Investing.com -- Morgan Stanley cut German residential property companies Vonovia and LEG to "underweight" from "equal-weight" on Tuesday after Berlin's three main left-of-centre parties made progress toward a coalition that broadly agreed to expropriate large privately owned housing portfolios.
The broker cut its price target on Vonoviato €14 from €25 and on LEG to €50 from €60. Vonovia shares were priced at €16.57 and LEG at €46.02 on Oct 19.
The agreement calls for compensation below book value, based on reported cost caps. The German federal government is preparing a national Investment Protection Act to stop this, but it remains a proposal and it is unclear whether such "prohibition-only" legislation would be legal, the analysts said.
The coalition's timetable and a possible legal challenge could create uncertainty for up to two years.
The analysts said the far-reaching consequences point to a likely compromise, though that could bring other concessions and regulations. The coalition agreement suggests expropriation is on the agenda for 2028.
LEG has no direct exposure to Berlin. The analysts do not expect other parts of Germany to follow, but said expropriation could reduce capital availability and appetite for German housing more broadly, affecting LEG's non-Berlin portfolio. They are also underweight on Aroundtown and Covivio.
Higher rates add to the pressure. German 10-year bond yields have risen 62 basis points this year.
Vonovia's portfolio is valued on a tight 3.5% net initial yield, with a 47% loan-to-value ratio at the start of the year and net debt of about 14 times EBITDA. LEG's is valued on a 4% yield, with a 49% ratio and about 13 times.
Property sales are a route to cutting debt for both companies, but the analysts argued that is now increasingly difficult. German residential deal volumes in the first half were 43% below the long-term average.
Morgan Stanley set Vonovia's target at a 70% discount to its estimated 2027 net asset value and LEG's at 65%. For Vonovia, it set a bull case of €33 and a bear case of €1, a "theoretical value and not a prediction of bankruptcy or other restructuring." For LEG, the cases are €95 and €30.
The analysts said lower rates would likely still see the stocks lag the sector until Berlin is resolved. They could do better if any of the three parties reconsidered expropriation and bond yields also fell materially.
Morgan Stanley had upgraded both to "equal-weight" earlier this year after two years at "underweight." The analysts said that view "proved premature."
Original Article
Morgan Stanley turns bearish on Vonovia, LEG as Berlin housing risks mount
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