Vonovia's Q3 2023 earnings call contained a subtle detail that may have been overlooked by many analysts. It wasn't a major acquisition, a sudden increase in disposals, or a dramatic change in strategy. It was something far less obvious, yet potentially far more impactful: the growing 'bow wave' of delayed rent increases.

While Vonovia's core rental business remains undeniably strong, with a 7% EBITDA growth driven by accelerating rents and rock-bottom vacancy rates, the company is navigating a turbulent environment of high interest rates and a hesitant transaction market. Disposals, their primary tool to address a large balance sheet, have been steady, yet remain a work in progress.

But beneath the surface, a hidden current is building – one that is poised to potentially catapult Vonovia's growth in 2024. Germany's meticulously rule-based rental system, while offering stability, has a peculiar side effect. When Mietspiegel (rent indexes) rise rapidly, as they have in response to inflation and a tightening housing market, the full impact is not felt immediately. Local rent increase caps and time restrictions create a time lag, delaying a portion of the permissible rent increases.

Vonovia refers to this as the 'bow wave,' and it's visually represented in their Q3 presentation (Slide 10). The green block on the chart, representing the cumulative amount of still-to-be-implemented Mietspiegel increases, is set to surge in 2024.

This isn't merely a hypothetical opportunity. These aren't potential rent increases that *might* materialize. These increases are already built into Vonovia's system, tied to specific apartments, just waiting for the restriction periods to expire. The amounts are meticulously detailed, apartment by apartment, in their operating system, ready to be implemented the moment restrictions lift.

Several factors are set to amplify this bow wave in 2024. First, Berlin, Vonovia's largest market, is expected to conduct a detailed, qualified Mietspiegel for the first time in years. This, combined with the ongoing catch-up in rent levels following the high court ruling declaring the previous rent freeze unconstitutional, suggests a potentially significant increase in allowed rent increases.

Further accelerating the trend, new German regulations mandating detailed Mietspiegel for all large cities, coupled with stronger Mietspiegel growth expected in 2024, indicate that this bow wave trend will continue beyond 2024.

While Vonovia hasn't quantified the potential cash impact of this bow wave for 2024, a visual analysis of the chart suggests that the green block, representing the delayed increases, could easily surpass the already-implemented portion. This implies a significant pent-up rental growth potential, ready to be unleashed as the restrictions expire.

Intriguingly, despite this looming wave of potential rent increases, Vonovia has projected flat rental revenue in 2024. This suggests two things: first, the magnitude of the disposals they're planning will have a considerable offsetting impact on revenue. Second, and perhaps more strategically, this flat guidance could be a deliberately conservative approach, aimed at managing expectations and avoiding regulatory or political pushback against what might be perceived as excessive rent hikes.

Hypothesis and Potential Impact

Let's consider a conservative scenario:

Assume the 'still-to-be-implemented' portion of Mietspiegel increases in 2024 (green block on Slide 10) translates to a 3% cash-effective rent increase for Vonovia. Consider their current annualized rental revenue of approximately €5 billion (based on 9-month 2023 figures).

A 3% increase on €5 billion equates to an additional €150 million in annualized rental revenue. While this is a rough estimate, it highlights the potential magnitude of this hidden growth driver.

Why This Matters

This bow wave isn't merely a temporary upswing. It represents a fundamental shift in Vonovia's revenue profile. As Mietspiegel catch up with market realities, and as restrictions expire, Vonovia is positioned to see a surge of rent increases that are, in large part, already predetermined and waiting to be implemented.

While other analysts are preoccupied with the immediate challenges of disposals and debt reduction, this delayed rent increase dynamic offers a compelling glimpse into Vonovia's long-term growth potential. It's a silent weapon, steadily amassing power, ready to be deployed when the time is right.

Vonovia's Financial Performance

Here's a breakdown of Vonovia's key financial metrics, as reported in their Q3 2023 earnings call:

Vonovia's Disposals

Vonovia is actively pursuing disposals to manage its leverage. Here's a summary of their progress:

Total disposals signed year-to-date 2023: €3.7 billion Disposals signed since early August 2023: €1.7 billion Target for additional disposal proceeds in 2024: Over €3 billion

Mietspiegel Growth and the Bow Wave Effect

The chart below illustrates the impact of accelerating Mietspiegel growth on Vonovia's rental income. The green bars represent the cumulative 'bow wave' of delayed rent increases, which is expected to expand significantly in 2024.

"Fun Fact: Vonovia owns and manages a vast portfolio of apartments – enough to house the entire population of Frankfurt, Germany's fifth-largest city. This highlights the scale and influence of this residential real estate giant, which is quietly shaping the housing landscape of Germany."