Scope Ratings says rent and property-development commitments made by Vonovia and Deutsche Wohnen regarding the German capital’s residential sector are crucial to understanding why the merger has been revived five years after Vonovia’s first attempt to take over its smaller rival. Scope has affirmed Vonovia’s credit rating at A-/Stable.

As part of the EUR 18bn merger, Vonovia and Deutsche Wohnen have agreed to sell 20,000 apartments at market prices to real estate companies owned by the Land of Berlin, limit rents increases to 1% a year for three years. In addition, they have agreed to limit rent increases on existing leases to the inflation rate for another two years for those apartments for which there hasn’t been work done to improve energy efficiency. Vonovia, Deutsche Wohnen have also agreed to develop 13,000 new apartments in the city, a third of which will be dedicated to affordable housing.

“The companies are trying to bring greater stability and predictability to Berlin residential tenants by reducing the burden of housing costs and thereby minimise the risk of further political intervention which led to the 2019 rent freeze,” says Philipp Wass, executive director at Scope.

“Crucially, Vonovia and Deutsche Wohnen have recognised that they need to address the lack of affordable housing stock, while, as the biggest, publicly listed player in the Berlin market, hoping their commitments to the authorities have set an example that other property owners will follow,” Wass says.

“The importance of the deal longer term is that the complementarity of the companies’ portfolios, merger-related cost savings, and broader economies of scale should help the combined company take on the significant increase in capex they face if they are to meet their commitments to carbon neutrality,” he says. Deutsche Wohnen has a target date of 2040. Vonovia’s is 2050.

“All Europe’s real estate companies face the challenge of capital-intensive business operations on top of the environmental challenges from the transition to a more sustainable economy. The industry is the biggest consumer of energy in Europe, accounting for around 40% of total energy consumption and one-third of carbon dioxide emissions,” says Wass.

The merger may have ramifications for the broader European real estate sector given that it is not only in Berlin where rising residential rents have triggered a political response, with the authorities under political pressure to ensure housing remains affordable - from new building projects to rent regulation. Take Lisbon’s secure rental income programme in 2020, Paris’s tightened control of rental caps in 2019, and similar measures in Catalonia. More regulatory measures are up for discussion in the European Parliament.