Shareholders query dividend in proposed German property deal Rising prices for Germany's army of renters are a controversial topic in the lead-up to the country's national elections in September. They now look set to create one of the biggest mergers in Germany this year. German property group Deutsche Wohnen said last month it was looking to absorb smaller rival GSW Immobilien to take advantage of the company's exposure to Berlin, widely viewed as one of the most attractive cities for residential property investors due to its rising rents. Yet for shareholders in the smaller property company, there is a sticking point. Following the offer of an all-share deal on August 20, GSW appeared to give a cautious thumbs-up last week, saying that it "could make sense." The Berlin-based company owns about 60,000 units. Combined with Deutsche Wohnen's 90,000 units, a merger will create a property company with €8.5bn under management, second only to Deutsche Annington, the largest privately owned residential landlord in Germany, with close to 180,000 units. Under the current terms of the offer, shareholders in GSW will receive shares in Deutsche Wohnen valuing GSW at €1.75bn - a mark-up on its current net asset value. But these newly created shares will pay no dividend in 2013, which has irked shareholders. "The dividend point is an issue for us," says Guy Barnard, a fund manager at Henderson Global Investors. We think it's slightly undervalued given the strong growth prospects for GSW in Berlin over the next year or so, though in the longer term the strategic rationale and synergies of the deal make sense. Deutsche Wohnen argues that the offer has been made at a premium to GSW's existing net asset value to take account of the lack of a dividend payout next year. Yet Peter Papadakos, an analyst at Green Street Advisors, thinks there is a better than 50 per cent chance that GSW shareholders will be able to claw back a dividend payout before the deal is finalised. Shareholders say the merger makes sense in other respects. One benefit is size. Cost savings due to cutting out duplicate overheads are expected to be about €25m a year, of which 90 per cent are expected to go to GSW shareholders. "From a liquidity point of view the new company would probably become a preferred vehicle for investors," says Mark Hargraves, a fund manager at Axa Investment Managers, which owns shares in GSW. Deutsche Wohnen shareholders will be asked to vote on the deal on September 30. For the deal to proceed, Deutsche Wohnen says it needs 75 per cent of GSW shareholders to tender their shares. Analysts at Commerzbank also believe the deal has a more than 50 per cent chance of being passed. Shareholders are hoping that a combined entity would have greater lobbying power with Berlin, with rent controls remaining a key issue for German voters. Both of Germany's main political parties, Angela Merkel's CDU and Peer Steinbrück's SPD, have promised to take further action to stem rises in rents. A recent law allows state governments to prevent rents from rising more than 15 per cent over a 36-month period, down from 20 per cent previously. There is talk of this being lowered further, to 10 per cent. But Mr Papadakos says this should not be a problem for German real estate investors. Berlin rents are growing at an average 2.5-3 per cent a year, keeping them under the radar of political interference - for now.