Dear ladies and gentlemen, welcome to the H1 2019 Results Analyst and Investor Conference Call of Vonovia SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Rene, who will lead you through this conference. Please go ahead.
Thank you, Angela, and welcome everybody to our earnings call for the first half of 2019. Your hosts today are CEO Rolf Buch and CFO Helene von Roeder. Rolf is enjoying some time away from the office this week, which is why we are in different locations today. In case there's any delays we may have in the Q&A later, I ask for your understanding. I assume you have all had a chance to download the presentation. Just to be sure, it is available on our IR website in the section Latest Publications. Rolf and Helene will lead through this results presentation on the basis of the agenda on page two, and will then be happy to take your questions. Without further delay, let's get things started, and for that, I'm handing over to Rolf.
Thank you very much, Rene, and also a warm welcome from my side. Let me start with the highlights of the year H1 2019. Performance similar to what you have seen in the Q1. We continued our solid operational performance across all our four segments: Rental, Value Add, Recurring Sales, and Development. I'm happy to say that we are well on track on all the segments and that we look with confidence also to the remainder of 2019 and beyond. Of course, I will come back to regulation later, but the confidence is completely intact. Our adjusted NAV at the end of H1 is EUR 48.51, compared to last year's end 2018, it is up 17.1% in absolute terms and 8% on a per share basis. Similar to last year, we have revaluated around two-third of our portfolio. Basically, the 26 largest locations in our portfolio, plus Vienna, plus Sweden.
The remaining one-third was not revaluated, but will of course be part of the 2019 full year revaluation, where we will then revaluate 100% of the portfolio. This half year revaluation resulted in a 7.9 value growth for the revalued portfolio only. I think Helene will talk about this later. Our LTV at the end of Q2 was on 40.4 and the debt to EBITDA multiple was 11.2, so both are very comfortable levels. We feel that we have a very solid balance sheet. Coming to regulation, I think a lot of questions will arise later. I personally think that the rent freeze legislation in Berlin is scheduled for later this year, and it will come as it was announced in the points in July.
I personally do not see any fundamental change in the legislation process in spite of the fact that some fundamentals of this legislation will have constitutional concerns. We expect that the Federal Constitutional Court will rule this legislation later, but this might take a long time, even it might take 2 to 5 years until we have a ruling. We continue to see the spillover risk of the business outside of Berlin extremely limited. I think there is clear message from all other states that they have understood that this is not the right way. Especially about regulation, we have also included a separate chapter in our FS financial reporting to this subject. With this, I hand over to Helene.
Thank you very much, Rolf, and a warm welcome from my side. On to page four. You see that we show growth across all segments. This is of course partly driven by the inclusion of BUWOG and Victoria Park, which only had a small impact in the first half of 2018. The average number of residential units in H1 2019 was 3.8% higher than in the prior year period. On that basis, we actually grew the adjusted EBITDA total by 22.2% and the group FFO, which is the basis for our dividend, by 12.9%. Group FFO per share was up 7.7%. You also see that while recurring sales and development make a considerable contribution to overall EBITDA and will continue to do so, the operating business with rental and value add clearly remains the largest part of our business.
Let's have a closer look at the rental segment on page five. Rental income is up almost 14% on the basis of a larger portfolio and organic rental growth. The slight increase in maintenance expense is volume driven. On a per square meter basis, maintenance did not change much. The increase in operating expenses needs a bit more explanation. In Sweden, rents are reported on a gross basis, so net cold rent plus auxiliary costs all in one number. The concept of a net cold rent does not really exist. For Victoria Park, this means that around about EUR 9 rent per square meter are the all-in rent. About EUR 6-EUR 6.50 of that amount are net cold rent if you apply our logic, and the remaining EUR 2.50-EUR 3 auxiliary costs. You cannot break it down to the last few cents, but that is broadly it.
These auxiliary costs paid implicitly by the tenant are included in the rental income, and because they're basically a pass-through item, also in our operating expenses. Rough math shows that it's about EUR 20 million for the first half year based on the 1.1 million square meters of Victoria Park, and an assumed EUR 3 per square meter. The impact of EUR 20 million in the rental income line is not all that material, but in operating expenses, it's quite significant, and it distorts the comparisons. Page six shows the main operating KPIs for the rental segment. Organic rent growth was at 4.0% year-on-year and in line with our expectations at this point. As you will see on the guidance page later, we remain optimistic about our full year guidance and a rental growth of around 4.4%. The vacancy rate is basically unchanged and remains low at 2.9%.
This number, as you know, is mostly the result of our actual investment activities. Then finally, maintenance per square meter is broadly on the same level as in the prior year period. I spent some time on our last call reminding us about the difference between maintenance expense and capitalized maintenance as EBITDA protecting on the one side and our investments that grow the EBITDA on the other. I don't think there's a need to belabor this point again. Just a reminder, let's please keep maintenance, whether it's capitalized or not, separate from the investments that drive growth. Page seven is on our investment program. We are still well on track here with the majority of the investments completed or kicked off. This includes development to hold, upgrade building, and optimize apartment, but it does not include development to sell investments.
Our neighborhood development projects, which usually include all three types of investments, are allocated across these three categories. We continue to guide a total volume between €1.3 and €1.6 billion for this year, and currently see us at about the middle of this range by year end. There's still some time to go, which may move this number a bit, we want to keep the flexibility and the range for the time being. While yields and IRRs differ between the three investment types, we continue to expect a 9%-10% average IRR across all investments in line with previous years. There will always be cases and reasons for shifting capital from one investment bucket to another. At the end of the day, we remain confident in our ability to invest the €1.3 billion-€1.6 billion at an average IRR of 9%-10%.
Page eight shows the breakdown across the strategic clusters in our portfolio. Most noteworthy is the fact that we have 60% of our portfolio still earmarked for investments. More than that, because many units undergo investments twice, once for upgrade building and once for optimize apartment. We have plenty opportunity for at least the next 10 years. The other thing I want to point out on this page is that we sold 754 non-core units in H1 with a fair value step-up of more than 20%. We see this as a good indicator that the dynamics of the German resi market remain strong. Page nine, for those with good eyesight, is the overview of our regional markets. There are way too many numbers on this page to go through on this call, I do want to point out a few interesting facts.
One is the relation between rental levels and in-place multiples on the one hand, and purchasing power on the other. What is also noteworthy on this page is our reversionary potential. We've been reletting apartments during the last 12 months at a rental level 35% of previous rent. This is largely the result of our optimized apartment investment strategy. The apartment we let after the modernization is fundamentally different than before. Without these investments, we are bound by the 10% rent cap, of course. Finally, the rent growth of what is left in the non-core portfolio is only 1%, which confirms our view that these are non-core markets. With that, over to Rolf.
Oh, thank you, Helene. Let me just shortly talk about page 10, which is our value add segment. The EBITDA from the segment is up by 39%, as you can see, which is largely the result of our organic growth in this business. Only a very small part of this cost comes from the addition of BUWOG and Victoria Park for the first half year. You know we are targeting around EUR 20 million EBITDA cost in this segment per year. If you look on the figure, and given where we are already on the half year mark, it is probably safe to say that we will likely overachieve this growth rate in 2019, but the EUR 30 million was always a yearly concept for the long-term perspective. I think it's a positive surprise.
On page 11, I would like to show you also a little bit what we are contributing EBITDA from recurring sales. This is only recurring sales. Page 11 shows the results. We sold 1,234 individual apartments for gross proceeds of EUR 170 million. The average sales price per apartment increased by 9% year-on-year. The fair value step-up was up 40.5% on average and quite a bit higher than last year in spite of a higher basis. This is partly driven by recurring sales in Austria, where fair value step-ups are considerably higher than in Germany. All in all, recurring sales contributed EUR 42.4 million of adjusted EBITDA, so higher than previous half year of 2018. With this, back to you, Helene.
Finally, the last segment, the development segment on page 12. This segment includes all new constructions of apartments by way of building entirely new buildings. We distinguish between development to sell and development to hold for our own portfolio. The bottom line adjusted EBITDA was EUR 30.7 million in H1. To state the obvious, this part of the business is less linear than the rental business, so one quarter or half year might be a bit different from another one. Page 13 has more color on the new construction activities. We completed 433 apartments to hold for our own portfolio and 397 apartments to sell. In development to hold, we have around 29,000 apartments in the overall long-term pipeline based on the opportunities in our portfolio today, and we want to deliver between 1,500 and 2,000 this year.
All of these units are built for our own portfolio, and we capture the spread between the construction cost and initial valuation in our EBITDA. The development to sell part is a useful addition to the development to hold developments. On the one hand, it generates attractive margins, but what is maybe even more important is that you often need the higher margin from the to sell project to cross-finance the lower margin to hold development in order to make an entire development project work. Often you have one-third development at some form of subsidized rent, one-third at market rents, and one-third for sale, and the for sale volume basically carries the land cost. The pipeline for to sell is approximately 6,700 apartments. Page 14 shows the H1 valuation result.
As in prior years, we took a pragmatic approach to the H1 valuation and did not value the entire portfolio, but only about two-thirds. This includes the 20 largest German cities, plus six additional cities in Germany, plus Vienna and Sweden. The rest of the portfolio was not revalued and only adjusted for the capitalization of our investments. On that basis, values are up by EUR 2.6 billion or 7.9%. This compares to EUR 1.8 billion or 6.9% for the first half of 2018. The new valuation puts the overall portfolio at 22.3 times in place rent multiple and EUR 1,759 fair value per square meter. Sorry, EUR 1,795. No, 59. Not my number today. Page 15 shows a bit more detail across 15 regional markets in Germany. As I said, we did a valuation of our 26 largest cities, but not for the rest.
Translating this into the regional market logic means that for some regional markets like Dresden, Berlin, or Kiel, almost the entire regional market was revalued. For others, such as the Rhine-Main area or the Stuttgart regional market, only a larger part was revalued. This is indicated by the small pie chart. The table gives you the breakdown of the total value uplift between performance and yield compression on the one hand, and investments on the other. The map on the right-hand side shows the total value growth. Page 16 is a bit technical and deals with the goodwill impairment we saw in H1. Because of the fair value growth, the headroom between the cash-generating units' book value and their earnings value became smaller, triggering an impairment test. This impairment test resulted in an adjustment of EUR 1.9 billion that impact the EPRA NAV but not the adjusted NAV.
Please bear in mind that we expect another EUR 200 million impairment in Q3 as a result of reorganization of regional operational footprint and therefore reallocating the remaining goodwill within the rental segment. Slide 17 details the NAV. The adjusted NAV increased by 13% in absolute terms and 8% on a per share basis in the first half of 2019. You saw the main contributors on the previous page. To list, it was the equity raise, the scrip dividends, as well as the portfolio valuation. To page 18, and with that, the LTV. Our LTV as of June 30th was at 40.4%, so 240 basis points down from the end of 2018 and at the lower end of our target corridor.
As I have said in the past, different market participants have different LTV comfort zones. We continue to argue that even after yield compression we have seen, the in-place value of our portfolio remains conservative if you not only look at transaction prices, but especially replacement values. We really do not see a scenario in which these values would come under material pressure. At this point, we believe our target range of 40%-45% still gives investors enough of a security buffer, while at the same time not putting an undue burden on our equity yields. Many of you also look at debt to EBITDA in addition to LTV, and so do we.
When you take our total EBITDA over the last 12 months and put it in relation to the average net debt over the same period, we are at 11.2 times, which to us is a sensible level if you look at the stability of the cash flows. Page 19 gives you more color on the capital structure and debt instruments. Our weighted average maturity is 8.1 years, Thus very healthy above the minimum levels required in some of our debt instruments. Our average cost of debt has come down by 10 basis points, Now is at 1.7%. Here, the repayment of the debt hybrid obviously helped. Our current incremental cost of debt is lower than this average, Upcoming refinancings are often more an opportunity than anything else.
To remind you, almost all debt is fixed or hedged, and no more than 12% of the total outstanding debt becomes due in any given year. All in all, we're happy with the maturity profile and the overall financing mix. As always, we potentially look at available sources of capital to finance our business and try to choose the most attractive type of capital at any given time. With that, back to Rolf.
Thank you, Helene. My role is now to give you a little bit of an overview of our European activities. Of course, you know this is a long-term strategy, there's not too much to be updated from one quarter to the next. We exercised our Victoria Park call options in Q2 and delisted afterwards Victoria Park shares. Squeeze out proceedings have been kicked off and are underway without any problems. With regards of our four more non-German markets, let me remind you where we stand. Again, this is not a big change in comparison to Q1. In Austria, while we continue to look at acquisitions opportunities, especially in Vienna, the main focus is to efficiently run our operating business while developing new units at the front end of the portfolio and selling individual units at back end of the portfolio.
In Sweden, we are actively pursuing growth opportunities and continue to see a healthy deal flow. We remain committed to our objective of demonstrating that our scalable business models works outside of Germany in similar environments, and we are very optimistic that we will play an instrumental role in consolidating the formal housing sector in Sweden. In the Netherlands, we are open for opportunities, so if we are offered an interesting deal, we would take a very good look at it. In France, we are continuing to research and development efforts to remain first in line when opportunities arise. I still am very convinced that this is a very attractive and huge market. We are increasing our network and understanding of the social housing market and actively engage with the relevant players to seek opportunities for the next steps.
With this, I think you see that our long-term internationalization strategy in Europe is on good track. There, of course, you cannot and you should not expect significant changes from one quarter to the next one. With this, I think Helene will give you the confirmation of the guidance.
Finally, guidance on page one. We have decided to leave the guidance unchanged as we feel we are well on track to achieve the numbers shown on this page, but at the same time do not want to get ahead of ourselves with five months still to go this year. Having said that, I would like to point out two things. First, we're confident about the 4.4% organic rent growth, but would like to remind you that it also depends on timely completion of the investment projects. With regards to Berlin, this number assumes that we push through the originally planned Mietspiegel rent growth and see no impact in 2019 from the planned rent freeze legislation. If we were unable to get that rent growth in Berlin, it would cost us about 10 basis points.
You do see that one way or another, we're not materially impacted by the Berlin specific regulation. We updated the group FFO per share to reflect the higher number of shares from the AVB and the scrip dividend. Of course, that number is a bit distorted because we have collected the equity and increased the share count, but we're not yet assuming any earnings impact from it. Obviously, once we put those funds to use, we will see a positive impact on the per share FFO numbers. Over to Rene.
I'll bounce it right back to Angela to please open up the Q&A, please.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. We've received the first question. It is from Sander Bunck of Barclays. Please go ahead. Your line is now open.
Hi. Afternoon, everyone. Three questions from me, please. First one is on your new construction targets. Can you give an indication of how confident you are to deliver new construction in the timeline you had in mind, especially given that new construction permits were down again in the first half? That's the first. The second one, in your discussions with valuers, and then particularly for your Berlin portfolio, can you give any indication on what their considerations are on potentially pushing through further capital value growth? What is it that they take into account? Is it a desktop analysis in terms of an IRR analysis, or is it transaction based, or how are they looking at that?
The last one is given the recent collapse in interest rates and your strong capital position, are you considering to break any debt ahead of its maturity to lock in potentially any financing savings? Thank you.
Okay, I think I'll do those. New construction targets. As you know, we said investment targets are around EUR 1.3 to EUR 1.6, with a bit of flex across the buckets. Of the three potential ways to invest, what we're seeing is we're pretty well aiming at this point in time in the middle of the range. I'm pretty confident that we're going to meet that guidance. Again, I consciously keep the range a bit wide because, as you rightly point out, construction is not quite as linear as we normally expect it to be. With this next question around valuers. Factually, when we look at it, the values are predominantly looking at the transactions that are being done in Berlin, and our observation is that actual transaction values are still rising in Berlin.
What we are seeing, though, is that there's a slight decrease in the number of transactions. Ultimately what valuers will be doing is they will be closely watching the market, look at what the transaction values in Berlin and other cities are, then based on that, we'll take an assessment of where values go. At this point in time, it's less mechanistic than we all expected. It's really based on what are the transactions that are happening at the point in time when these values make their assessment. Interest rates. Yes, you rightly point out that interest rates are dropping. As I pointed out, it's like we are very opportunistic in managing our capital structure, and if and when we see tactical opportunities to optimize that, we will definitely consider it and bring it forward.
That's great. Thank you. Just very quickly on the construction targets, can you say, are you at the moment behind, in line or ahead of new construction?
We are in the-
In terms of the amount we're looking to spend.
No, we're totally, as I said, it's like we're bang in the middle of the range at this point in time.
Okay. That's also for the new construction. I know you can move around a bit how much you spend in every segment, but specifically for the new construction, you're in line with what you previously had in budget.
I would say it's neither here nor there. Maybe a little bit muted, but nothing to write home about.
Cool. I won't write home about it then. Thank you.
Thank you.
Thank you. The next question is from Thomas Neuhold of Kepler Cheuvreux. Please go ahead. Your line is now open.
Good afternoon. Thank you very much for taking my questions. I also have three, two on the Berlin situation and one regarding your guidance. Firstly, on the Berlin situation, I know your base case is that the planned Berlin rent law will be considered unconstitutional. However, I was wondering if and how your strategy would change if Berlin would be allowed to implement and keep the currently planned rent legislation.
Can you do question by question? Because then I can better answer it.
Yes. That was actually the first question, yeah.
To be very clear, we believe that the legislation will go through, and it will happen. Between two and five years, depending on the way how it comes in terms of the Constitutional Court, it will be ruled out. In between this time, it will be active, an active law, and we will, or we all have to respect it, because the penalty by case will be, as long as they transferred in the law, it was announced by EUR 500,000 per case. We will not increase rent by EUR 20 to risk a penalty of EUR 500,000 per case.
The question now is when it will come in front of the Constitutional Court, there is one way which is more the longer one, which is if we take one case, then we go from one court to the next, then probably in five years we will end up in front of the Constitutional Court in Germany, then it will be ruled there. The other alternative, but this is not in our control, is that the German Bundestag can make an Abstrakte Normenkontrolle and go directly in front of the Constitutional Court because their constitutional rights are affected. There is normally their right to define the rental regulation and not the right of a state. That's why they have the opportunity, but we don't know if this will happen.
That's why we will assume that the law will be passed. To explicitly tell you what we are doing then, it's a little bit difficult because we only have some framework points, so no law, and there is a lot of details. That's why we have to wait for the law until September, and then we will define our strategy, how we will react. Of course, I'm telling you not a secret, we are preparing all options.
Okay, understood.
To make clear, for us, it's relatively easy. We have only a limited part of our portfolio in Berlin. The modernization volume we can shift to other locations. For us, it is probably not too difficult to react.
Okay. Understood. The second question is also on Berlin. I was wondering what your view is, what the impact of this rent regulation in Berlin might have on the transaction market, both in terms of prices and volumes, until it is clear, basically, if a federal state can implement its own rental law or not. Do you think prices will fall? I was also wondering what you think how the supply side will react to the planned legislation.
Keep in mind that the information of this legislation and the framework points were coming up middle of June. It's not a very long time ago, and it's summer. Probably it is very early, as Helene has pointed out, to say the prices are going in this direction or in this direction. What you can see is that you see a little bit less volume in the moment on the market, which I think is rational. Nobody knows what is the outcome. To wait, I think, is a very good strategy. Everybody's waiting for September, and in September, if the law is coming out or the draft of the law is coming out, then I think we know better how to react. This would be a rational reaction, not to do anything at the moment.
This, I think, a lot of people are doing.
Yeah. Do you think that the prices might come under pressure if the law is implemented as currently targeted, that you have five years of a rental freeze?
I'm sorry. I don't know. I just don't know, because I can just explain to you what we are doing. We would wait in the moment. With a very long-term view, we would probably also buy in Berlin afterwards if the prices are coming down. Small portfolios. Because some landlords might think, especially private people might think it is a too long-term perspective for them for the next five or 10 years, because you never know if the rent freeze is limited for five years. Actually, realistically, it is very difficult to imagine that the government will get off the rent freeze after five years. There might be private owners who say, "It's just too high risk for us, and that's why we are selling." It's too early, and we are just waiting. We have no rush.
We would also, in the moment, definitely not sell our portfolio in Berlin because we have to wait until the law is there.
Okay, understood. My last question is on your guidance. You roughly sold 50% of the targeted 2,500 units with a fair value step-up of more than 40% in the first half year. You maintained your fair value step-up guidance of 30% for the full year. I was wondering, is there any specific reason for that, or did you just simply not update this part of your guidance at the current point in time?
It's actually mathematical because we increased the value of the portfolio with the revaluation. The step-up, by definition, needs to drop a bit.
Okay.
We just sort of put the numbers back in line.
Okay. Understood. Thanks.
Thank you. The next question is from Jaap Kooij of ING. Please go ahead. Your line is now open.
Yeah. Hi, good afternoon. I've got one question. I think this morning in your email statement, there was quite an important statement about splitting of units and the, let's say, eviction of tenants. Could you kind of detail the impact on Vonovia of your position regarding the splitting of buildings into combos and what this means for the sector? Thanks.
I think you can see that, especially in the press calls, we also have to anticipate a little bit the political environment, and that's why I pointed it out so explicitly. You can see that the next debate starting especially in Berlin again, is that they are talking about the privatization of condos. We in Vonovia, you know, we were built in the beginning by private equity to split all existing buildings into condos. That's why we show in our portfolio still a significant part of already condominiumized apartments, which, of course, we will continue to sell. What we are not doing and what we have not done in the last years was to split new buildings into condos.
I think this business model will come under much more pressure than anything else, and that is why we were very actively declaring that we are not doing it, because this would be actually putting oil in the fire. This will be the next topic, and that is why we want to make sure from the beginning that we are not doing it, because anyway, it was not planned in our company.
Thanks. Did you already receive any indication of any movements by the Berlin government or any other government to put in place regulations or-
You know, the separation of condos is the last exit from a rent freeze. If you cannot increase rent, if you cannot do investment, actually if you want to exit it, the only way how to exit it is to privatize individual apartments. That's why you have to split the building into individual apartments first. It is definitely clear, and it's well understood from the government, that this will reduce the number of rental apartments. They have a lot of action possibilities to reduce the separation of buildings into condos. That's why I will see that this will come up. Because I don't want to be part of this debate, we have explicitly declared that this is not our business model, which it was not our business model in the last years. That's why it's not changing our strategy.
All right. Thanks a lot.
Thank you. The next question is from Robert Werdemann of Kempen. Please go ahead. Your line is now open.
Good afternoon. This is Robert. Hi. On page number nine of your presentation, if I look into the footnote, it actually states a EUR 1.1 billion development lent. If I compare that to the first quarter 2019, that was EUR 1.4 billion. I'm not sure what it was at the end of 2018, where is the delta coming from quarter on quarter? As a follow-up, what can we expect, let's say, going forward, where this will move to?
Hi there. I'm actually wearing my glasses, but I have a problem even reading the footnote on the printout that I have in front of me.
I have very good eyes.
Yeah, indeed. You must be younger than I am. Joking aside, is it okay if we come back to you? Indeed, it sounds odd because we actually have been actively buying new development plots. Hence, let us please look at that and come back to you, if that's okay.
That's definitely okay. I just wonder how much is accounted for in the value growth. Looking forward to the answer there.
Of course.
Now, also pretty nitty-gritty, and I didn't get the answer right now, but for model purposes, if we will see that Rent freeze coming through for five years, which pretty much is the case, what will you do with your maintenance? Let's assume that Berlin is on average at EUR 8 like the rest of your portfolio. What should we pencil in order to get a better view of the 2020, 2021 numbers?
Robert, we have to be also very clearly here, it's a public call, and we have not taken any decision how we react on the law. One potential reaction, this is probably not necessarily the reaction of Vonovia, but of the market is, of course, because if you cannot increase rent, if you actually don't have to compete for tenants because the rent is artificially low, strategy of a lot of players could be to reduce the maintenance spending to a minimum. We have seen this from our private equity times. We know that we could spend much less maintenance without actually losing the substance quickly. This is an option, but we have not taken a decision yet, and we definitely will not announce this decision before we have not seen the law.
Okay. Can fully imagine that. Thanks for that. Just out of curiosity, also because you mentioned that you will very much look into the transaction market. After the 7th of June when it actually came into the newspaper and the 18th of June that it was voted through, have you actually seen, let's say, meaningful transactions in the Berlin market, i.e., Because you mentioned there's still some activity. Is there really already data points that we can basically look into?
No. It's just a no. It's too early, it's too little. It doesn't happen. I think my feeling is that a lot of people are frustrated at the moment.
Okay. More a strategic question. Let's go forward three to five years when likely the imbalance of supply-demand in housing stock is even greater than it currently is. Would you envisage yourself taking a very prominent role in basically supporting the market with significant amounts of new units? I'm not talking about the 29,000 development pipeline, what you have, but like really stepping up in a very meaningful way. Would that feature, let's say, very long strategy?
I think it's a very theoretical question. Of course, if it would be feasible, if we get the construction permissions, and if it makes sense economically for us, why should we buy existing portfolio if we can do for the same metrics, build a new construction? Actually this is an alternative, which we will do. I don't see at the moment any chance to get enough construction permission to get a very significant portfolio. Significant means more than the 29,000 units in a foreseeable timeframe. You have to buy land. This is a long-term process. I don't see that this will come. Of course, we would be willing to do it because as long as the KPIs are, it is also interesting to have more newly built buildings.
Okay, great. This is all very helpful. Many thanks.
Thank you. The next question we've received is from Marc Mozzi of Bank of America Merrill Lynch. Please go ahead, your line is now open.
Thank you. Very good afternoon, gentlemen and Helene. Can I have your understanding, Rolf and Helene, of what means upper limit for the Berlin rent freeze law, what you're calling rent ceiling. How should we read that? It seems to me that the law would like rents to go down, but is that your reading as well, and if that the case, by what should be that rent ceiling? Should we consider it as being the Mietspiegel because this is an already existing benchmark?
Marc, what is happening, if the law really comes through, and we only know the framework. We don't know the law, and we don't know the text. The framework says that there is no rental growth at all, so 0% for the next 12 years, because from reletting and from existing, and you are also not allowed, if you have under-rented a building, you are not allowed to lift to the Mietspiegel. Actually, the Mietspiegel is more or less out of function. What Helene has mentioned, I think is also an interesting point, the 0.1 percentage points. There was a new Mietspiegel coming out one month before the announcement of the rent freeze, so in May. We have not yet realized this Mietspiegel increase. If this will not happen, it will have an impact of 0.1% of our rental growth, so not meaningful.
The next Mietspiegel then, which comes out then in 2021, of course, will technically, if I understand the concept correct, show a rental growth of 0%.
I am with you. I just wanted to know what was your understanding of this rent ceiling, which you cannot pass or be above, and if you thought it was below enough. Helene, about Vonovia's attitude regarding Berlin assets. Historically, I understood that they were more using the DCF model to value assets, looking at transactions to find out the exit yield or the cap rate for the terminal value. If I understand well your answer to Sander's question, you are telling us that all the absence of rental growth will be captured into a compression of the cap rate in the end. Is that the way I should read your answer, and is that the way you think that we are going to still see some capital value growth in Berlin?
Well, first answer is yes, that's exactly how it is done. You basically start to move the cap rate. It's actually interestingly enough, an output and not an input parameter on your DCF. Whether you will still NAV growth or value growth in Berlin, I don't know. That remains to be seen.
Okay. On your modernization program, can you give us a slight idea what is a blend between new construction, building modernization, and apartment optimization? From what we understood from your capital market day, there is a massive yield on cost difference between the 3 type of investment. Can you have a kind of a blend for this year, at least for your EUR 1.5 billion of modernization?
Marc, same question, same answer. We are not giving that blend. Having said that, if you look at sort of the stacks on the presentation, you can sort of deduct pretty easily of where it is.
Okay. All right.
It's not completely out of range.
Okay. All right.
Marc, keep in mind that we are shifting a little bit during the year from one to the other. That's why it doesn't make sense to give you a detailed figure, because this is actually the optimization process we are doing during the year.
Okay. Makes sense. The last final one, a purely technical one. Shall we expect your goodwill to be fully written down by the end of the year if we assume EUR 200 million plus another capital value growth?
On the rental business, we sort of have marginal values less, but nothing exciting. We continue to have goodwill on value add, we continue to have goodwill on development, and we have continued to have goodwill in Sweden, and I don't see a change there. That's a different dynamic. Makes sense, right?
Mm-hmm. Okay. Thank you very much. That's it for me.
Thank you. The next question is from Kai Klose of Berenberg. Please go ahead. Your line is now open.
Yes. Hello. Good afternoon. I have got a first question on page 19 of the H1 report. We have in the group FFO EUR 25 million of non-recurring items and EUR 24 million of intra-group profits. Could you maybe just indicate how much you expect this to be for the full year? Second question would be on the new construction targets, the 1,900 units of completion targets for 2019. Sorry, 1,500 units-2,000 units. What would this translate in annual rents for 2020, if you already have maybe a number in mind? The last question would be on the current discussions about the share deal structures potentially to be changed. Just to get a feeling, do you have any previous transaction which might be affected by the potentially upcoming change in the share deal structures?
Sorry. On the second one, I will need a bit of help. On the one-offs, ultimately, it's hard to predict because they usually stem from M&A or a capital increase or something like that. As a result, given I don't know what I'm going to be doing for the next month, it's hard to predict what could be coming in there. At this point in time, the way I'm answering this means is I don't have a lot of visibility, which means I'm not planning anything. I hope that answers your question right.
Okay.
Your next question was the expected rental levels from the development.
I was asking about the completion targets of develop-to-hold units in 2019, the 1,500 to 2,000 units. Could you maybe guess how much this could generate in rent in 2020?
I think ultimately it's another way of asking Marc Mozzi's question. Basically, yeah, think about it. We're basically saying we're investing our EUR 1.3 to EUR 1.6 and have an IRR of 9%-10%. I'm not going to break out the rent in my mind, that would be just like deducting it the other way around.
To be very clear, to just help out, if you are building an apartment in Munich, you get a new rent of EUR 15. If you are building the same apartment in North Rhine-Westphalia, you are probably getting a new rent of EUR 10. Also there is a big difference between the two. That's why this depends also on the mixture of the buildings we are doing.
Sure.
Your last question was on the transaction tax.
Yeah.
Which is what Rene said. Ultimately the consequence is that we will look and assess potential M&A in Germany on the basis of the changed regulations. The truth is, if you look at the current proposal, that there's a clause in there which basically means that if the number of owners changes too often, you need to pay transaction tax on your entire portfolio. Any listed company at this point in time, if the draft would come through, so that could be BASF, Merck, or whoever, would need to pay transaction tax on their own properties, which is why I do think there's going to be big changes in that proposal at this point in time.
All right. Perfect. Thanks so much.
As you know, in the process, it was carved out. I think this is also a very strong indication. It was carved out as a normal tax legislation. It now became a separate law. It was planned to be a part of the overall tax legislation law, which is coming every year. It was carved out. This is a very clear indication that Parliament thinks that it has to be revisited. But please don't quote me. It's just a feeling that I have got. You know how politics is, right?
Thank you.
Thank you. As there are no further questions at this time, I would hand back to Rene.
Thanks, Angela, and thanks everyone for joining. As a reminder, our nine-month 2019 results will come out on November 5. We'll be on the road quite a bit in September and October, so we hope to see many of you before the Q3 results. As always, please do reach out to me and the team with any questions or comments you may have. That's it from us for today. Have a great day, and enjoy the rest of the summer. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.