How to Invest in Europe’s Biggest Economy

Looking to invest in Europe’s biggest economy? Aroundtown SA (AANNF) is a real estate company with a focus on income-generating quality properties. The company has multiple commercial and residential holdings in Germany, which is Europe’s biggest economy. In addition, it holds properties with value-add potential in central locations in top-tier European cities in the Netherlands and London.

AANNF stock gives investors an opportunity to dip into the European real estate market and take part in a business with strong fundamentals and growth prospects.

TipRanks recently had the opportunity to discuss the company’s workings with Oschrie Massatschi, Chief Capital Markets Officer at Aroundtown. Read on to learn all about this company’s prospects.

TipRanks: What makes this company attractive to investors? 

Oschrie Massatschi: Aroundtown is an attractive investment due to several key factors that set it apart in the European real estate market: 

1. Market Position 

Third Largest Publicly With a €25 billion asset base: Aroundtown is the third-largest publicly listed real estate company in Europe. Its scale and market position provide significant advantages in terms of operational efficiency, market access, and deal flow. Aroundtown is a well-known and trusted player in transaction markets, providing it with a wide network comprising leading market participants and thereby strong access to acquisition and disposal opportunities.

2. High Level of Diversification 

Diverse Asset Types and Locations: Aroundtown’s portfolio is highly diversified, both in terms of asset types and geographic locations. The company focuses on prime properties in Germany and the Netherlands, with a mix of residential properties in Germany and London, hotels across Europe, and offices in key cities in Germany and the Netherlands. This diversification ensures multiple earnings drivers and reduces risk, as the company is not dependent on any single location, asset type, or tenant base. While at the same time the Company’s large scale still allows it to benefit from a strong local position and depth of experience in its specific asset locations and asset types, resulting in a competitive advantage on a local level. 

3. Strong Financial Position 

Credit Rating and Market Access: Aroundtown enjoys a strong credit rating of BBB+  from S&P (highest for German commercial & residential real estate). This reflects the company’s solid financial management and provides superb access to capital markets and bank financing, ensuring liquidity and financial flexibility. This was reflected in recent bond issuances which were 7x oversubscribed, with strong demand from leading global bond investors, allowing it to raise funds on short notice to capitalize on attractive opportunities if these arise. 

Stable Cash Flows: The company generates stable rental income from its diversified and high-quality tenant base, further strengthening its financial position. 

4. Attractive Valuation 

High Discount to NAV: Due to the current weak market sentiment driven by interest rate fluctuations and market volatility, Aroundtown is trading at a significant discount to its net asset value (NAV). Despite this, the company continues to deliver a high earnings yield, indicating that its market price is disconnected from its actual earnings power and the quality of its assets. This presents a compelling value opportunity for investors. 

5. Macroeconomic Positioning 

Poised for Growth: Aroundtown is well-positioned to benefit from improved macroeconomic conditions and potential interest rate cuts. As the market sentiment improves, the company’s strong asset base and pro-active financial management will allow it to capitalize on these changes, driving potential capital appreciation and enhanced investor returns. 

To summarize: 

Aroundtown’s scale, diversification, strong credit rating, and attractive valuation make it an appealing investment, especially in the context of current market conditions. The company’s ability to generate stable earnings while trading at a discount to its NAV offers significant upside potential, particularly as macroeconomic conditions improve and interest rates further reduce. 

TipRanks: From your extensive experience in the real estate industry, what types of assets do you believe will hold the greatest value for investors in the coming years?  

Oschrie Massatschi: Residential Properties are now showing the greatest value for investors. This is the case as a result of the current environment, but the drivers are very sustainable and are expected to generate high value also in the long-term. Residential real estate will continue to be a top-performing asset class due to a substantial demand-supply gap. In key markets like Germany and London, housing demand far outstrips supply, with urbanization and population growth driving the need for more residential units. For instance, Germany alone faces a shortfall of hundreds of thousands of housing units annually. This imbalance is likely to sustain high occupancy rates and rental growth, making residential properties a strong investment.  

Hotels are benefiting from a positive momentum post-pandemic. Hotels, particularly in the leisure segment, are seeing a robust recovery post-pandemic. Leisure travel has bounced back strongly, driven by pent-up demand and the return of large-scale events across Europe, such as the recent European football tournament in Germany. This resurgence in tourism is boosting occupancy rates and revenues for hotels, making them a very attractive asset class. 

Looking more into the mid-term, the office sector, particularly in Germany and the Netherlands, is poised for a rebound. Market vacancy rates are currently low, sitting below historic levels, and new supply is limited as many development projects have been halted or cancelled. Once the economy starts growing again, which is expected to coincide with interest rate reductions, demand for office space is anticipated to pick up. This combination of low supply and growing demand positions offices in these markets as valuable assets for investors in the coming years. 

TipRanks: In July, Aroundtown announced the successful launch of a €650 million unsecured bond, with plans to use the proceeds to buy back shorter-term debt. How will that bond affect the company’s financials?  

Oschrie Massatschi: We have robust access to capital markets, and the recent bond issuance has further diversified our liquidity sources, lowered refinancing risk, and extended our average debt maturity by enabling the buyback of shorter-dated bonds at a discount. The bond issuance was seven times oversubscribed, reflecting strong investor demand and attracting high-quality investors. In addition, our residential subsidiary Grand City Properties also issued a bond, with similar high demand as Aroundtown’s issuance. The proceeds are being used to optimize the Company’s financial profile, thereby reducing refinancing risk and allowing the Company to focus on the execution of its long-term value creation strategy. 

TipRanks: What are the most prominent risks Aroundtown faces, and what steps are you taking to minimize those risks?  

Oschrie Massatschi: Rising interest rates negatively affect our valuations, thereby increasing leverage. We’ve managed to keep leverage conservative by disposing of assets and buying back debt at a discount. With interest rates peaking and beginning to decline, the pace of value reduction has slowed, suggesting we may be nearing the bottom. However, higher interest rates also impact our refinancing costs, which could negatively affect future earnings. To counter this, we’re repurchasing variable debt, hedging it at lower fixed rates, and enhancing our portfolio’s reversionary potential, which exceeds 20%. 

The current demand for office space is subdued due to the weak economic environment. To mitigate this risk, we maintain long average lease terms with no significant maturities in any single year, avoid dependence on single tenants—our top 10 tenants account for less than 20% of total rent—ensure strong tenant quality with approximately 75% of tenants being public sector entities, multinationals, or large domestic corporations, and explore conversion options, such as turning office spaces into hotels or residential units. 

TipRanks: What strategies is Aroundtown using to promote its growth in the German and NL real estate markets?  

Oschrie Massatschi: Our portfolio currently has a reversionary potential of over 20%, meaning that there is a significant gap between current rent and market rent. We aim to capture this potential through re-letting opportunities as leases mature, either by extending existing leases or securing new tenants, with the success of this strategy largely influenced by market conditions. This approach has already shown positive results, as evidenced by our consistent like-for-like rent growth of 2.8% over the last 12 months as of March. 

Additionally, our value-add strategy plays a crucial role in driving growth. By leveraging our expertise across all asset types, we identify and implement the best use for our properties, ensuring we maximize their potential and enhance overall portfolio performance. 

TipRanks: How does Aroundtown maintain its substantial pipeline of new real estate deals?   

Oschrie Massatschi: Since 2004, we have developed a robust deal-sourcing network, bolstered by our strong reputation as a reliable counterparty that executes transactions efficiently and with certainty, given our position as cash buyers. This network has historically been a key resource for acquisitions, but since 2020, we have increasingly leveraged it for disposals as well. Our ability to maintain a substantial pipeline of new real estate deals is driven by the strength of these long-established relationships, which continue to provide us with high-quality opportunities in both acquisition and disposition markets. Furthermore, the Company’s ability to quickly pivot from acquisitions to disposals, as shown when we started disposing in 2020, and ability to shift back to acquisitions, when attractive opportunities arise, is a clear strength of the Company’s platform. 

TipRanks: According to Statista, German real estate is expected to grow annually (CAGR 2024-2029) by 2.77%, led by residential real estate. Currently, residential housing comprises 33% of Aroundtown’s assets. Do you have plans to shift your asset balance and increase your residential real estate segment?    

Oschrie Massatschi: AT’s residential assets are held through GCP. GCP holds around 81% in Germany and 19% in London. We are happy with our position in residential, but may also increase our position through targeted conversion of commercial assets into residential. 

Both residential markets are characterized by a systemic supply-demand imbalance which results in consistent strong operations for the mid- to long-term. Germany has rent regulation, which limits the amount of rent increase and thus provides more stable cash flows with long-term upside potential as demand outpaces supply significantly. The London rental market has no regulation, thus capturing the potential to market rent is faster. The reversionary rent potential of GCP is 24%. 

TipRanks: Do you expect interest rates in Germany and the Netherlands to rise or fall through the end of 2024? How will the rates affect Aroundtown’s revenues?   

Oschrie Massatschi: Interest rates peaked in Q4 2023, and by June, the ECB had begun lowering them again. With inflation continuing to ease, we anticipate that interest rates will decrease further, as indicated by trends in mid-swap rates. 

Given this outlook, we expect interest rates in Germany and the Netherlands to continue declining through the end of 2024, in-line with market expectations. Lower interest rates should positively impact Aroundtown’s revenues by reducing financing costs and creating a more favorable environment for refinancing existing debt. This decrease in borrowing costs could also stimulate market activity, further supporting our revenue growth.  

However, Aroundtown follows a pro-active management approach, also regarding its financing structure, and is prepared to deal with scenarios in which rates do not decrease at the pace markets expect.