higher margins than we have in Germany. Clear because the maintenance requirements for new constructed buildings are lower than in our portfolio in Germany.
Okay. That's very helpful. In terms of the land that you are acquiring, is it already all the land for the 3,400 units or the 5,000 units that you intend on developing? Or is it only for a certain portion of that?
No, that's all secured. It's not, let's say, mid to long-term pipeline. When we talk about the 5,300 units in total, out of which we think up to 3,400 units are available for the letting business, that's all secured. That means really acquired. For not every part of the pipeline, the building permission is already there, but that's a very natural process. We have no projects in the pipeline where perhaps there are complex transactions required, like changing zoning plans from commercial use to residential use. That's really a secure pipeline.
Basically, of the 5,300 units, you own the land and you have pretty much a planning permission for most of the development units.
Yeah. That's correct.
Okay, perfect. Thank you. Just a bit more on the market because quite frankly, I'm not that familiar with the market at all. Just kind of looking at the various metrics that you've provided, it really looks to be a premium product. If you look at affordability, mainly on page 14, that you're offering. Also on page 15, it looks actually that market rents in Wrocław actually peaked in the early 2017 and have since been a bit on the decline. Just trying to get a bit more feeling on how you're positioning this product and what you're offering here. What the additional risks are, because obviously it is not as risk-free as Germany. Just to get a bit more understanding on how you think about that.
You're perhaps absolutely right. If you look at prices, we're talking here about per square meter prices in the letting business, which is currently on the market, not mid to long-term assumption, but really it is currently paid for this kind of product. For example, in Wrocław, the per square meter prices are between PLN 45 and PLN 50 per square meter. That's, let's say, between EUR 10 and EUR 12 per square meter. That seems to be quite a lot. The typical household looks like this. We're talking here about more smaller apartments. For example, a 40 to 45 square meter apartment is absolutely the typical product. We're talking about a household size of at least two people. A young couple, perhaps with an additional child, is living in this apartment. That's the way important people are financing this product.
Two people are living there, perhaps both of them working, but on a definitely lower square meter area compared, for example, to Germany. On this basis, for them, it's absolutely affordable, and we're talking here about people who are then not in, let's say, the lower income segment, but more in the mid to upper end of the income segment.
Okay. Basically, the stats on page 14 are more for the average, but that does not necessarily apply to the type of people that you're targeting with your product.
Yeah.
Is that correct?
That's correct. That's, of course, only average numbers for Wroclaw, and that includes really everything. As I said, perhaps in Poland, you have to look at two different parts of the residential market. The first part is really the older product who are now coming into a certain age need to be replaced. On the other side, the clearly more mid to higher quality products like we are offering via Vantage.
Okay. In terms of the market rental in Wrocław, which looks like it has been down since the peak in 2017. Also looking at the level of development that at the moment seems to be going on, it seems like development activity is quite strong at the moment, more generally. How are you thinking about market rental growth going forward?
Well, in our model, we really have cautious assumptions, that means we're talking about rental growth that really fulfills our requirements between perhaps 1% and 2%. That should not be really an aggressive assumption. What we clearly see in this product that we're offering is the very strong demand. For example, I think I mentioned that already currently 30% of the disposal of Vantage is basically for the residential business as it goes to people who are renting it out afterwards. The time it takes to rent out an apartment after someone acquired that, we're talking here not about weeks, we are basically talking about some days. Already, or a very short time, afterwards the apartment's already rented.
Looking at the purchase price assumptions, the selling price assumption for Vantage, currently compared to some months back when we started to take a first look at the company, the realized prices are better than expected some months ago. Therefore, this gives us, let's say, a very good feeling and makes us very optimistic for the current stage of the market for our product.
Okay. That also means because I know you mentioned it earlier during the call, that you're targeting a yield on cost of around 7%-8%. If you look at the yield proxies that you're highlighting on page 14, they're all pretty much well above that. You're saying again, that is then probably not reflective of the type of product you are offering?
Yeah. That's correct.
Okay. Understood. One more on that. How does the rent structure work? Is it basically, do you agree a rent on a yearly basis, and does it then get reset to market? How should we be thinking about that?
Yeah, I mean, the contract can, of course, from both sides be terminated as it is in normal international context, in most cases after one year. You definitely renegotiate the tenant from time to time about the rental. There's no really rental law in Poland, so that's all part of the general civil law.
Okay, also no indexation?
Of course, you're free to do this, but there's no general law that rents are capped, indexed, or something like that.
Okay. It's very much on an individual basis. In principle, it's a one-year contract. Could be subject to inflation, but could also be readjusted to market upwards or downwards after a year, effectively.
That's correct.
Okay. Then very last one. Sorry for the various numbers of questions, but the very last one. How are you intending to fund the pipeline? Are you looking to do that through basically selling out of Germany and going into Poland? Are you looking to use other sources of funding as well?
What we want to do is that we sell apartments in our portfolios in Germany to fund our business in Poland. As I said, the business in Poland is really something additional. Therefore, we're talking about a portfolio of 8,000-10,000 units that we want to build up. Then we adhere, let's say, the very normal assumptions that we need to have for that. What is not needed is in the short term, any equity increase to finance debt. We can do this from existing cash. We can also issue bonds or promissory notes to finance debt. Of course, as investments become larger, which will not be the case or not be necessary in the next weeks or months, we also think about using equity for building up that pipeline.
That's then something which is very comparable to our financing strategy, financing needs in Germany. This acquisition is definitely nothing that should change our balance sheet metrics, which developed so positively in the last years.
Okay. Understood. That's great insight. Thanks very much, guys.
The next questioner is Peter Papadakos from Green Street Advisors.
Good morning. Just one question, really, on alignment with the Vantage team. Are you doing anything to try to retain key people? Obviously, you're going to rely on the local team as you understand the market.
Yeah
In more detail, what are you doing to retain some of the key people?
Yeah. Thank you, Peter. Of course, it was an important question for us because there could be, let's say, a risk. We buy the company, all the people leave. What we wanted to do when we entered the Polish residential market, that we not only buying assets, but also the platform. The know-how is gone in the next day. The top management, that means the two management board members and also the first layer below them, is already incentivized to stay in the company. Perhaps that's a more formal point and, of course, a financial point, but perhaps for us, even more important that we really get the impression in the discussions in the last weeks and months that they, first of all, are convinced themselves about our plans in Poland.
Secondly, that for them, of course, it is also an attractive perspective and attractive chance to be part of perhaps one of the, or the largest landlord in Poland. Then what was a certain limit in the past, that means the availability of capital, the availability of equity now is there. That means their sourcing activities can really be then translated into concrete projects. That seems for us is perhaps even a higher motivation than financial incentives that are already in place.
Great, understood. Sort of related to that, in terms of the business strategy of Vantage going forward, will you continue to pursue development to sell as part of that business? Will it, over time, really all be TAG is the acquirer of developed units?
Yeah. You're right. It will, from our point of view, never be a 100% approach. This also depends then on markets and depends also on the projects. Simple example, if we acquire a new land bank via Vantage and say, well, that's available for, let's say, 1,000 apartments, perhaps then there are parts in this development project of, I don't know, 100, 150, 200 apartments where one would say, well, that's then something where the demand from the selling pipeline or from the seller perspective is much higher because these are then the larger apartments, the more high-priced apartments where we have demand and where we have a better choice to sell it. Of course, the idea is to have the very largest part in the relating business.
It will, I think the realistic assumption, never be a 100% very strict approach and something that is perhaps very natural. Therefore, we are always speaking of up to 3,400 units available for the letting business. Yes, the clear plan is to have that, the largest majority in the letting business. Let's see how this develops in the future. Clearly, the business model is to have the very largest part of business in the letting business in Poland.
Understood. Final question, just theoretically, if you buy in a year's time, 2,500 apartments in Kraków. What happens day one in terms of who does the letting, the management on day one?
The idea is to build up this letting platform now within Vantage, within the team. The good thing is, we're talking about now a time of perhaps one and a half years, perhaps a little bit less, until we really see the first tenants moving in. Remember, from 2021 onwards, we'll have really cash flows from the letting business. That allows us now in the next month to build up the processes for the letting business. That's something where we say, "Well, that's where we are hopefully very experienced, where we know how to do it." Therefore, this combination from the TAG know-how, how to structure the letting business from the local market know-how, from the sourcing power of Vantage, this is a good combination.
In other locations in Kraków, of course, then the central management would be from within Vantage, that means that's from Wroclaw. Then I'm sure we will follow quite quickly our approach that we're using also in Germany, that yes, of course, also in Kraków, we need people managing the portfolios right on the ground, right where we own the properties.
Yeah. Okay, great. Thank you.
The next question comes from Thomas Neuhold from Kepler Cheuvreux.
Yes, good morning. Thanks. Thank you. My question, I actually have two. First is a follow-up on the 8,000 to 10,000 unit long-term target. Does this, or will this eventually also involve a regional expansion within Poland, or you want to stay focused on the Wrocław region?
No. Good morning, Thomas. This also includes other cities. It's not purely Wrocław. This also includes, for example, cities like Poznań or like Kraków.
Perfect. I was wondering if you can give us an overview about the similarities or differences in the regulatory environment between Poland and Germany, especially in terms of approval process, building requirements and regulations which govern the construction process and the rights of the acquirer of buildings and also what the typical throughput time in Poland is versus Germany, between the acquisition of land plots and then you can really hand over the apartments to tenants or buyers.
Yeah. That's really a big difference, and in a positively manner. If you really concentrate on a project, if you really, let's say, acquire the plot of land or secure the plot of land, the time until you get the building permissions, we're talking here about months and not years like in Germany. Then also the construction process is then done, as what we have observed, quite quickly. We're talking about whole cycles of perhaps two years, three years, compared to perhaps double the time it takes in Germany. This whole process, yes, of course, it's regulated and it's a formal process. What we have seen, not only at Vantage Development, but generally in the market, the whole processes are much quicker, much more natural, much more in a normal timeframe as it is in Germany.
Whereas in Germany, we really talk about extremely long periods of time to develop products and extremely long time until you get certainty whether the building permission is granted and so on. That's different in Poland. Therefore, a large part or a substantial part of the development risk that we have in Germany is in Poland, from our point of view, different and much lower.
Okay. In terms of minimum quality criteria you have to have, if you construct a residential building, are there also differences between Germany and Poland?
No, we wouldn't say this. Of course, we have done within this transaction or within the whole process an intensive due diligence, also a technical due diligence. We really had also external advisers who went into the buildings who made a deep diligence on the construction quality, on the whole building process. The quality is absolutely comparable to what we have in Germany. As I said, we're talking here in the Vantage case of a product more between the medium and the upper end of the market.
Thank you very much.
Now we're coming to the next questioner. This is Georg Kanders from Bankhaus Lampe.
Yeah, good morning from Düsseldorf. I understood that this up to 3,400 units you have acquired, this will be completed until 2025. Is this correct, or is this 8,000-10,000 the target for 2025?
No, that's correct.
That's correct. The 8,000-10,000 is even a little bit longer-term target? Is this
The idea is to acquire also from other developers or now to, first of all, perhaps speed up the process at Vantage Development, because now the financial power is there to build that. Plus to additionally acquire project via Vantage. We're talking about a mid-term target to 8,000-10,000 units within the next 3-5 years, and that means in 5 years from now on, we're talking in about 2025, perhaps the 8,000 units should already be in the process of producing cash flows for us via the letting business.
From the larger cities of Poland, I see on the map, Szczecin is quite close to Germany. Is there other economic environment there that it's not your preferred target, or because it's very close to already existing properties?
Yeah. Yes, of course, Szczecin is very clearly also a market we are looking at. The reason is, you are absolutely right, it's very natural because it's very close to the German borders. Szczecin is not part of what Poland calls the so-called Big six cities, but it's definitely one of the larger cities. Let's say below the size of Szczecin, we're not so much looking at the cities. Contrary to Germany, we're really here concentrating in Poland on the larger cities, like, for example, Wrocław or Poznań.
You made more or less two circles. Warsaw and Krakow would then be in the larger distance, so a little bit something for a little bit later and more Poznan or Lodz as a premier target?
Yeah.
It's just by accident on the circles.
Yeah. We internally discussed also about the circles. To make it concrete, we very much looked at markets like Wrocław, Poznań, and Szczecin right now. This is something where we really feel comfortable, but of course, a very close and logical next step would then be to expand in cities like, for example, Kraków or like Łódź, or perhaps even like Warsaw. Warsaw needs to be really handled with care. Of course, good dynamics, but in Warsaw also price levels are then in a region where perhaps sometimes we then see gross deals that are not attractive for us.
Okay. Thank you very much.
Next up is Thomas Rothaeusler from Jefferies.
Hi. Morning. Just one question to get a rough idea about the residential developers market in Poland, and get an idea about the competitive position of Vantage there. I guess it's a fragmented market and also are there other listed players in the space?
Yes, there are other listed players in the space. You have names like, for example, Echo Investment, who by the way, was just recently sold to a Hungarian fund, and developer companies like Dom, for example. Yes, there are also larger players, but what we especially found interesting at Vantage is, first of all, this focus on a very attractive region and a very attractive city of Wrocław. Secondly, let's say, a team that really fits to us. People that, let's say, have a kind of hands-on approach, that are experienced, where we simply have just the feeling this is a team that we can integrate quite quickly. From the size is a good first step for us, because it would not have made sense for us to acquire a huge developer in Poland who have often then a really, let's say, wide business model.
Not only residential, but also constructing shopping centers, constructing offices and so on. That was not what we were looking at.
Maybe a last one on recent developments of land costs and also CPI development. A house price inflation, I think you gave some figures. Just to get a rough idea of what the numbers are there, maybe as per square meter? Just to get a rough idea.
For example, the current disposal prices at Vantage Development on average, of course, it differs a little bit from project to project, are at, without the so-called fit-out cost, at EUR 1,800 per square meter. Including the fit-out. Fit-out means in this regard, in Poland, it's very natural to acquire, as a private person, the apartment without the bathroom, without the doors, really much more basic. If you include the fit-out cost to the selling prices, you are perhaps at EUR 2,000, EUR 2,100 per square meter. What we had in the last years is, of course, an attractive growth in the square meter prices. We don't think that the current level is already at a level where perhaps this is, let's say, the end of development.
Yes, for example, in 2018, the difference in per square meter prices in Wrocław was more than 10%, I think 13% was the exact figure, above the previous year. Again, we're talking here about small sized apartments and therefore, for the people that buy this apartment, or even more for the people that rent the apartment, prices are still affordable.
Mmh. Do you have a rough idea about land costs, what you currently pay, and CPI dynamics or cost dynamics in the business?
Yes. Let's say the wages had also increased strongly. I think we had last year in Wrocław was around 5% or 6% on average, or even in whole Poland, wage growth in the larger cities. We're talking here really from a different basis in absolute terms. That means that also for our platform costs, even if we have strong growth in wages, the absolute costs are for a long time, for us, definitely attractive. On the other side, a strong growth in wages and salaries is then for us more good news because this then creates more and more dynamics and more demand in the product that we offer to the market.
Okay. Thank you.
Mr. Thiel, at the moment, there are no further questions.
Okay. Many thanks all to listening to our call. As always, if there are any questions left, please do not hesitate to contact our IR department or myself directly. That's it from our side. Many thanks again for listening to the call, and talk soon to you.