German Federal Cartel Office Provides Detailed Guidance on its Analysis of Residential Real Estate Transactions
On 28 January 2015, the German Federal Cartel Office (“FCO”) approved the acquisition of Luxembourglisted Gagfah S.A. (“Gagfah”) by German-listed Deutsche Annington Immobilien SE (“Deutsche Annington”). The FCO’s approval of this transaction paves the way for the creation of the largest residential real estate company in Germany, and the second-largest publicly listed real estate company in continental Europe.
Deutsche Annington is Germany’s leading private-sector residential rental real estate company both in terms of portfolio value and the number of units owned. Its portfolio currently comprises around 210,000 residential units. Gagfah, with a portfolio of around 145,000 residential units, is the third-largest publicly listed residential rental real estate company in Germany.
Much of Germany’s residential rental real estate still is state or municipally owned, and these assets have increasingly become the target of mergers and acquisitions by listed and private real estate companies. The take-over by Deutsche Annington of rival Gagfah marks the largest residential real estate transaction in Germany to date. With the publication of its case study of the transaction on 26 February 2015, the FCO has provided some much anticipated guidance on its analysis of transactions in the residential rental real estate sector in Germany.
THE ANALYSIS OF THE TRANSACTION BY THE FCO
Traditionally, the FCO identified a single relevant product market for residential rental units and defined the relevant geographic markets by city/municipality. However, given that both Deutsche Annington and Gagfah focus on 1-2 bedroom flats for medium-to-low income tenants, the FCO felt it necessary to refine its definition of the relevant markets.
In a first step, the FCO determined those cities in Germany where Deutsche Annington and Gagfah together accounted for more than 10% of the residential rental units. In these cities, the FCO determined the combined shares of Deutsche Annington and Gagfah of the market for 1-2 bedroom rental flats. The combined market shares did not exceed 25% in all but one of the relevant cities. In a second step, the FCO narrowed the relevant product market to 1-2 bedroom flats with a basic rent of up to 6.00 EUR per square metre to take into account Deutsche Annington and Gagfah’s core target group of medium-to-low income tenants. On this basis, combined market shares in a small number of cities in Germany were significantly larger than 30%.
However, the FCO did not find these market shares to be indicative of a significant impediment to competition. Because market share increments were relatively insignificant in each of the relevant cities, the FCO concluded that the transaction would not negatively impact market structure. Crucially, this decision marks a departure by the FCO from its historic approach of analysing the effects of real estate transactions on geographic markets confined to city limits. The FCO accepted the argument that the cities’ hinterland and surrounding municipalities should, at least to some extent, be included in the relevant geographic markets because people take into account the feasibility of commuting to work when choosing a place to live.
The Deutsche Annington/Gagfah transaction probably signals the end of the simple real estate transaction from an antitrust perspective in Germany. Investors should assume that, going forward, the combination of real estate portfolios of significant sizes in Germany will attract closer scrutiny by the FCO. Having said that, the FCO has shown that it is open to new arguments of market definition, and timely merger approvals for real estate transactions are still achievable in Germany despite closer antitrust scrutiny.