UPDATE 1-Germany's LEG to buy 10,000 flats after listing

Mon Jan 21, 2013 10:40am EST

* No capital increase needed to fund investment

* Sees potential to increase rents by 13 percent

* Investors attracted by stable residential returns

By Kathrin Jones and Tom Bill

FRANKFURT, Jan 21 (Reuters) - Property group LEG Immobilien plans to buy 10,000 apartments in Germany over the next two years, betting on a market increasingly sought out for its stable returns.

The German company, which is due to list its shares on the Frankfurt stock exchange next month, already owns 91,000 flats and has 170 million euros ($226 million) of liquidity available, LEG said on Monday, adding that it would not need to increase its capital for the new investment.

German residential property portfolio transactions were up 70 percent at a five-year high of about 11.1 billion euros in 2012 as investors bet on the strength of a market closely tied to the German economy, property consultant Jones Lang LaSalle said.

Despite a contraction in the country's economy in the final quarter of 2012, investors are expected to keep faith with German residential amid uncertainty elsewhere on European property markets. There has also been talk of more residential initial public offerings (IPOs), including Deutsche Annington.

"German residential property is a very stable market, though not necessarily one where you can make fast money," Joseph Schaesberg, of property consultant CBRE, said on Monday.

Investment yields, the annual rent as a percentage of the property's value, are about 4.5 percent for the best housing and 6 percent in so-called secondary locations.

LEG said that the average rent for its flats is 13 percent below the market average, a gap that it intends to close over the next few years.

INVESTOR APPETITE

Investors are particularly attracted to Germany's stock of rented apartments because it is a well-established market where they can buy in bulk, said Chris Bell, managing director of Europe at consultant Knight Frank.

In a further sign of investor appetite for housing in Europe, British housebuilder Crest Nicholson on Monday signalled its intention to return to the stock market after being taken private five years ago.

LEG will not be issuing any new shares on its listing next month, so will not reap any proceeds from its debut on the Frankfurt bourse.

Instead, the two investment funds that own the company aim to sell up to 1.43 billion euros of their shares in what would be the biggest IPO by a German real estate group since that of GSW two years ago.

LEG's listing is set to value the company at between 2.2 billion euros and 2.5 billion euros, making it a candidate for inclusion in Germany's mid-cap index.

Whitehall, a Goldman Sachs investment fund, will cut its LEG stake to 33.4 percent from 89 percent, while Perry Capital will reduce its holding to a little more than 9 percent from 11 percent.

LEG's owners had originally planned to hold on to a larger stake, hoping to benefit from a potential share price increase in follow-on placements several months after the initial offering.

"But it was the explicit request from investors to have a liquid share with a high free float," Deutsche Bank capital markets banker Foruhar Madjlessi said.

Deutsche Bank and Goldman Sachs are the main banks managing the transaction.

LEG's shares will be offered at between 41 and 47 euros from Jan. 21-31, with the first day of trading on the Frankfurt Stock Exchange slated for Feb. 1.

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