Dear ladies and gentlemen, welcome to the 9 Months 2019 Results Analyst and Investor Call of Innovia SE. At our customers' 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. May I now hand you over to Rene, who will lead this growth conference.
Please go ahead, sir.
Thank you, Judith, and welcome everybody to our earnings call for the 1st 9 months of 2019. Your hosts today are once again CEO, Rolf Buch and CFO, Helene von Rodin. I assume you have all had a chance to download the presentation. Just to be sure, the earnings call presentation for today is available on our IR website in the section Latest Publications. Rolf Ventilino will lead through this results presentation on the basis of the agenda on Page 2, and we'll then, of course, be happy to take your questions.
So without further delay, let's get it started. And for that, I'm handing you over to Rolf.
Thank you, Henne, and also a warm welcome from my side. I have always a pleasure to start with the highlights of the 1st 9 months. In this case, total EBITDA is up almost 70% group FFO almost 11% or 5.5 percent per share. After 9 months into the year, the adjusted NAV has grown by 9%, and we estimate a second fair value growth at the end of the year between EUR 2,100,000,000 and EUR 2,800,000,000 for the second half, which would bring adjusted NAV at the end of the year of something between €51.50.53 per share. At the end of Q3, our LTV was at 40.3%.
And if we include everything we know today, including HEMLA, the full financing of HEMLR, which is already completed, plus the H2 valuation estimate, we expect the LTV to still be very comfortable in the our final you our final guidance for this year, with total EBITDA and group FFO at the very top end of the originally given range. And we will feel confident enough to reach all these figures that we are already to fix we are already ready to fix the dividend at €1.57 which we will propose to the AGM. So this is a 9% year on year growth. As always, we also give you the first guidance for the year 2020. As we are looking back on a very successful year 2019, we estimate that the FFO group FFO will grow by 7% in the midpoint and 9% at the top end of the guidance range.
Then we also will talk this time about regulation and political debate. As you know, the draft bill of Berlin specific rent free regulation will cost us around €6,000,000 of group FFO next year. So you can see that what we have said always, while the law will not solve the problem but only make things worse, we will not be materially impacted by the one way or the other. In terms of spillover, we remain very confident that this is a Berlin specific topic, and we estimate the risk of similar legislation outside of Berlin to be extremely low. What we do see is that stakeholder debate is becoming increasingly important.
And here, we as Vonovia, we are determined and we were determined to continue to lead by example. And with these highlights, I hand over to Helena.
Thank you very much, Rolf, and good afternoon. So on to Page 4. You see that we show growth across all segments. This is, of course, partly driven by the full inclusion of BUWOG and Victoria Park, which only had a smaller impact in the 1st 9 months of 2018. The average number of residential units in 9 months EBITDA total by 16.7 percent and the group FFO, which is the basis for our dividend, by 10.7%.
Group FFO per share was up 5.5%. 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. So let's have a closer look at the individual segments, starting with the rental segment on Page 5. Rental income is up almost 10% on the basis of a larger portfolio and organic rental growth. The 5% increase in maintenance expenses is volume driven.
On a per square meter basis, maintenance is basically flat year on year. The increase in operating expenses needs a bit more explanation. In Sweden, rents are reported on a gross basis, so net cold rent plus ancillary costs all in one number. The concept of a net cold rent does not really exist. For Victoria Park, this means that around about €9 per square meter are the all in rent.
About €6 to €6.50 of that amount are net cold rent if you apply our logic and the remaining €2.50 to €3 ancillary costs. You cannot break it down to the last €2, but that is broadly it. These ancillary costs paid implicitly by the tenant are included in the rental income and because they are basically a pass through item also in our operating expenses. Rough math shows that it is about €30,000,000 for the 1st 9 months based on the 1,100,000 square meter of Victoria Park and an assumed €3 per square meter. The impact of €30,000,000 in the rental income line is not all that material, but in operating expenses, it is quite significant and distorts the comparison.
Page 6 shows the main operating KPIs for the rental segment. Organic rent growth was 4% year on year. The vacancy rate of 2.9% is mostly the result of our investment activities. And then finally, maintenance per per square meter is broadly on the same level as in the prior year period. Just as a reminder, let's please keep maintenance, which protects future EBITDA, whether it's capitalized or not, separate from the investments that drive the growth of future EBITDA.
And with that, back to Rolf.
So let's move to the value add page on Page 7. The EBITDA from this segment is up by 21%, which is largely the result of our organic growth in this business. Only a very, very small amount comes from the adding of BUWOG and Victoria Park. As you know, we are targeting around €20,000,000 EBITDA growth per year in this segment. Given where we are at this time at this moment, it is probably safe to say that we would likely overachieve this growth rate in 2019.
Page 8 shows the result of our recurring sales segment. We sold roughly 1900 individual apartments for gross proceeds of roughly €270,000,000 The average sales price increased by 10% year on year. The fair value step up was 41.4% on average and quite a bit higher than last year in spite of the higher basis because we had the high revaluation last year. 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 close to €70,000,000 of adjusted EBITDA.
As a small note side note, outside the recurring sales segment, we sold almost 1700 noncore units, which are not reported in this segment in the 1st 9 months, as a fair market value step up of more than 15%. This gives also a flavor where our valuation is in comparison to the market. And this is back to Helene.
So finally, our Development segment on Page 9. This segment includes all new constructions of apartments by way of entirely new buildings, so excluding additions of floors on existing buildings. We distinguish between development to sell and development to hold for our own portfolio. The bottom line adjusted EBITDA was EUR 62,000,000 in the 9 months results for 2019. To state the obvious, this part of our business is less linear than the rental business, so 1 quarter can be quite a bit different from another one.
So Page 10 has more color on our new construction activities. We completed 967 apartments to hold for our own portfolio and 5 15 apartments to sell. In development to hold, we have about 31,000 apartments in the overall pipeline based on the opportunities in our portfolio today, and we want to deliver up to 1400 apartments to hold this year. This is a bit below our earlier expectations where we had hoped to be able to complete between 15,021,000 apartments, but we are continuing to experience difficulties and delays in construction permits. You may have seen that recently the Federal Statistics Office reported that on a national level, the number of building permits as per August had declined by 2 point 5% year on year.
For multifamily homes, the decline was even steeper at 3.5%. The whole task of building new apartment is made more difficult by the fact that the shortage of construction labor is not getting any better. The development to sell part is a useful addition to the 2 whole 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 Sussal project to cross finance the lower margin to hold development in order to make an entire development project work. So often, you have onethree development at some form of subsidized rent, onethree at market rent and onethree for sale and the for sale volume basically carries the land costs.
The pipeline for to sell apartments is approximately mid lease 7,400 apartments. So Page 11 shows the estimates for the H2 valuation. For H2 2019, we estimate an overall value growth between EUR 2,100,000,000 and EUR 2,800,000,000, which would take the full year 2019 value growth to between EUR 4,700,000,000 EUR 5,400,000,000 or EUR 10.5 percent to 12.1 percent. In terms of market evidence, we have been seeing offer prices in 2019 continuing to rise across all of our markets. The one exception is Berlin, where in H2 we have seen flat offer prices and volumes alongside a declining number of transactions.
When we look at value growth from yield compression, and this is the lower left hand chart, we see that number losing steam since the 2016 peak. That clearly shouldn't come as a surprise because yield compression is not a concept for eternity. But what is interesting is that a slowdown is happening at a slower pace. With the exception of Berlin, we are seeing value growth from yield compression almost on the same level as last year. So while Berlin appears to be lagging at this point, we are seeing other locations basically growing in value at similar speed as last year.
Given the absolute growth in value, which is looking to be higher than in 2018, it is fair to say that we have managed to compensate for the lack of growth in Berlin. The H2 valuation is expected to put the portfolio at an all in place rent multiple between 23 24 and the fair value per square meter between €1800,000,000 €1900. So a bit more color on the valuation of our portfolio in Berlin versus the rest of Germany on Page 12. Offer prices in all our regional markets except for Berlin have been continuing to grow in H2, but we have seen little movement in Berlin. There, the offer prices have largely been flat and so have the number of offers.
At the same time, the number of transactions is down. To what extent values will change in the context of the planned rent freeze legislation in Berlin, if at all, will probably not be seen before H1 2020. So with that to Slide 13 on the net asset value. The adjusted NAV increased by 14% in absolute terms and 9% on a per share basis for the 1st 9 months of 2019. This is largely the result of the equity raise in May, the scrip dividend after the AGM and the portfolio valuation.
So Page 14 shows the LTV. Our LTV as of September 30 was 40.3%, so 250 basis points down from the end of 2018 and at the low 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 years compression, we have seen the in place values of our portfolio remains relatively conservative if you not only look at transaction prices, but especially replacement values. And we really do not see a scenario in which these values would come under material pressure.
So at this point, we believe our target range of 40% to 45% still gives investors enough of a security buffer while at the same time not putting an undue burden on our equity use. As quite a few things have happened since September 30, I would like to give you an estimate of a year end LTV accounting for what we currently know. So mainly the Hemla acquisition, the financing of it and the estimated H2 portfolio valuation. Accounting for all this, the year end pro form a LTV estimate is still well within our range, and I'm happy to say that we feel very comfortable at that level. To be clear, HEMBLA is fully financed.
We used the capital increase in May this year for the equity portion, and we raised EUR 1,500,000,000 of debt a few weeks ago, so there's no further need to raise any additional equity for Hemla. 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 11.1 times, which to us is a sensible level if you look at the stability of cash flows. Page 15, a bit more color on the capital structure and debt instruments. Interest cover ratio is now at 4.9 times and thus very healthy above the minimum levels required in some of our debt instruments.
Almost all debt is fixed or hedged, so any interest rate increase would affect our numbers only slowly as no more than 12% of the total debt becomes due in any given year because of the smooth maturity profile. And thanks to the robust top line growth, there's plenty of interest rate increases we can observe before we feel any pain in our earnings or dividend capacity. I want to point out that the average cost of debt as per September 30 has come down to 1.6%. Accounting for the refinancings we have made since, the overall average now is at 1.5%. To give you some color on incremental financing terms.
We issued €500,000,000 bonds a few weeks ago, and the coupons were 0.125 for the 3.5 years, 0.625 for the 8 year and 1.625 for the 20 year maturity. So even a 20 year maturity is at the level of our overall average interest rate, the blended coupon across the EUR 1,500,000,000 is 0.8 percent for a duration of 10.5 years.
So let me give you an update on where we stand on HEMBLA. This is Page 16. In September, we announced that we have agreed to buy 69% of the voting rights and 61% of the shares in Handler from Blackstone, subject to merger clearance. We just got a few hours ago or 2 hours ago the merger clearance in Sweden, so this is done. If we add to the Blackstone stake the shares we have been buying since September, our total stake will be close to 72% of the voting rights and about 64% of the shares.
Once the mandatory offer has been triggered, which will happen very soon by the closing of the Blackstone transaction, the offer will be announced, and the offer period of 4 weeks is expected to run-in November December 2019. Minority shareholders will be able to tender their shares for SEK 2.50 per share. In terms of strategy, we are building on the know how and experience from our German operations, and we intend to continue to consolidate the Swedish market and build an efficient and scalable operating platform. Vonovia is a long term investor and holder of property. We said in the announcement that we will stay in Sweden forever.
It is not part of our strategy to realize value through the future sale of our buildings or for our own benefit or for that of the minority shareholders. Instead, we will focus on expansion and further investment in Hemla's properties. Hemla's current dividend policy is not to distribute dividend to shareholders, but to reinvest earnings into the properties. We agree with this strategy completely and currently have no intention to amend HEMLIB's dividend policy.
So Page 17 is a bit technical, but still quite important. You've heard us say countless times that there are very few ways to really hurt our business. Overpaying on an acquisition is one way. That is why acquisition criteria are important. A management team with an acquisition target, however, is dangerous for shareholders.
We now need to make 2 technical changes to our criteria to make sure we can remain disciplined. The first two criteria remain the same. The acquisition portfolio must make sense from a strategic point of view, and it must be at least rating neutral assuming F-fifty-fifty equity and debt financing. Criteria 34 will be amended. Since we discontinued the FFO I and replaced it with group FFO, we need to find a new metric to measure earnings accretion.
Group FFO is not the best metric because there's basically no portfolio company out there that operates across the 4 segments as we do. So accretion to group FFO is tricky because you compare apples and pears. As most portfolios are mostly or entirely rental, we will be looking at EBITDA rental yield, and that yield must be better within the acquisition than without. And finally, EPRA is looking to retire in the net asset value and replace it with another metric. That will not be radically different and is, in fact, quite similar to NAV, but we will be using that metric and for and future acquisitions will have to be at least neutral on a per share basis to that metric.
I like to think of this criterion as a currency check to see how much we can afford to pay in respect to our own brick and mortar value. So on to the final guidance for 2019 on Page 18. This is excluding Hembla, except for the adjusted NAV per share. Starting with organic rent growth. As I said on the Q2 earnings call, the guidance we gave then depended on timely completion of the investment projects and receipt of the required construction permits.
We have unfortunately seen that many of these permits are taking longer than we would like, and that is why we will not be able to reach our targeted volume for 2019. I also indicated last time that if we were to decide not to implement the 2019 Berlin Meetschbiegel, it would cost us about 10 basis points. We did make the decision not to send out this rent growth letters in Berlin. And looking at the planned legislations, we are actually very, very happy we didn't. Add these two reasons together and you get to a revised organic rent growth guidance of approximately 4% for this year.
However, as we have put the basis on a broader footing, we still think we will come out at the upper end of our range for both EBITDA and group FFO. That is why we intend to propose a dividend of €1.57 per share to the AGM in May. And finally, since we're late in the year, we feel comfortable to give you some guidance on the adjusted NAV per share for the year end. We estimate it to be between €51.50 €53.
So on
Page 9, you see our initial guidance for 2020. So starting with organic rent growth again, we estimate this to be around 4% in 2020 as well. There are quite a few analysis in the appendix on the pages 35 to 38. In a nutshell, there are the following factors why we estimate around 4%. The Berlin rent freeze is estimated to cost us 30 to 40 basis points.
Continuously declining fluctuation is responsible for around 20 to 30 basis points. And as indicated before, lagging building permits, labor shortage and more comprehensive investment projects, especially neighborhood development and new constructions result in a more extended period for realizing the full rent growth from the investments. At this point, today, we are looking at a pipeline of EUR 63,000,000 incremental rent growth from investments that have been started but are not yet fully completed. Based on our track record of delivering the returns on investment, I can tell you that this incremental rent will be coming, but it will take a bit longer than in previous years. The chart on Page 37 shows this effect nicely, I think.
And finally, we are seeing a slight decline in growth potential for Meetschbiegel upgrades because of the political influence in Meetschbiegel and the impact of the 10% rental cap, the Meadprailspremse, for those of you who like German, on MeadSpiegel. So one more word on the 2020 rent growth estimate and another potential impact of Berlin legislation. It does not include the one off rent reductions called for if the in place rent is more than 120% above the rent ceiling, the meet Oberprenze. 1st, this is expected to be enforced only 9 months after the rent freeze becomes law, so towards the end of 2020 probably. 2nd, tenants will have to file a rent reduction request with the authorities who will need to review it and then order us to lower the rent.
And third, this rent reduction element is considered to be the most unconstitutional element of the draft bill. So on balance, we have decided not to account for it at this point in our 2020 organic rent growth guidance. Bottom line, 2020 guidance is EBITDA up 8.6% at midpoint and 10% at the upper end. Group FFO plus 7% at midpoint and 9% at the upper end of the guidance range. And back to Rob.
So thank you, Helene, for the good guidance. Probably because I imagine that there were also a lot of questions about Berlin in the Q and A session, I would like to give you a little bit some more color on the planned Berlin specific rent fees and rent reduction on Page 20. As most of you are aware, the draft bill was approved by the Senate, and it is expected to be enacted in Q1 next year. So original time line was January 11, but it might come in a little bit later. What I think has not fully understood by many is the element of rent reduction in this regulation.
It is called a rent free law rent freeze law, but in reality, it includes rent reduction elements. And to reduce rent is actually the declared objective of the Berlin government. So they are looking to fix a price irrespective of all circumstances that usually play a role in price setting. Location is largely ignored. Increasing costs are totally ignored.
This is very unique and, in our view, unconstitutional. This is an unconstitutional approach to regulation and a clear back break with any form of our form of social market economy. And the main problem is that it does not solve any issue. So regulation will lead to a decline in investment, both in the existing stock and in new housing. But make no mistakes, even through so we very much disagree with the legislation, we will play by the rules for as long as they are in place.
For 2020, this means we expect a €6,000,000 loss of FFO because of it. To be clear, this is a cash flow number and low because we only need to hold back a smaller number of increase made after June 18. Technically, Berlin portfolios might show negative trend growth under the planned legislation. For the year 2020 and what you have heard from Helena in 2021, so 2 years of negative trend growth. To repeat what we have been saying for a while now, we see the spillover risk as extremely low.
I know that the mayor in Frankfurt, for example, has said that he likes idea. But make no mistakes, financial regulation is, in Germany, credible. It is already highly questionable whether a state can pass its own loan on regulation. For a city, this is basically out of question. In Frankfurt, for example, or Munich, in very conservative federal stage, where the government has been very clear in saying that the rent freeze is not a good idea.
So yes, individual and small groups here and there outside of Berlin are in favor, but we clearly do not see any broad based support for this outside of Berlin. And I know that some of you think that this is very popular with voters, and politicians will have to do it. But I think we should not underestimate the large majority of Germans who do not want to give up on the idea of social market economy, which has worked rather well in Germany for the last 70 years. Germans also have tried the alternative, and it has clearly failed. So on next page, on 21, and before I wrap up of today's presentation, allow me to say a word of political and public debate.
You have heard me say many times that I believe residential rents need to be somehow regulated. Obviously, Berlin is taking way too far and the wrong way in the wrong direction. But I do believe that because housing is such a sensitive and important product, you cannot leave it to the free market forces. This is also the consensus in Germany and actually works reasonably well through the established system of Mitchbigger. Yes, there's quite a bit of political influence in developing new mitigbigels.
But by and large, the German system, which in essence is quite close to the system in Sweden, works well in that sitting tenants need not to fear excessive rent increase, and landlords can build a business around a largely stable top line. So we support the concept of mixed vehicle and even in the press Bronson. But precisely because we operate in this business that is more important than most anything else in our tenants' life, we will have a very special responsibility to strike for the right stakeholder balance, and we take this responsibility very serious. We developed a business philosophy that guides our action and goes beyond what is legally required in Germany. We have limited ourselves to a rent growth of not more than €2 per square meter following a modernization even through, in many cases, the law would allow us €3.
We have made a promise to our tenants who are 70 years older that they will not be forced to move out because of Eiseng Hunt. And we made the deliberately decision not to implement the 2019 Mitschbikl in Berlin because we felt that it would add only fuel to the fire and add of unsecurity to our tenants. I think all these decisions was very positive noted in the German press and by the politicians of Germany. Of course, we are a commercial enterprise, and we work hard to generate a decent risk adjusted return for our shareholders. But we also believe that this is in the long run, we cannot and do not want to ignore the interest of all other stakeholders.
Moving to Page 22. Clearly, this is an effort that never ends, and we will always have cases where we do can better. But there is no doubt that we have come a long way. By now, we are among the top 10 homebuilders in Germany, so we are making a real contribution to tackle the housing shortage. So to build new houses in Germany and new apartments in Germany is not only economically interesting, but it is also contributing to society, which is highly appreciated.
Our efforts are increasingly recognized. And interestingly, we are seeing that more and more often, politicians are starting to distinguish between different players. You can see probably the different quotes. My most favorite quote is actually on the upper right, which is a quote from the minister from the left wing minister of Housing in Berlin. So this is a lady who has invented the Mittendstadt and Mittendeker.
But also here, you can see that she is able and loves the support which we are giving to Berlin. Or take ancillary expenses, for example. Because of our efficiency, we are 9% below the German average. This is direct and tangible value for our tenants. We clearly see ourselves as a part of the solution, and we're very mindful of the fact that in our regulated business, you cannot be successful in the long term if you work against your tenants or the regulator or other stakeholders.
We will continue to be vocal about the real problems, and we will continue to actively work for solutions. We owe it to our tenants, and we owe it to the long term interests of our shareholders. And this remark probably finally allow me, before we go to the Q and A, to wrap up our presentation. As you have seen, based on our Q9 twenty nineteen performance, we are on track to deliver EBITDA and group FFO on the very upper end of our guidance. Our valuation estimates for the H2 adjusted value uplift and adjusted NAV share between €51,500,000 €53,000 at the end of the year.
Our expectation for the year end 20 19 pro form a LTV is well in our target range. The initial guidance for 2020 shows an estimated group FFO growth of 7% in the midpoint and 9% on the top end top on the range. We expect to continue to deliver best in class rental growth. The diversification of our business in terms of geographic and breadth of activity is paying off. The Berlin specific rental regulation will only have a minor impact on group FFO with €6,000,000 but we will see for Berlin only in the portfolio negative rent growth in 2020 2021.
And we continue to see no spillover risk into other areas outside Berlin. We consider them as extremely low. And finally, Vonovia leads by example with regard of the high relevant stakeholder debate. And with this, I will go into questions. Thank you very
much. The first question is from Charles Bosier, UBS. Your line is open.
Yes. Hi. Thank you for taking my questions. I have a few questions. So the first one on the revaluation for second half.
You mentioned a fair value of €2,100,000,000 to €2,800,000,000 So 4.4 percent to 5.9 percent. That's quite actually unusually wide range. It's 2x wider than last year. I was just wondering given we are in November and you may have received some clear enough indication from CBRE to provide the guidance. What is driving the wider range?
Is it just a Berlin uncertainty on revaluation? Or is there anything else?
Actually, I think that's more okay, how are you? Actually, to say the truth, there's nothing behind it. We have a larger portfolio. And as a result, we sort of like decided to increase the range a little bit. We haven't seen any sort of major noise on this.
At the moment, we're working through the numbers. So nothing to read into this at all.
Okay. And then on Hemla, just looking at their recent quarterly presentation, so they speak about like for like of 1.7% in the 3rd quarter. That was actually 3.8% in the first half. So I just was wondering what's your take on the performance and what like do you expect from this business going forward because it just seem like it has slowed a little bit in the 3rd quarter?
To be very open, we have no of course, we got the merger control today, so we were not allowed to discuss with them at any detail in the business. So actually, I only know what you have seen also in the figures. What we know from our business in Victoria Park that the business is completely intact. So we are showing significant rental growth in Sweden. If there's any one off effects or any problems with the modernization in Hemla, I don't know.
But we don't see any changing trend in Sweden. Opposite, we see a very positive development in Sweden, but also with a normal bread and butter trend because you know there's a government in Sweden, and that's why the tenant associations are pretty nice with the tenant landlords at the moment.
Okay. Thank you. Then I'm just having some question on Page 35, which is actually an appendix. So just taking them 1 by 1. So on point A, you mentioned Berlin impact 30 to 40 basis points.
Is that essentially the rent freeze? And then the rent points to get to the 1% you were guiding late August or is there something else to think about on the Berlin impact? Just in terms of the total impact when you consider both 2020 2021, still keeping in mind that you mentioned that the range reduction is a more discussable or debatable part of the measure?
So as you rightly just said, this is about the first step of the bill in legislation. This is the 30 to 40 basis points. And you may note that the reason why this is quite low is because we have not enacted the last this year's Meegebib. So we don't need to go up and then down like other players may or may not have to do. What we haven't included and there's this, I think, big footnote is this whole thing about the 120% cap.
Why? Because it's only coming into place in 9 months' time, because tenants need to ask for the cap to be in excess. And thirdly, because we consider that as the really, really, really unconstitutional element of the rent regulation.
But to be very clear, the rent regulation, this rent will come regulation will come in place. If you are talking to the lawyers in the members of parliament and the Bundestag, they are telling us that at least it will take 2 years before the government will come to visit before the court will come to a final conclusion. So we have to be realistic. This law will be in place in 2020. And for us, it will have only the small impact because Helene would explain.
And for 2021, there will be a bigger impact. We just don't think that the impact will happen in the end of 2020 because the bureaucracy of Berlin also to be very clear has to handle not all players the same way. So there might be some priorities for bureaucratic to decide that rent reduction should become easier in some other parts of the game. So that's I think here as Vonovia, we will see the impact probably most probably in 2021. But as I said before, we will see negative rent growth, significant negative rent growth for our portfolio in Berlin in 2020 and especially in 2020 1.
And then hope Sorry,
I apologize.
Then in 2022 or 2023, we will see rent uplift if the constitutional court is declaring the law nonconstitution.
So would you say that this measure as it stands as a bigger impact than what you were looking at from Mrs. Lemshore back end of August when you were talking about the total impact of 1%?
No, I think it's different phases. What is definitely clear is we have seen 3 announcements. The first was, I think, the 18th June. Then we saw an intermediate announcement, which looks like a little bit looser and not as strong as the 18th June. This was a cap of the rent was only for people who have to spend more than 30% of the income for rent.
And then we saw the final draft, which is worse and more strict than the one because there the rent reduction is gone for all apartments independent if the tenant is spending more than 30% of his income or not. To be very precise, there are apartments, which is probably not in our portfolio, but they are very well renovated apartments built in the 50s, which probably has a rent today of €20 per square meter, and they will reduce to €9 per square meter. So this is completely new, and this is actually stronger than the in between proposal we have seen, I think, in August.
Okay. Thank you. And then on Point C, you mentioned Mitch Bigel and Investments and you mentioned the political influence on Mitch Bigel values. What about the recent coalition agreement on housing with regards to the rent table? I know it's still in discussion between the Federal Minister of Justice and Housing.
But do you see that potentially having an impact in 2020 or you think 2021 or you think that would not have any impact to those current discussions?
No, I think this discussion will happen, and that's why this is a part of this discussion. So what we are saying is actually what we've seen in the last years, we see more pressure on the Mittsbiegel. But first of all, more political pressure. So look on the 2019 Mittsbiegel, even in Berlin, they managed to bring it down to 5%, which is probably a little bit away from the market before the legislation. But you see also the mid price trends, which has an impact because the mid price plan is reducing the new rent, which will go to the rent table 2 years after.
And then you see the element of 4% to 6 percent. So what we see in general is because of the significant rent increase we have seen, politicians are pushing harder to reduce the Mitspiegel system. And that's why I think in what we have previously said, rental growth of 5%, that we probably see a rough estimate, which is 20 to 30 basis points coming from just lower mid single digit.
I don't aim to push back, but I thought the whole discussion around that new Mitchbiegel revision was also to make it more scientific and less
This is not included in our figure because we have not seen any legal document for this. So I think the only thing what they will decide or I think they have already in the process is to extend from 4 to 6 years. So to get it more artificially better, this, of course, would help us and it would not be a negative impact, there's a positive impact, but we have not included it into our figures in the market.
Okay. Thank you very much. And apologies, the last question on the technical update of acquisition criteria. You mentioned earnings accretion will be measured relative to comparable portfolios within Vonovia. So I just wanted to know, so for example, if you make an acquisition, say, in the Netherlands or France, are you talking here when you're talking about comparable portfolios, is that just a rental portfolio?
Or is that portfolios you would select that you consider to be as a right benchmark?
No, no, it's the rental portfolio. So don't worry.
Okay. Thank you.
And to be open in France, we would not have a comparable portfolio yet. So we don't consider our 400 apartment as a portfolio which should be comparable for the future acquisitions. So this is mainly for Germany and Sweden.
Okay. Thank you.
The next question is from Christopher Fremantle, Morgan Stanley. Your line is open.
Hi, good afternoon. I just wanted to follow-up on the acquisition criteria that you have represented. How does the fact that your shares have started to trade at a discount to your NAV affect your strategy to continue this bolt on acquisitions? And in particular, whether you would fund those via new equity issuance? Clearly, that has been the trend over the last few years and interested in how you think about that, please?
And then on the same subject, when you talk about being accretive on EBITDA rental yield, Do you mean on a same year basis? Or do you are you talking about a year 1 or year 2? Because clearly, there can be different outcomes based on how you how far forward you'd look on that basis. So if you can just be a bit more specific about that, that would be helpful, please.
Chris, so on the NAV criteria, nothing has changed. So we continue as we did before. Only that obviously the NAV calculation on EPRA have been announced, I think yesterday at 5 o'clock or something like that for those interested. I saw Bart issuing a research on this already. So no change there whatsoever.
And then your second question was around sorry, someone help me?
The EBITDA rental yield. Are you talking about the same does it have to be accretive in the same year? Or are you talking or is it accretive on a forward look basis?
So it is after synergies. So again, nothing changed on that metric.
We normally say that it's the 1st year of full consolidation. Yes.
Okay. And all right.
It only makes sense. So for half year, it's very artisanal. So I think the 1st year of consolidation is the 1st year where we really can verify
it. All right. Okay. Can you on my second question, just you meant you talked about yield compression outside Berlin, and you suggested that the pace of revaluations and capital growth was at a fairly constant pace. Do you see that continuing into 2020 given what has happened to the cost of debt?
Or are we in the sort of the end game of yield compression as far as you can see. I appreciate you don't want to give too much specific guidance. But should people be expecting yields to continue falling after your full year 2019?
So, Chris, same answer as every call. We do not give any guidance on yield compression. So unfortunately, we don't know. We can't help you. There's nothing we influence.
What we do influence is clearly value accretion as a result of our investment programs. And that we do guide yield compression, we do not have an opinion on, at least not a public one.
Thank you.
The next question is from Kai Klose, Berenberg. Your line is now open.
Yes, good afternoon. I've got a quick question on Page 31 of the presentation. So you show the split of investments. Just being curious for 2020 as you haven't shown the split between upgrade and optimize, so I'd be interested if you want to keep it a bit more open or a bit more flexible? Or do we or if you might expect a bit of a stronger shift in terms of investments into the portfolio?
Hi, Kai. So yes, we continue to keep it Hi, Kai. So yes, we continue to keep it flexible as also this year we have seen that we do need to shift between investment programs. Really this year function of when we get building permits, That was the key driver. So indeed, we do just want to keep it flexible.
And just to preempt one of the questions that always comes, we don't detail the exact amount of how much we invest in 1 into the other program.
And the last question would be on Page 10 regarding the pipeline. The compared to the Q2, the pipeline is now at 31,000 units. After it was a bit lower, I think about 29,000 or so by the end of June. This comes from where? Did you from securing more bidding wise possibilities or from Sweden?
Just interested where we have seen where this larger, longer pipeline is coming from.
Yes. No, actually, we bought some land both in Austria and in Germany. So that's basically land which we are now developing to basically add to the pipeline.
Okay. Perfect. Thanks so much.
The next question is from Sanderbank Barclays. Your line is now open.
Hi. Excuse me. Good afternoon. A couple of questions for me as well, please. Just going back to Page 35, just to make sure that it's absolutely crystal clear.
So if I look at portion A, where there's a 30, 40 basis points impact from the reversal, Am I right to understand that this is a one off effect, which kind of ceases at the end of 2020 And that will then effectively will be replaced by 50 basis points impacting the year thereafter. So net net in 2020, the there is the 30, 40 basis points rolls off that has as a result has slight positive impact, but then the 50 basis points has a negative impact. So net net, you're between 10 20 basis points lower compared to the 5%. Is that the right way to look at it? Or
So actually, to be very clear, we are not speculating in the moment. I said that in 2 years, this is the earliest moment where the constitutional court can decide or not decide about constitutional of the rent freeze and the Mittendeker. Our assumption is in the moment that the law is in place and we have no assumption when the law will get out of place. So to be very clear, it's not that we are building models also in our long term plan. We are modeling that this rent law will stay there for 5 years.
And to be also very clear, nobody has a clue what would happen after 5 years because it is technically impossible to just stop the law because this would come to an exclusion of rent. So nobody has a clue in the moment in Germany what will happen an ABAP Defined.
I understand. But it's more that the 30 to 40 basis points impact. Is that a one off impact?
No, but it's every year.
For 2019 and then that rolls off or not?
Problem is normally in Berlin, you would realize a rental growth every year and this has stopped, right? Yes. So this is not coming.
No, I understand. But so but there's effectively 2 impacts you're quoting here. You have a big footnote about 50 basis points and you have another end of 0.8.
The 50 basis point is a onetime effect where you bring everything back to the meat and Decker.
Yes. Okay. So there's a 30, 40 basis points impact for next year, then that effect goes away and then there's another 50 basis
points impact. No, the 30 to 40 basis points will continue to because the 5% was actually what we used to have on the rental growth portfolio before. Now we have Berlin and we are losing 30 to 40 basis points in Berlin every year because we are not showing rental growth in Berlin in any year, which we would add before the legislation. And then the 50 percentage basis point, which is actually really going down one off because it just brings a lot
of Okay. So the 30, 40 basis points is permanent and the 50 basis points is a one off, not the other way around.
Okay. Okay, perfect.
Then you have a small to be very clear, you have actually to be very clear, I think this is very important because a lot of people have not understood it. You have actually 2 elements of rent reduction according to the law, as Helena has explained. The first is coming in January, where you have to rewind all rent, which we have increased since 18 June 2019. Keep in mind, there is a new midstream. So a lot some players have increased their rent according to the midstream because they have the right.
Now they have to reduce it. This is a first element of rent reduction. We are not so much impacted because we have decided not to increase the rent. So that's why, of course, we will not have to reduce it. But to be also very clear, there is newly renovated apartments,
which
we have rented out since June 2018. And this apartment will be reduced by the rent in January 2020. So I want to make very clear, there is a tenant who has signed an apartment for €11 per square meter in August, And he will go back, for example, depending on the age of the building, to €8,000,000 or €9,000,000 in January. This is why we are saying this is a good signal for being unconstitutional because a lot of rights in Germany are violated here, but this is another debate. So this is the 1st wave.
And then the 2nd wave, which is a much bigger one, is coming in September or later, dependent on the approval process in the administration, where actually people can ask to have the rent reduced to amount which is 100% of the rental cap. And they call it VUKAMETEN, but this is not a VUKAMETEN. They call €8 a VUKAMETEN to be very precise. So or even €7. So this is but this is a reduction and this will hit all of us.
We don't know exactly in which time frame, but will hit all of us probably in 20 21. Okay.
And if you you spoke earlier about very negative like for like rental growth in Berlin. Can you kind of quantify what kind of number you're looking at?
We are not quantifying it, and it's also difficult to be very clear because we don't want to give guidance for other companies. So also you have to be very careful that normally that you just put our volume and multiply it or divide it by the other volumes. This is probably not helpful because it depends very much on your locations. It depends on your rent. Actually, you can say one thing is better your quality in Berlin is, as better you get a bigger problem.
No, no. But I understand. But just broad magnitude, are we talking minus 10% or are we talking minus 2%?
We have not given you and I actually I have not calculated from the burn in specific, so this would be guessing now. We will probably include it in the next presentations.
Okay. That's it. And just on that, like how are you looking at Berlin in terms of CapEx? Are you basically putting CapEx? Are you keep on investing in the maintenance but reducing your CapEx program?
Or are you looking to shift that around? Or how are you thinking about that?
So it's clear CapEx is not allowed anymore, at least if you don't want it's only allowed if you're Sure,
it is allowed.
So but it's technically not allowed anymore to make investments there. So we will lose you reduce CapEx, especially modernization to a minimum. And we will shift this to other places. As you see in our guidance, we are guiding more or less the same volume than what we have done in 19. And the new construction, of course, we will finish the buildings which are under construction because they are not directly impacted by the law.
And we will look very carefully on new construction in Berlin because what is not in the law today might be in the law tomorrow. So that's why we have to be very careful in Berlin what we are doing.
Sure. Okay. And a very last one, is how do you are you currently looking at potentially doing acquisitions in Berlin even if those acquisitions fall outside of your acquisition criteria, but you're taking a slightly longer term view. Especially, I think there were some headlines this morning where you were quoted saying that the financing environment has become a bit more difficult and a bit more tricky. How are you looking at that?
How are you looking at the moment that valuations in the
way that should
To be very clear, Helene is knocking on me because she's just blaming what I have said in this morning, but I cannot remember that I have said that financing conditions are getting more difficult. I think it's more the opposite, but anyhow, no, we are not to be very clear, in Berlin, if somebody and I said it more in example that a small butcher owns the apartments, if his rent was reduced by half, he is probably forced to do a forced sale because he just gets the half of the rent. This means actually that probably his interest in his personal case because he has levered it probably with 80%, 90% is higher than the rent he is collecting. And in this moment, he is probably pushed by the banks to sell. So these cases will happen.
And of course, in these cases, you might have a chance to buy for a very good price. And this was the explanation. This was more to be very clear. It was not for the capital market. It was to explain the German press what will happen to the butchers in Poland because this has a massive impact on people.
So don't underestimate this. This has a massive impact on the population because a variety of Germans are using apartments which they rent out for their pensions.
And these are
is now this pension money is now getting to become 0. So this has an effect, but this is more for the political debate for us. Of course, if somebody would offer us a very good portfolio in Berlin for a very low price, so much lower than what we see today, we would not ignore to look on it as we look on all portfolios. But I think there's enough uncertainty in the moment in Berlin that you have to be very, very careful.
Okay. That's all very clear. Thanks very much.
Operator, do we have anybody else in the queue at this point?
Yes, we have the next question is from Tom Carstairs, Commerzbank. Your line is now open.
Tom?
Hello. Can you hear me?
I think
you need to speak up a bit. We can't hear you.
Can you hear me now?
Yes. Perfect.
Loud and clear.
Sorry. Apologies for that. So, yes, two questions, please. First one, regarding Rolf's comments on the court decision not before 2 years. Because I understood that the FDP is planning to challenge this in parliament and that would potentially that could be fast tracked to the constitutional court.
So does that exclude that FDP
potential? No. This is the only way how we can come to 2 years. If this is not happening, the time will be much longer. Right.
But what everybody is telling, so I'm an engineer, I'm not a lawyer. But everybody, what the lawyers are telling me, if you are applying a point of the constitutional court in Germany, it will take a while before the constitutional court will decide the first meeting and they have to collect material and all of these things. So this process, according to our lawyers, is normally taking 2 years. But the constitutional cost is very free in how fast they want to react. But as I understood from some members of parliament, they are actually saying 2 years is fast.
Okay, cool. Thank you. Second question
It's not cool. It's not cool. It's a disaster.
Sorry, misuse of the word. The second question relates to HEMBLA. And I was wondering whether you could give any indication of your estimate of Hembla's 2018 earnings based on your group FFO earnings
approach? No. Again, I said we had no possibility except public available information. So I think we should not say anything about Hemla at this moment of time. And again, to be very clear, our assumption is that we will run the Hemla portfolio like the Victoria Park portfolio.
So we don't care too much about what is the historic figures of Hemla.
It was more for me, but thanks.
I'm sorry. I'm sorry. It's just I'm not educated in HEMLIB enough to answer questions about 2018 or
The next question is from Maurice Pasteur, Credit Suisse. Your line is now open.
Hi there. Thank you for the update. Look, I just want to go back over Page 35 just very, very quickly, just to make absolutely certain in terms of future growth. Because on Page 20, you're mentioning that your estimated impact on group FFO in 2020 will be €6,000,000 which is the unrealized rent growth because of freeze and then also the rent reversals. So on Page 35, is part of that 30 to 40 basis points, a mixture of the 2.
So the 30 to 40 won't be every year because some of that is the day 1 rent reversals and the rest of it is the unrealized rent growth. Is that correct?
Keep in mind that our rent reversal is very little because we have not used the rent mid figure 2019 to increase rents. So don't have to reverse.
Okay. So a very, very small portion of that 30 to 40 days is basically
I explained the system because I think a lot of people have not understood that there's 2 elements of rent reversal in the system. In our case, we had decided not to increase the rent, and I think this was a good decision because it is a confusion to send out to tenants in October a rent increase letter and in December a rent decrease letter. So probably the cost related to this is higher than the difference in rent. So that's why for us, the first rental reduction will be not material. Okay.
And then the second one, they'll be material.
Okay. Makes sense. Thank you.
The next question is from Doctor. Georg Hamner, Bankhaus Lampe. Your line is now open.
Good afternoon. I have a question regarding the outlook for the current year. You had now quite a high contribution from the development department and on recurring sales? Do you expect for Q4, is there a significant reduction from the contribution? And then I have a special question regarding the Development segment.
When I look at the quarterly development, there are very low operational expenses booked in Q3. Is there a special reason for this?
Hi. So I think we need to follow-up on that one because that goes deeply into sort of like the development accounting. As you know, for the development to sell, we have POC accounting. That can always have an effect. And then we have the development to hold where buildings come in online all at once.
So we ideally would like to come back to you with details and granularity on these questions.
It's just that it was more or less a normal development for the Q1 and then just even below €2,000,000 operating expenses. And I would level in operating expenses from the revenue side. We will
come back to you, this is because this is very difficult detail. Before we are giving wrong answers here, I take it.
But what I want to is this my impression correct that there will be more or less a decline in Q4, especially from these two items? Or is this because I
think you'll be very clear, this to look on the development business on a quarter by quarter view is probably a little bit difficult because you know this, especially in the developmental hold, realizing its profit at the moment if the buildings are finished. And if you have, for example, because of bad weather, finishing in January, then you don't realize the profit. So I think to look on the Development business on the quarter by quarter business is a little bit tricky and we will have this always. So but you cannot read anything out of it.
As there are no further questions, I would like to hand back to Rene.
Thank you, Judith, and thanks everybody else for joining. As a reminder, our full year earnings results 2019 will come out on March 5, which is obviously quite a ways away. So until then, we'll be on the road quite a bit, and we hope we'll be speaking during a roadshow or at a conference. Our financial calendar is on Page 55 of today's presentation and the most up to date version is always on our website. As always, feel free to reach out to me or the team with any questions or comments you may have.
That's it from us for today. Have a great day, everyone.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.