Vonovia SE (VNA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Full Year Results 2020 Analyst and Investor Conference Call of Vonovia SE. At our customer's request, this conference will be recorded. [Operator Instructions] I now hand you over to Rene, who will lead you for this conference. Please go ahead.

Thank you, Alexandra, and welcome to our 2020 earnings call. In line with tradition, your host today are once again CEO, Rolf Buch; and CFO, Helene von Roeder. I assume you've all had a chance to download the presentation, and in case you have not, please go to our website, and you'll find it under the latest publications. It has become a pretty thick deck, but that is because it is really 2 parts. The first is the earnings call presentation, which we will be going through today, so Pages 2 through 28. And the second is the more general investor presentation, plus the appendix. We have combined the 2 documents into 1 to use the same sets for different events and situations over the next weeks. So Rolf and Helene will now lead you through this first part and of course, we'll be happy to take your questions afterwards. And with that, over to Rolf.

Thank you very much, Rene, and welcome also from my side. Yes, we are doing every year a full year set of reporting numbers, and I think this is a good opportunity not to just look on the detail of the prior year. But also to take a step back to a broader view. We are reporting today annual results for the eighth time since our IPO in 2013, and I would like to briefly take the opportunity to give you an overview of the main difference between then and now. Our business scope is much broader. Our geographic scope is much wider but also at the same time, more focused on urban growth areas. Vertical integration is working, and we have built a successful in-sourcing model as part of our operating platform. We have acquired more than 300,000 apartments, and with our competitive cost of capital, our best-in-class operating cost, and now, with our strategy for CO2 reduction, we expect to see additional opportunities in the future. We have proven scalability for Germany, and we are now looking to replicate the business model in similar markets outside of Germany. Sustainability has been now firmly anchored in our business. In terms of reputation, we still have some way to go. As it will be no doubt, be seen this year because of the federal election campaigns. But we have made a lot of good progress. We are an accepted and appreciated partner for many of all levels of the government. In summary, while we have been very true to our strategy that we communicated and promised to you during the IPO, I think we have managed not only grow the company, but also to put it on a more solid and broader basis for sustainable long-term growth. On the next page. I like this page, by the way, our KPI and their development since the IPO. Every time we report a new set of numbers, they were better than the year before. And I'm as confident as ever that we will continue to deliver earnings and value growth in the future as well. So now let's go on the highlights on Page 6. Clearly, last year was an exceptional year in many ways. The world had to deal and still deals with a global pandemic that has proven to be disruptive in so many ways. But even in this environment, as you have already seen with our interim results, our business was barely impacted. And we saw the same robustness and stability that we have seen in previous years, and in all situations, which were highly challenging. So I think we were able to prove this year that our thesis of a very robust business is always the case. The pandemic also has reminded us how serious we need to take our responsibility of providing a place that 1 million people call their home. I have said this in many times before. We will only be successful in our business if we strike a right balance between our different [ owned ] stakeholders. Because our business is so stable, and we have been able to look after our tenants, to demonstrate advantages of living with a large professional organization and to clearly show, once again, that we have solutions about our stakeholder approach. And finally, we made a lot of progress on sustainability in 2020. We improved our scores in the different rankings, as committed to a path of climate -- and we committed a path to climate neutrality by 2050, and we implemented a measuring system to track our success in this respect. On the financial side, it was the same old story as before. We achieved or overachieved the targets, and we have -- that we have set ourselves. Total segment revenue was up by more than 6%. Adjusted EBITDA grew by 8.5%, and group FFO by more than 10% or 6% per share. Organic rent growth was 3.1%, of course, impacted by the Berlin rent freeze, as announced, which cost us 50 bps because of the onetime reduction in November. Valuation also came in as expected with a 9.4% total value growth for 2020, resulting in an overall 14% growth on adjusted NAV and also on the new NTA. Our capital structure remains conservative with an LTV, including the hybrid, of 41.1%, so on the lower end of the range. And finally, before I hand over to Helene for more details a word on sustainability. I will explain the SPI a little bit later in the presentation. I only want to say 2 points now. First, it aligns our interest even better with the interest of our shareholders and our stakeholders; and second, make sure that our performance on sustainability is as relevant as our financial performance. And with this, I hand over to Helene.

So thank you very much, Rolf, and good afternoon from my side also. As always, I will start with the overview of the segment EBITDAs and how that translates to group FFO. On average, our total number of units grew by 3.9% in 2020, and on that basis, our top line with the total segment revenue grew by 6.3%, our EBITDA increased by 8.5% and and our FFO was up 10.6% in absolute terms. On a per share basis, that is a 6% increase for end-of-period share and 7.1% for average shares. Year-on-year, the number of shares increased by 4.4% because of the scrip dividend in July and also the equity raise in September. So let's take a closer look at the different segments and start with the Rental segment on Page 8. Rental revenue increased by 10.2% or EUR 211 million. The larger part clearly came from Hembla, and the remainder, from organic rental growth. Maintenance expenses grew by 3.9%, which is in line with the overall portfolio growth. And for the operating expenses, you are probably now familiar with the so-called Sweden effect. The increase you see here is mostly driven by this. Because Sweden does not distinguish between the net cold rent and ancillary expenses, both the rental revenue and the corresponding operating expenses include ancillary costs. Rough math suggests it's about EUR 100 million for 2020 and about EUR 50 million for 2019. So adjusting for this on a pro forma basis, we saw Rental revenue increase by 8% and operating expenses by 11%. But please bear in mind that this is still on the basis of running 2 operating platforms in Sweden with no operational synergies. This will obviously be different in 2021 because we completed the integration at the end of last year. Final comment on this page, our EBITDA operations margin in Germany increased slightly to 76.7%, but the cost per unit were also up a bit. I do not see a trend here, though. The slight increase is mostly driven by some COVID-related expenses, but nothing to write home about. The general direction of these numbers remain south-bound, but of course, on a more or less stable portfolio, the momentum will be slower. On Page 9, we have the main operating KPIs for the Rental segment. Organic rent growth was 3.1% year-on-year, of which 0.6% came from the market, 1.9% from modernization and 0.6% from new construction. Obviously, we're missing 50 basis points from the reduction of the rents on 1/3 of our Berlin portfolio due to the rent freeze. Vacancy is down another 20 basis points. And this is both the result of the unbroken demand for our products, but also because our team performed extremely strongly in spite of COVID-19 restrictions. So for example, mass viewing were not possible during lockdown. Again, maintenance expenses were in line with last year, and on a per square meter basis, and capitalized maintenance was higher than last year as we've been carrying out some larger maintenance work that, accounting-wise, does not go through P&L. And with that, back to Rolf.

Thank you, Helene. So let's go on Page 10 and talk about the Value-add segment. You may remember that we were below the prior year numbers for the first 6 and for the first 9 months of this year. And I'm happy to report that we ended the year 4.1% better than last year. What held back an even better performance was that we have discussed on previous calls, the temporary delay in our investment program and the lack of earning contribution in the residential environment on back on the cold wind -- or the mild winter temperature last winter. Other than that, we continue to move along with the different value-add initiatives, so I expect our Value-add EBITDA to go up again in 2021 as well. On Page 11, you have the result of the Recurring Sales segment. We closed the year with 2,442 individual apartments sales for a gross proceed of EUR 382 million. The fair value step-up was again 39.6% on average, and so again, well above our guidance of 30%. So the slightly lower volume but higher proceeds and the fair values with the similar margins. So to us, that is an evidence of unchanged positive market sentiment. The demand for condo units remains very strong, and that is testimony for the positive overall underlying market fundamentals. You will also see this trend when Helene shows you the valuation result in a few minutes.

So with that, the last segment, Development, on Page 12. This segment includes all new constructions of apartments by way of entirely new buildings, but it excludes additions of floors on existing buildings. Both the revenue from to sell developments as well as the to hold volume were up by double-digit percentage numbers. Combined, this led to more than 30% growth in EBITDA for this segment. Overall, the Development EBITDA represents less than 6% of our total EBITDA, so from a risk point of view, negligible. We consider the development to hold to be even less of a risk because we know the market very well, and letting the newly completed units is usually not exactly a major challenge. If we go to Page 13, then we can see that including the floor additions, we completed 1,442 units to hold and another 646 to sell for a total of more than 2,000 apartments. And as we have said before, this is important for 2 reasons: for one, it makes economic sense, but it also helps us to be part of the solution to mitigate the housing shortage. The current pipeline stands at about 38,000 apartments to hold plus approximately 9,000 apartments to sell. For this year, we're looking to complete 1,500 units for our own portfolio and another 1,000 to sell for other parties. So let's look at Page 14 for investment program. 2020 was the second year in which we have achieved our target range volume after a few years of ramping it up to the current size. At EUR 1,344 billion (sic) [ EUR 1,344 million ] it was below last year, but that was basically corona-related. For 2021, we clearly target a similar volume again. You know we never give you the exact breakdown into the 3 investment categories and actually only shade the 3 blocks to give you a rough idea. Now we're taking secrecy one step further for now and leave out the shading as well, actually not because we enjoy giving you a hard time, but we are in the process of analyzing what the new Federal Funding Regulation for Energy-efficient Buildings, BEG, means for us in terms of hard numbers. And Rolf will explain to you that it's clearly a positive. We just don't know yet how positive and need a bit more time before we can come back to you. So Page 15 shows the 2020 valuation results. The overall value growth was EUR 4.9 billion or 9.4% on a like-for-like basis. 7.5% of that came from performance and yield compression, and the remaining 1.9% from our investment. This is a bit below the 11.9% of last year, but if you exclude Berlin from the equation for obvious reasons, you get to very similar results both in 2019 and 2020. The new valuation puts the overall portfolio at 24.2x in-place rent multiple or a 4.1% growth yield and EUR 2,063 fair value per square meter. So on Page 16, we're looking at the mother of all real estate questions. What will the future bring in terms of yield compression? Our general position has not changed. Since we do not have direct influence on yield compression, we cannot speak to the quantum of further yield compression yet to come. Having said that, there are a couple of points I'd like to make to show that there are strong indications that even after substantial yield compression in the past, there's probably more yield compression yet to come. First, our market observations and our preparation work for the H1 valuation point to a material yield compression also in H1. Second, if you look at our German portfolio, excluding Berlin, you see that the momentum on yield compression increased after decreasing for 3 consecutive years before. And third, transaction prices, both for portfolio deals and condo sales in our markets, suggest a further tightening of yields. Fourth, in light of the enormous volume of sovereign bonds with a positive yield issued by countries that have now a negative yield, it is probably reasonable to assume that some of this money will end up in residential real estate and continue to drive up prices. So with that, let's move on to Page 17 for the NAV. On the back of the portfolio valuation, the adjusted NAV grew by 19.3% in absolute terms and 14.4% on a per share basis. The impairment trust resulted in no need for an impairment in 2020. However, if we look on the one hand at the headroom and the 2 remaining operating regions in which we still have a bit of goodwill left, it's about EUR 150 million. And on the growing fair values on the other, I cannot rule out an impairment at, at least in part of the course -- at least in part in the course of this year. The goodwill outside the rental segment, so in value-add and development, looks to have plenty of headroom at this point. On Slide 18, we'll become a bit technical. We had already given you a preview of our NTA and NRV with the half year numbers. And now is the first time that we're reporting the new EPRA NAVs as part of our regular reporting. We noticed after our H1 reporting, that there seems to be a bit of confusion as to what should go into these numbers. And at the risk of being a bit theoretical or maybe even dull at this point, I would like to remind you on how we apply the EPRA best business practices. EPRA specifically calls for the separation of the portfolio into, a, a whole portfolio where the intention is not to sell the portfolio in the long run; and b, the rest, which is then essentially a sales portfolio. On that basis, deferred taxes are excluded from the whole portfolio by adding them back to the equity because if the intention is not to sell the portfolio, then clearly, the deferred taxes will not materialize. That makes perfect sense. The very same logic should be applied to the item of purchases costs, including real estate transfer tax as well, we think. The portfolio valuation is a DCF calculation of the rental cash flows. From the growth value that results from the valuation, a certain amount is then deducted from purchases costs, and the net amount is included in the IFRS accounts. In the case of the whole portfolio, however, by definition, assets will not be sold. So this cost item that reduces the rental cash flow value should be added back, just like it's added back for the deferred taxes. This is clearly in line with EPRA's recommendations. So in our case, we're talking about 88% of the portfolio. The remaining 12% are the sales portfolios. And this is the noncore portfolio, the portfolio out of which we sell the condominium, and to be conservative, all of Austria. On Page 19, we translate this into numbers. Keeping with the NTA on the left-hand side, we're starting with the IFRS equity, to which we add back the deferred taxes for the whole portfolio. In addition to the adjustments for fair value of financial instruments, goodwill and IFRS intangibles, we also add back the purchases cost to the extent they relate to the whole portfolio to get to the NTA. As of the end of 2020, this was EUR 62.71 per share, up 14.3% year-on-year. We have the full set of 2019 and 2020 old and new NAV numbers on Page 69 in the appendix. Now moving to the right side of the page, we show an NRV of EUR 77.18 per share. For the NAV, there's no distinction between the hold and the sales portfolio, and in addition to the deferred taxes and the purchases cost, the fair value of intangibles that are not included in the balance sheet are also added. This fair value of the intangibles is calculated by a third-party independent appraiser on the basis of our 5-year plan for both the Value-add and the Development segments. So on Page 20, we have the LTV. Our standard definition resulted in an LTV of 39.4% at the end of 2020. Now in light of the call date for the perpetual hybrid at the end of this year, however, it makes probably sense to start looking at the LTV including replacing the hybrid with a senior debt instrument because we are now in a position to repay it. Either way, the LTV is at or even slightly below our target rate, which continues to be between 40% and 45%. The net debt-to-EBITDA multiple was 12.3x, up 80 basis points from the end of 2019. This is still a level that doesn't make us nervous. Let us not forget, this number already includes the full debt, but not the full EBITDA potential, which is normal in a growing business. And Page 21 has all the relevant financial KPIs. I'd like to remind people that LTV alone is not a meaningful indicator for the resilience of the company's balance sheet. I like to look at it together with the fixed or hedged debt ratio and the maturity profile. And I continue to believe that we're in very good shape here. You may have seen our last bond issuance for EUR 500 million with a 20-year maturity and a 1% coupon. There's quite some talk about steepening yield curves and the sea of rising interest rates, but if I look at these terms, I'm not particularly worried as it looks like refinancing will remain rather an opportunity. And with that, back to Rolf.

Thank you, Helene. And now, we'll become tough. Page 22 to 24 is really dense. The good news is that you will not see additional new topics coming up to these pages during the year '21 because we probably have 3 weeks left for the legislation body to invent new legislations, so -- because then we are coming in the campaign mode. So this will be a relatively relaxed topic despite, of course, effects which we have on this slide. Let me start on Page 22, with Berlin rent freeze. We have been very clear in all of our conversations in the last -- in the past that if you believe the court decision in Q2 will simply bring back the situation which we had before the rent freeze, then you might want to think again. With the election in Berlin, there's a possibility of the nationalization referendum on the same-day in September, we believe that we will continue to see a pretty difficult period for Berlin in the -- for some time to come. It will be a hot summer. And we do not think that there can be business as usual once the court has spoken. The next topic. By now, you will be familiar with the CO2 tax that was implemented in the beginning of the year. As a reminder, this is fully recoverable from tenants, and there is no doubt about this based on the current legislation. What we are seeing is a discussion on how this might change in the future. This will be definitely a topic for election campaigns. Vonovia proposal is clear. In order to sell the right incentives, we think that an allocation of the CO2 tax between tenants and landlords need to be made alongside the energy efficiency classes on the buildings. What is more important is that CO2 emissions must be reduced regardless who pays the tax on it. But to be also very clear, if we do not find a solution for the distribution of the CO2 tax in the next 3 weeks, the CO2 tax of the year '22 will also be paid by the tenants. Our effort to reduce CO2 received some tailwind recently with the Renewable Energy Act in Germany. While there is more policy work to be done, this is good progress because this provides us better incentives for landlords to tenant electricity models, improve conditions for an energy site generation and the implementation of the neighborhood concept. This is helpful because we see the future of energy supply to be local with the neighborhoods. It is here that we want to generate, store and supply energy to our tenants. With all modesty, I think we have been pretty successful in lobbying process. At the next page, Page 23, includes a bit of color on the last 2 pieces of legislation that are being worked on, plus a reminder that '21 is in [ an important ] -- as I said before, election year in Germany. The first law is a Mietspiegel reform. One element is slightly negative. The extension from 2 to 3 years is negative. The other is a potential positive, and that is a plan to make the Mietspiegel more reliable and a more accurate reflection of what happens in the market. This would reduce the room for political interference and would overly be helpful for all of us. The other land law is a mobilization of land for construction. This has 2 parts. The first one is looking to improve the brokers to designate land as development land, but also gives local authorities a preemptive purchasing right, which is good. So order is a provision that would require owners to obtain the prior approval from the local authorities before a multifamily home can be converted in condos for sale. This can be seen as a direct response to landlords trying to escape legislation by selling the units' individual, which you can see in the moment in Berlin. With this legislation, that would become sustainable [ subsidization ] more difficult. To be clear, this would only apply to future condos, not to condos that already exist. So our 26,000 condos would not be affected. The summary of all this legislation is that we do not see anything that we find too boring. Regulation at the right level is helpful for our business. 70% of all rental apartments in Germany are owned by retail owners. That is why legislation always needs to work for the average owner. For us, the opportunity lies in operating with a legal framework and driving our performance and value generation by just being better than the average owner through scale and efficiency. And finally, on this page, please keep in mind that '21, as I said, is an election year. COVID-19 is fading one way or the other -- is fading out, and one way or the other, social impact discussion will be a very big topic in the future months which will come. So we prepared for some quite noise, but remain confident that at the end of the day, our business will not be impacted in a material way. And now the last page on regulation is Page 24. Now it comes to a clearly positive element. At the end of 2020, Germany improved the federal funding regulation for energy efficiency buildings. Helene already mentioned it. The objective is to provide one comprehensive subsidy regime to set the right incentives for owner to step up the energy efficiency investments and renewable energy investments. Unlike before, you can now also choose to take the subsidy as a cash investment instead of a subsidized loan. Depending on how much energy you save and how you deal with the aspect of renewable energy, you can get sustainable subsidies on much as 45% of the investment amount up to investment of EUR 120,000 per apartment. This is quite meaningful. As you should expect from us, we are in the progress of looking at this subsidy regime to figure out precisely what does this mean for us in terms of hard numbers. At this point, as Helene mentioned, I cannot estimate the quantitative impact yet for what we need to go through our portfolio on a granular level because every situation is different, and we want to make sure that we get the best possible outcome by combining the right subsidy elements in each case. But this is a [ process-driven ] optimization, so really, our home turf. What I can say today is that the positive impact will include more investment in energy efficiency modernization, and therefore, faster CO2 reductions and definitely more NAV close. Rental costs and investment yields will probably not change much because of the subsidy amount will be -- will, of course, not be able to be passed on the modernization allowance to the tenants because this would probably generate 2 returns. But however, as much as the work is to be done by our own people, we will see a significant EBITDA contribution on our Value-add business based on the increased investment volume. And not to forget, this legislation can improve the social acceptance of energy-efficient modernization because of reduced modernization allowance and increased savings in the [ ET ] book. So this was the regulatory framework. So now let's go to sustainably -- our sustainability update. I would like to give you this update on Page 25. As I mentioned before, the new sustainability performance index, we are implementing a measurable KPI that we consider as relevant as FFO or NTA. I explain the index on the next page. But before we go there, let me mention 2 things. First, we have been getting ready to use -- to issue green bonds. The necessary framework has been established and it can be found on our IR website. Subject to market conditions, we are now basically ready to go and look for an adequate window. Second, we have made sure that the ESG-related risks are comprehensively included in our risk management system. The good news is that there is no material ESG-related risk. The most relevant is the CO2 tax, and the risk is that at least a part of it has to be paid by the landlords at one point, but most probably not before '23. But even this most material is here -- it's clearly manageable in the overall context. And through our CO2 reduction strategy, we are actively mitigating this risk. So finally, let's have a closer look on the SPI on Page 26. The SPI includes 6 criteria that's laid out here on the slide. For each one, we have a specific target, and if we achieve 100% of all 6 individual targets of the SPI, we will be total 100% number, and of course, higher or lower, depending on how we do in this 6 individual criteria. You may have noticed that the second criteria, it says sustainable increase. This is because of the approval of new buildings and construction work started a while ago and the focus on primary energy need was not as strict as today. Still, we felt it was important to include it already now to make sure that the SPI follows the same structure from the very start. Of course, new projects that we will approve will lead to a reduction of the primary energy needs, and you will see this reflected in our future targets and figures. As I said before, this index represents our commitment to ESG, and we'll guide and report on our SPI numbers, like we do for FFO and NAV. For the senior staff below the management board office, the SPI is already an important KPI on their LTIPs. And if the AGM approves a new management remuneration scheme on April 16, the SPI will also play an important role on the LTIP of my colleague and myself to make sure that we are aligned with the interest, not only of our shareholders, but all other stakeholders as well. And with this, back to Helene.

So on Page 27, we have the guidance for 2021. We probably do not need to talk too much about it today because this is what we guided initially when we reported our 9 months numbers last November. And we decided to keep the guidance for now because nothing we have seen so far this year would suggest otherwise.

So my summary call is as follows: First, 2020 saw earnings and value growth across the board, just like any other year before we reported since the IPO. Second, the underlying market fundamentals are intact, and the environment in which we operate remains favorable. And third, we remain comfortable that we can build on our track record and continue to deliver earnings and value growth this year and beyond. Back to Rene.

Thank you, Helene. Thank you, Rolf. And back to Alexandra, actually, at the operator side for the Q&A, please.

[Operator Instructions] The first question is from Thomas Neuhold of Kepler Cheuvreux.

Actually, I only have 2. The first is on the topic, capital allocation, acquisitions, potential share buybacks. Your LTV is now slightly below at the lower end of your target range. You said you expect further regulation gains this year, and you emphasized in your presentation that you have more appetite for acquisitions. So I was wondering if you can provide us an update on your acquisition pipeline, if there's any currently. And if there are no attractive acquisition opportunities, would you consider share buyback, especially given the fact that the stock is trading well below the EPRA NTA and also NRV? That's the first one.

So probably I'll start, and then about the capital structure, Helene can step in. I think the question, we get very often. The answer is always the same. Yes, we have a clear acquisition strategy, which is completely opportunistic. It is there is always an acquisition pipeline, so we are never running out of steam. Sometimes it works, sometimes it's too expensive, and that's why you see us opportunistically acquiring. But I see no change in rent, and there will be also, in the short-term future, bigger portfolios coming to the market because people will realize that the CO2 emission issue will be an issue. And a company like us, who is able to manage this will even have better opportunities. But probably, Helene, you can add a little bit to the LTV argument.

And no, I mean, as you've seen, is like we are right now at a pro forma basis, 41.5%, which is still well within our range. And trust me, there's more than enough demand for organic growth in terms of like additional investments. And as Rolf said, like the strategy remains to be around acquisition. So at this point in time, I'm not worried that I don't find a good home for the money.

Okay. And just theoretically, share buybacks, a topic for you. I don't know which conditions you would consider share buyback?

Look, I mean, you know as we act very opportunistically and tactically. And if it makes sense for the company, the stakeholders and the shareholders, we would also look at such a thing. But that's a pretty hypothetical question at this point in time.

Okay. Understood. And my second question is on this new federal funding regulation. It looks to be quite positive for your business. You kept your investment targets unchanged for this year. I was just wondering, once you've done your analysis and then you find out that actually, a lot of things could be done, is it possible that you might increase the investment program in the medium term?

So first of all, you're completely right. We have to work through with this as -- actually, the new regime is up in the 1st of July. So we still have a little bit of time. What I would probably say is that we can shift also from one investment program to the other because the EUR 1.3 billion to EUR 1.6 billion is actually a stable number, which also is backed because we don't need equity to [ investors ]. So to massively increase it -- this is actually the other side of your question, so then we should -- we would have to be forced to issue equity, and our policy is actually not to issue equity for just running the business. So that's why the EUR 1.6 billion is probably not a strict limit, but we cannot go as much as we want because then, we would probably need to issue equity on what going basis, which is not the strategy. But here, again, you see that we have a lot of opportunities to invest before we buy back shares.

The next question is from Marc Mozzi of Bank of America.

I have 2 questions essentially. The first one is on regulation. And it's in 2 parts. The first one is about the rent freeze in Berlin. Where do you see the potential nuances coming from the ruling of the federal constitutional court? What could be the -- unexpected at this stage from your point of view? And then the next one on regulation is about the draft law for the Mietspiegel. How do you see the extended period of update of date that -- which figure index impacting your rental growth? And why so? That's my first question.

So the second is relatively easy. It's only a slight impact, I actually, I cannot give you the exact figure, but it is not really meaningful from the 2 to 3 years. Because it depends if you are in a city where you have seen strong rental growth in the last 3 years or more stable rental growth in the year. So this is probably not a massive impact in our -- and will not change our guidance. For the Berlin legislation and the constitutional court, theoretically, it can be everything between everything is constitutional to everything is unconstitutional. Both extreme points are probably most-less probable, and we will see something in between. And you might see also that the court gives a hint to the city of Berlin and saying, "This element is unconstitutional, but if you change it this way, you can make it constitutional." So I'm not a lawyer. So I don't know -- and nobody knows the outcome, to be very clear. And there is also no possibility to get access to the constitutional court. So it's not like this is a parliament where you can probably get a proposal 2 weeks before it is read in the parliament. Yes, it is really a closed shop. What we know is that there is 2 parts of the court ruling on 2 different questions. And there might be even a scenario that one part of the court is saying its constitutional, the other part is saying it's nonconstitutional. And then we have a big mess because then they have to meet together and find a common understanding. And this, I learned, can take years.

Okay, makes sense. And the second one is about your ESG or sustainability target. In your objective to reduce your CO2 emission, are you looking at Scope 3? Or does it include Scope 3, i.e., new construction into your target? Or it's something you put on the side for the time being, and you will see later?

So we have 2 targets. One is the CO2 emission of our existing buildings. And there, actually the Scope 3 for the energy is included, because this is a primary energy which leads to CO2. For the new construction, actually, the material we are using is, of course -- no, it's not included. There is just the CO2 emission of this building if it is constructed. We will continue to work on the second topic to actually look on the full supply chain of the building this year and next year. And this will be definitely a topic with which we are coming back to you. The biggest and the hottest debate is, in this topic, that we probably on the long run, has to change -- have to change the building material. I think the construction is solid. Either companies like HeidelbergCement find ways to get their production CO2-neutral, which will be difficult, or we will produce more with wood. And there is an ongoing debate in Germany, which we are taking part, where we are actually arguing saying, "If we use wood for construction, we extract CO2 for the next 100 years." And that's why we could get -- we should get actually a negative tax, so positive payment, to do so, which then can compensate the difference of wood construction in comparison to solid. Because wood construction today is, in general, a little bit more expensive than solid. It's is a blocking topic for us in the year '21 and 22. But also to add, of course, we started this CO2 emission on the CO2 footprint of the existing buildings because this is, by dimensions, bigger than what we are generating in the supply chain. It's generated in the supply chain. So we are starting with the big pieces, and then we are going and drilling down to smaller pieces.

The next question is from Kai Klose of Berenberg.

I've got 2 quick questions, if I may. The first one is regarding Page 14. Could you indicate how much you spent in the last year for the purchase of land to be used for the construction of develop to hold and develop to sell units? And secondly, on Page 13, maybe you could indicate of the about 38,000 units as developed to hold, how much you intend to build on land you already own, including floor additions and on land which you have bought with or -- yes, have added with the purpose to develop on.

Yes. Thank you very much for the question. So we spent approximately EUR 100 million for land that is in Germany and in Austria. And then roughly, it's about 50-50. 50% of our land pipeline is a pipeline on existing land, so land between our individual already existing housing blocks. And 50% is land which we purposefully purchased in order to construct new houses.

Great. And a quick follow-up on the second answer. Do you see any material differences in the construction costs, development costs, depending on if you develop on land, or on land which we you have recently purchased for the construction of new properties?

You take that.

No, I don't -- no, in general, not. I think what you can say, in general, if you have a big piece of land, the construction cost is normally a little bit lower. If you are building a one building only, the construction cost per square meter is a little bit higher, this is a very general statement. Of course, construction cost depends on the type of building we're building, depends on how much social housing you are building. So it depends on the region. Construction cost in Munich is higher than in Berlin. So there's a lot of different arguments, which actually makes every project a little bit different.

Christopher Fremantle of Morgan Stanley.

I just had one question, which is just to ask you to talk in a little bit more detail about the profitability of your CapEx envelope, the EUR 1.3 billion to EUR 1.6 billion, but specifically, the modernization part of that CapEx. I appreciate there's a huge amount of detail and work that goes into that activity. But just should -- what we -- I'm trying to drive at is, should we assume that the 2 percentage point contribution to rent growth from modernization is sustainable? I mean, clearly, the size of your overall rent is a bit of a headwind to that. And I think as you highlight, some of the environmental legislation may be a tailwind to that profitability. But how should we think about that 2 percentage point contribution? Or if you can talk about the profitability on your modernization CapEx in a different way, that would be helpful just to understand the sustainability of that modernization profitability, please.

I think in general, our target is to manage -- is that we are delivering stability. The EUR 1.3 billion to EUR 1.6 billion actually is not only modernization. It includes also new construction. And I think there is a bigger difference. In the modernization, you know the 8% is more or less -- 8% on top of the regulated yield is more or less given as a fact of the legislation. So there is no change in this legislation foreseeable, especially not in '21. So I think there is no big change. So the higher subsidy regime will actually lead probably to the fact that we have the same amount of which we can pass on for the tenants, with this 8% rule, but on top of it, we will have additional investment for further modernization, which will actually increase the NAV, but of course, will not increase rent. So this is a mechanic of the new system. So to be very clear, if we are lucky and we get a 40% subsidy on an apartment with EUR 120,000 but it's very difficult to spend EUR 120,000. Just for the mathematic, let's say, EUR 100,000 -- we spend EUR 100,000, and we get 40% subsidies. Actually, the EUR 60,000, we pass on to the tenant in forms of rent and the other EUR 40,000, we get on our balance sheet without paying for it.

Yes. So yes, you're not -- just to be clear, you're not saying we're going to increase the overall amount of CapEx that you spend, even though you might increase the amount of total campaign, some of which -- some of which is subsidized by spikes in CapEx?

So we would probably invest, but this is actually the detailed work now. But on the longer run, we will invest about EUR 1.6 billion, plus the subsidies we get.

Yes, okay.

So this is might be then more. So it is clear, we will put more -- and we have to put more because also in our CO2 reduction path, we have to do a little bit more modernization that we have done -- than we have done in the past. So we need to do spend a little bit more in modernization, which will be covered by the subsidy.

Yes. And do you think that, that will also the fundamental contribution to organic rental growth, which has been around 2 percentage points per annum? Or when you boil -- I appreciate all of your work is not complete there. But is that going to be a material difference to that 2 percentage points?

No, I think we will add on top -- actually, I think this will probably more or less stay the same, of course, under the reserves that we still have to do the details. But logically, this will stay the same. But on top of it, we will have some more investment, which will not lead to rental growth, but only lead to NAV growth, which will improve the substance of the building further. And to remind you, actually, I think with our climate conference in October, we have led the way for this legislation because we have said, "To reduce those buildings, you need to do this. You to revise the subsidy regime. And the second is you have to make possible that we can produce energy on top of ours roofs. And both happened. So we are happy. And now we have to figure out how we have to do it in the details.

The next question is from Andres Toome of Green Street Advisors.

I was just wondering if you can maybe express some of your views on the latest government plans to increase residential constructions. So do you think these proposals to mobilize building land have truly substance and will lead to more construction activity?

If you are referring to the meeting of the German government probably 1.5 week ago, this was a meeting where they celebrated the successes of the past. And this is, of course, a pre-election campaign. So actually, this was how they have shown -- you know they had a target of 1.5 million constructions, and they are now showing that in the last 4 years, they have fulfilled it, if they include all the construction permissions they have given in the period. So the opposition, of course, is arguing saying, "This is not exactly what you have promised." But this is now pre-election debate. So -- but there was no more actions taken because it's now end of action. So the government is not passing new legislation. So this was more presenting what they have done in the last 2.5 years. And it is evident that we have not enough apartments in the big cities. And it is evident that it is not easy to replace it. What -- and probably in this context, it is important for you to know, and we have just had a publication, but only in German language, that all prognosis of households in Germany are actually based on the fact that we have no [ migration ] to Germany, but we have an aging population. So if you want to keep the production capacity of Germany stable, you need to get more than 3 million families into Germany in the next 10 or 15 years. This prognosis is not included in any housing forecast. So -- and 3 million more apartments in 10 years, this would mean that we have to double our construction capacity, which is very good news for Daniel Riedl and our development business, but it's very bad news for the hope of people that the imbalance between supply and demand in Germany will be covered.

Right. But in your presentation...

So what is behind this, actually, if somebody gets retired, he still occupies an apartment but he's not working anymore.

Yes. Fair enough. But also coming back to that mobilization of land for construction. I mean, in your presentation, you also show that there is a draft law in the works right now. Do you think that will be meaningful in adding supply?

Unfortunately, I don't think so. It will probably help a little, but not in the magnitude we need.

Right, okay. And then my second question is, maybe you can speak to the value growth that you derive from Sweden. I think there have been several transactions recently quite sizable. So to that end, is there more juice in the tank, so to speak, in Sweden versus Germany, if I look forward to 1H '21 in our reported valuations?

So we are not giving guidance for valuation and especially also not valuation forward-looking for '21. What you have correctly figured out is that especially in Sweden, because Sweden is a small market, there is people on the markets which are willing to accept yields which were unbelievable for us to be accepted. And this was the latest transaction. We were really surprised. We were participating in all these, and we were not able -- or we were not ready actually to accept this very low yields. So understanding the logic of valuation, this might have an impact on values in the future. But I'm not giving you a guidance. And I think what we have seen in Sweden is a small market, and that's why you'll probably see it first there. And we might see the same pediments also in Germany and in Austria. And the underlying fact is that people are understanding what I think we have told you. This operating residential apartments in a regulated environment with a good social security network is a pretty stable business. And you also see now companies like insurance companies are thinking about going back into this business. But for them, of course, it's difficult because they don't have a platform.

[Operator Instructions] The next question is from Manuel Martin of ODDO BHF.

Two questions from my side, maybe one after the other, if I may. The first question is the follow-up question on your construction activity and modernization activity. Maybe you can elaborate a bit on potential bottlenecks or headwinds that you're experiencing? Because I could imagine that you would like to construct a bit more than just around 2,000 units per year. That would be the first question.

So I think in the construction, one bottleneck is definitely the availability of construction permissions, which is indirectly actually saying land with construction permissions. The process is very long and difficult, and this has not changed really. And what we will see in the future is that Germany has actually underestimated and was underinvested in infrastructure in general. And with COVID-19, what I will think people -- now in the moment, we are spending money to cover the results of COVID-19. But on the long run, I think we have to reinvest in our -- we have to spend money to get the economy going up again. And this means that the German state will most probably invest more in infrastructure, which will not make it easy for us to get construction capacity. So if I would have a son, which was able to do a little bit practical work, I would advise him to become a construction worker because this will be a guarantee for full employment over the next 30 years. So yes, we have challenges there. In the modernization, it's a little bit easier for us because we have our own workforce, so we are not 100% dependent on third parties. But also there, it is not easy to recruit people, and it's not easy to find contractors.

I see. Okay. Second question is pointing more towards your foreign country target markets. Do you see any relevant trends there, which might be new or directions which might be worth to share with us or legislation or possibilities, something like that?

No. I think if you refer to Austria and Sweden, it's very stable. In Sweden, I think it was not very in detail in the presentation. We have fulfilled our [ criteria ] as the company is now integrated, as I think we have said in the Q4 reporting, it's finished. We are now working on one platform actually. So we are probably there on the birthdate on where we announced that Deutsche Annington and GAGFAH is merged. We are there now in Sweden, and that's why I think we have positive momentum there. And nothing meaningful has changed in the Netherlands and in France. This is definitely -- to be very clear, this is definitely a negative impact of COVID because traveling to France or to The Netherlands at the moment is very difficult.

The next question is from Rob Jones from Exane.

I'm looking at Page 22 of the presentation and thinking about CO2 taxes. Obviously, at the moment, the cost of the CO2 taxes borne by the tenant. That obviously could change potentially over time. But if we just roll forward to 2025 for a moment and imagine simplistically that no expenditures made on the portfolio, and therefore, CO2 emissions don't decrease. I appreciate that's not the reality, but just to keep it simple. At that point, we could see a tenant paying EUR 55 a ton for their emissions. In relation to that, number one, do you know or have a view on the quantum of emissions that a tenant typically would incur? Are we talking kind of 7 tons per capita, for example? And if so, in relation to that, does that then have an influence on the tenants ability to effectively use his discretionary income to pay rent rather than CO2 tax, i.e., is there a rental impact because of the fact that the tenant is spending more money on CO2 taxation? And then secondly, in relation to that, do we get to a position where a tenant, when they're selecting an apartment, starts to look at its energy efficiency in greater detail, and that becomes a key component as to where someone lives, obviously alongside location, cost, et cetera, et cetera?

So first of all, your first question is assumptions that we are not improving our -- in our CO2. So we stopped modernization immediately, in 5 years from now, we will still be at 1 million tons CO2 multiplied by EUR 55 per ton. So the whole bill for all our apartments in Germany is then EUR 55 million. And then you can divide it by the apartments, and you will get the average impact. Of course, keep in mind, that a building in category H, so very poor energy modernization, it will be significantly higher than the average, while an A and B building will be significantly lower than the average. So that's why it's difficult to say, but it can be -- rough estimates show that the CO2 tax can be worth 1 month's rent, which means it's a significant amount of money. And -- but keep also in mind that the tenant today, he has to cover the CO2 tax because we can pass it on, but in the same time, as the CO2 tax was decided, they have also a compensation mechanism for the tenants to be rewarded for this. So for the social -- for the tenants who receive payments from the state, actually, this payment was increased, and the tax on electricity was reduced. So for an average household, it is more or less neutral. For a household which is living in an H building, so a very poor building, it is not neutral. So it pushed actually everything in the direction that you have to get rid of your H buildings, which was the intention of the law. And you can get rid of H buildings by 2 ways: either you modernize, this is our way, or you sell it to somebody. And that's why I'm talking about a competitive advantage. We have built up now the knowledge and the capacity to modernize buildings. And we are now talking not about the year '21, but on the long term, we will see a lot of landlords, which don't have this ability. And then these landlords will have an issue, which is intended by the European Commission.

And in relation to the second point around tenant apartment selection and being influenced by its energy efficiency. Do you think there's scope for that to become a factor for a tenant perspective?

Yes. I think it's already today -- in Germany, you're not allowed to rent out apartments without showing which type of efficiency it is. I think the energy bill will be an important factor because this is ancillary costs today, which we'll pass on. And of course, the tenant is more looking on the overall bill and not only on the net code rent.

Okay. Great. And then just finally, a very quick follow-up. Obviously, you mentioned...

Keep in mind, and I think you obviously pointing out with your question, is a very important point. This will change the market, and this is the next driver for consolidation because the small ones will not be able to manage this issue.

And therefore, do you think there is acquisition opportunities if we start to see a, an asset price divergence between, at one extreme, an H rated asset versus an A, B or even C-rated asset, and therefore, opportunity for landlords like yourself to be acquirers of these assets from other individuals or companies who don't have the modernization expertise that you do? And then obviously, you can add value through the improvement in modernization of those assets and maybe why...

This is exactly what I -- this is actually exactly what I wanted to express. But of course, we keep in mind, this is a longer process because today, the CO2 emission tax is only [ EUR 25 million ], in the year 25, it will be [ EUR 55 million ]. And more important, in the year '26, it will be a CO2 emission trade system. And then politicians can decide how high CO2 tax will be. Because they just have to take CO2 emission certificates out of the market. So to make it -- so in the past, sustainability was a nice to have. And I think in the most recent year, it was considered as a must have. For us, sustainability is a competitive advantage and a strong one.

If there are no further questions. I hand back to the speakers.

Okay. Thanks, everyone, for joining today. As a reminder, the Q1 '21 results will come out on May 4. And until then, we'll be engaging quite a bit, obviously, still virtually for the time being. Our financial calendar is on Page 81 of today's presentation, and it shows our planned activities for the coming weeks, and the most up-to-date version of it can always be found online on our IR website. While we're talking about dates, please kindly note that we have moved our Capital Markets Day date from the end of June to September 29 to be exact. We hope that by pushing it down the road another 3 months, we will be able to do what our Capital Markets Day is largely about, and that is not just to give you an insight into certain parts of the business, but also allow for personal exchange over dinner, over coffee, and happily, over beer as well. We will send out a new [indiscernible] e-mail tomorrow for September 29 here in Bochum. So much for today, as always, let me or the team know any questions you may have. And we're looking forward to staying in touch. Thanks for today. That's it from us, stay happy and healthy, and a great day, everyone.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.