TAG Immobilien AG

XETRA:TEG

Earnings Call Transcript 2021-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the conference call of TAG Immobilien AG regarding the publication of the interim statement of the first quarter 2021. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Martin Thiel, CFO, who will lead you through this conference. Please go ahead.

[Martin Thiel, CFO & Member of Management Board]

Yes. Many thanks, and good morning, everybody. Welcome to today's conference call for the Q1 figures. Many thanks for dialing in. Today, perhaps you've seen already in the presentation, we wanted to structure the call a little bit differently, so quite brief and comprehensive overview about the Q1 results and perhaps afterwards a little bit more time to talk about ESG topics that you know that we have published our last sustainability report 2 weeks ago. So perhaps a good time to talk a little bit more about our ESG strategy. But let's start on Page #4 of the presentation and look at financial highlights for the first quarter 2021. The results development was definitely very positive, looking at the FFO I development in the first quarter, FFO I increased by nearly 9% year-on-year. So if we compare it with the first quarter of 2020 and by 10% quarter-on-quarter, if we compare it with the fourth quarter of 2020. Also on a per share basis, we saw the strong increase or similar increases like in absolute terms. Just important to point it out that we're growing as well on a per share basis as in absolute terms. Looking at the vacancy development. Well, what we saw in the first quarter of 2021 was an increase of the vacancy rate in the residential units by 60 basis points. This is more or less in line with the development of the first half of 2020. I will come back to that in a second. Like-for-like rental growth without vacancy reduction was unchanged at 1.4% compared to the same number in the last 12 months in 2020, including changes in vacancy, like-for-like rental growth was a little bit lower at 1.2%. This was due to the increase in the vacancy rates that I already mentioned. Looking at the EPRA NTA and LTV. Perhaps not any spectacular development. We saw a steady increase in the EPRA NTA. We saw a slight decrease in the LTV, now at 44.8%, which is slightly below our LTV target of 45%. No acquisitions in the first quarter of 2021, some smaller disposals in Germany, roughly 100 units that we signed. Coming to the next page and looking at the operational performance in Poland. You know that we are still selling apartments in Poland. This is still the main business in Poland, but this will now change over the course of 2021. We expect the first tenant to move into our portfolio in Poland in the third and fourth quarter. Revenues from sale of properties were quite strong in the first quarter. Perhaps you remember that we had some delayed handovers in the fourth quarter. Now they have been taking place in the first quarter of 2021 that led to revenues from sale of properties of more than EUR 19 million compared to EUR 11 million in the same period of the previous year. Also the results from operations in Poland or the FFO impact was stronger than the previous year, came out at EUR 1.9 million. Our total pipeline, which is contractually secured, grew by roughly 300 units quarter-on-quarter and by more than 3,000 units year-on-year to now almost 9,000 units, out of which roughly 6,000 units will be rented out in the future and a little bit more than 3,000 units should be sold in the future. So that means in Poland, we are well on track. In fact, the construction sites are all running. So that's, of course, good to see for us. Maybe just to complete this. On bottom of Page #5, COVID-19 business update. I mean rent deferrals are still of minor impact. So that's an extremely small number. What we've seen is a slightly reduced like-for-like rental growth and slightly increased vacancy rate. We consider this clearly something temporary, something that we have already seen in the last year. So there should be nothing structural. But what we clearly observed is that renting processes in terms of the lockdown in our regions are more difficult than the times where we have no lockdown. Also good to see in this difficult time of the COVID-19 pandemic is that the rating agency Moody's increased its outlook or changed its outlook from Baa3 stable to Baa3 positive. And this was -- this action was taken in April 2021, and that should be a very good sign of our financial stability. Looking a little bit more closely on like-for-like rental growth. That's on Page #7. On the bottom left, you see the components of the like-for-like rental growth, as I said, the basic like-for-like rental growth without changes in vacancy was unchanged at 1.4%, and the composition was also very similar to what we have seen in the previous quarters. So still the monetization surcharge has a very small contribution to the like-for-like rental growth because we're investing most of our CapEx in vacancy reduction. And the rent increase from tenant turnover and from existing tenants was quite on a same level at 0.6% or 0.7%, respectively. In the first quarter of 2021, we saw also a little bit low CapEx. On the top right of Page #7 you see that we invested EUR 11.2 million after EUR 14.6 million in -- sorry, EUR 11.2 per square meter after EUR 14.6 per square meter in 2020. But please be aware that this is not a change in our CapEx strategy, and this is more or less something seasonal. And so you should expect for the full year of 2021, a similar number like we have seen in 2020. Page 8 shows the development of the vacancy rates. As I already mentioned, we saw an increase by 60 basis points. How should we think about this increase? Well, we have no concern that this is something fundamental or something structural. Firstly, if you look at the last year's really, we always saw in the first quarter of the year an increase by perhaps 30 basis points and especially after larger acquisitions with high vacancy rates, which was the case in 2020. Most of these acquisitions closed towards the end of 2020, and these acquisitions in financial year 2020 had a vacancy rate of more than 20% so there's nothing unusual. And the second thing to have in mind. I mean what we clearly see is that re-letting processes in times of the lockdown are a little bit more difficult, and it's not the case that we cannot rent it out, but clearly, tenants in markets where we have taken vacancy rates increasing twice but to move or not in such times, so what we expect for the remaining part of the year is to see a similar development, like in 2020. So perhaps more or less stable vacancy rates in the second quarter and then a clear reduction in the third and fourth quarter of 2021. Looking at Page #10. We are showing the FFO and dividend guidance for financial year 2021, which is unchanged. I mean looking at the run rate for 2021 based on the first quarter results where we achieved more than EUR 45 million FFO, if you multiply that with 4, you're already at the upper end of the guidance, which stands between EUR 178 million and EUR 182 million. So you see that we have here a very good momentum at the moment. We are paying out EUR 0.88 per share after our AGM, which will take place tomorrow and also dividend guidance for 2021 at EUR 0.92 per share is unchanged. As I said, from Page #12 onwards, we have some more slides on ESG because we know that this is, of course, a very important and big topic for everyone. And I mean very naturally, there should have been always a topic. But what clearly has changed in the last quarters, perhaps the last 1 or 2 years, is that companies and as also ourselves need to talk more about that. Page 12 shows you a condensed overview about our ESG strategy. And first, it's very clear that all 3 areas of ESG are important. The focus is, of course, in our sector, very often on environment, and it's clear that energy efficiency and reducing CO2 emissions is extremely important. But we think that really it needs to be seen as a topic where all 3 components are important. And especially in the German residential sector, the social component should be extremely important as this clearly also relates to tenant relationships. And you know all the discussions about the relationship between, especially, listed landlords and tenants in Germany. And therefore, this social element, especially in our business model, is extremely important. Governance is an underlying fundamental from our point of view, especially in excellent Board expertise, which we should clearly have, and a transparent compensation scheme for management are some of the key areas to cover here. Moving on to Page #13 and talk a little bit more specifically about the sustainability goals. What's the difficult thing about these goals? I mean the difficult thing is perhaps to bring in line economic goals on the one side with social and ecological goals on the other side. And especially when it comes to CO2 emission reduction, this is perhaps not that easy to achieve. So therefore, that clearly needs to be handled with care. What is good in our business model is that we clearly can bring in line, social goals with economic goals, because you know that we are investing in areas in portfolios where we still have higher vacancy rates, where tenants pay affordable rents. So therefore, we, as a company, achieving high yields and, on other side, we are clearly supporting society, we're supporting cities, we are offering a good product for tenants to rent apartments at affordable rents. I don't want to comment on every sustainability goal that we have, but please take your time and have a look into our sustainability report, which is also available on the website and, as I said, which was published just 2 weeks ago. Page #14 puts a little bit more spotlight on the S. As I mentioned, we are clearly in a sector, and we are clearly focusing where we're looking at affordable rents. Our average net actual rent per square meter is currently around EUR 5.50. And you know that our average apartment size is around 60 square meters. So that brings us to a typical average net rent per month in absolute terms of around EUR 330. And that should be also in a time of economic difficulties like the pandemic, something that a lot of people are searching and that really everyone can pay. And this is clearly an advantage that we have in these times, around discussions of rent regulations, around discussions about this social's topic in the ESG, that we offer, hopefully, the right product for the markets. So affordable rents and high-yielding portfolios, that's clearly our business strategy, and that has to bring in line with the different targets that I mentioned, on one side, the economic targets and the other side, the social targets. Page 14 also shows on the bottom right, the results that we achieved from our Energie company. Energie Wohnen Service GmbH, the 100% owned subsidiary. Why are we showing that here? Because we think that's also a good example for bringing in line different areas of ESG. So we're clearly here improving energy efficiency by modernizing heating system. And on the other side, this also contributes to the S, because after such modernization, the rent increases that tenants receive are very, very moderate. So that's for them definitely manageable, definitely stay at affordable rents. But on other side, we're improving here energy efficiency. So that perhaps is also an example, how we see these different components and how we want to bring them in line. Page #15 gives you a lot of details about our ESG corporate structure. ESG is clearly an area that the whole management Board is focusing on, the responsibility within our management Board is with my colleague, Claudia Hoyer, our COO. And we think it's important to include also employees in these discussions. We show you here on Page #15 that in the sustainability committee, there are also TAG employees, and that's clearly the majority of the members of the sustainability committee who are sitting on this committee. We think it's simply important to include them into these discussions and also sign where you see how important the opinion and thoughts from employees are for us, is that we still have 2 employees as members of the Supervisory Board. Looking at corporate governance on the bottom right of this page. You see that ESG goals are also introduced now, and it's new in the management Board compensation. We have the AGM tomorrow. And we proposed to our shareholders to change the remuneration system of the management and also to implement nonfinancial targets in the short-term incentive plan and as also an option for a Supervisory Board to put nonfinancial targets, ESG targets, in the long-term incentive plan, and that could contribute to up to 20% of the total long-term incentive plan remuneration. On Page 16, we look at our portfolio from an energy efficiency view. Perhaps it's worth here speaking about, I would not say 2 different portfolios, but clearly 2 different kind of investments that we have. Now that we are investing in Poland now quite materially in the next years, that's more than EUR 1 billion. And as we are only investing in Poland in new constructed apartments, it's clear that they are highly energy efficient. So that brings us with additional investments, which are a clear focus in the next years into also an energy standard, which is clearly above average. Looking at our German portfolio. It's good to see that we already are at least comparing that with in sector, comparing that to within the peers, also above-average regarding energy efficiency. The emission intensity in the total portfolio in 2019 stood at 31.9 kilogram CO2 emissions per square meter, which is definitely a good value. And also, if you look at the energy efficiency certificates, which you show -- which you see at the bottom left of Page #16, you will realize that more than 60% of our residential units have already energy certificate, which is C or even better, and that less than 5% of our billings are in the energy efficiency classes, G or H, which is also, of course, good to see. And what does this -- It's not the case that we can say, well, we don't need any investments in the future, but this is definitely a good starting point. So we have a portfolio, which is clearly more above-average regarding energy efficiency. And therefore, for whatever is coming in the next 10 to 20 years, the investments that we need to do will start on a very good basis. We are right now working on a decarbonization strategy, and we will finish that by the end of the year, which will then clearly set the fundament for future investments. We're taking that clearly with care because we are talking here about investments for the next 10, 15, 20 years. And therefore, we think it's perhaps good to have a little bit more time to have really the chance to develop that very carefully. Page 17 gives you some more insights about tenant services. I mean, for us, it's so clear to be an attractive landlord as we invest in regions, such as, where we still have vacancy. So therefore, that's absolutely crucial for us, tenant satisfaction and also new offers that we create for tenants. Like to see some examples, the BeHome platform or like electric mobility and community initiatives, that's something we've been working on now for years. Looking at Page #18, it's a final aspect of our ESG discussions today. And clearly, employees are an important part of TAG. And perhaps important to point out and good to see is that diversity at TAG is already more or less achieved, as the share of men and women working in our company is nearly equal. So 50% women, 50% men and also in the management Board. So it means -- sorry, in the management level, the management Board and in the first management level, the relationship between men and women is nearly split, as you can see on Page #18. Yes, finally, Page #19 shows you an overview about ESG rating. We are quite proud that we have significantly improved our ESG ratings in the last 1 to 2 years, especially Sustainalytics and MSCI, we have improved that strongly. So that means that also rating agencies have seen what we're doing here basically for years. We will continue to work on other ratings that you see also on Page #19. So therefore, we are very optimistic that now for next years, we'll also keep very good and clearly above ESG ratings. Yes, that's from my side, a quick overview regarding the Q1 results, also a short summary of our ESG strategies. Again, for further details regarding ESG, please have a look at the sustainability report which we have published on our website. But of course, now we have also enough time to discuss Q1 results and ESG strategies. And therefore, I'm happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Sander Bunck, Barclays.

[Sander Bunck, Vice President of Real Estate Equity Research]

Two questions from my side. The first one is on the increase in vacancy. And just, first of all, one clarification, please. So if I read on the front page of Page 4, then the difference between the like-for-like rental growth with and without vacancy reduction, it's around 20 basis points. If I go to Slide 8 of your presentation, that increased a bit to be close to 60 basis points. Can you just explain that difference, please?

[Martin Thiel, CFO & Member of Management Board]

It's not unusual that there is a different, and perhaps in this quarter, it's a little bit more why is that, the like-for-like rental growth is a very pure exact like-for-like number over the last 12 months. On Page #8, we will show the vacancy development. Basically, the like-for-like view start always at the beginning of the year. So that means between January and March 2021, that's a like-for-like number, also includes acquisitions that we had in the, for example, second half of 2020. So these acquisitions are included in this vacancy development and perhaps contribute a little bit more to the increasing vacancy, whereas in the like-for-like rental growth number, as they have not been in the group for a whole 12-month period, they're not included. So over a full year, this is exactly the same number. But with this vacancy view, we always start new at the 1st of January. So that means at the end of our first quarter, it's just a 3-month like-for-like view, if you want so.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. But just to confirm, the vacancy rate increased by circa 60 basis points in the first quarter.

[Martin Thiel, CFO & Member of Management Board]

Yes, that's the case.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. And just a bit elaborating for a bit on that because that is post-pandemic. And I think it's basically the strongest increase, albeit still very modest, I may be wrong, but the largest increase we've seen over the last 5 years. What is the exact reason for that? And how do you expect to develop into the remainder of this year?

[Martin Thiel, CFO & Member of Management Board]

First of all, very clear that we expect a vacancy reduction in the course of the year, and we don't see here anything fundamental that changes anything structural. And by the way, just to mention that and to show you the underlying fundamentals, I mean we are not guiding today for a specific valuation results for the half year valuation. But everything that we see in the market and that we hear is some preliminary thoughts numbers from our value-add points towards the valuation results, which should be clearly more than in the second half of 2020. So that should confirm what I said, that we are not talking here about a weaker market or whatever. And I mean what we have, nearly always, is a kind of seasonality in the first quarter. Looking also in a year like 2019, we had a 20 basis points increase. Looking into a year like 2018, we had a 30 basis points increase. So this is nothing unusual. And then what we have is an impact from the pandemic, is that we are simply missing, for example, in some locations, students. That's something, but that's really incredible, hard to rent out. We're not offering 100% student homes, but in some locations, also our partners that are really -- that fit to the need for students. And secondly, we see that reletting processes in times of a lockdown are simply more difficult. I mean people in a location like Salzgitter or Gera, who would think twice, well do we really have to move into a new apartment in times of the lockdown or this is also something that I can do in some weeks when we are in a different time of the pandemic. So therefore, we are not worried that we now see increasing vacancy rate, and we are convinced that in the course of 2021, you will see a positive development again.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. So -- and kind of pulling that all together. I think you briefly mentioned something, but just to make sure, what will be, at this point in time, your kind of sense of like-for-like rental growth in FY '21, including vacancy reduction?

[Martin Thiel, CFO & Member of Management Board]

Well, the guidance stands between 1.5% and 2%, and this is clearly something that is unchanged from today's point of view. And you know that we are in Germany, hopefully, now in a good way regarding the pandemic. So the lockdown is now ending. And therefore, we are very optimistic that we actually achieve this guidance, and this would include vacancy reduction. So this 1.5% to 2% is really the total like-for-like rental growth.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. Great. And the second question I had was on Poland and on the development there. And I was just kind of trying to understand a bit more in terms of what you're expecting from that, particularly with regards to potential revaluations? I mean the yield on cost remains quite high relative to Germany, obviously, around 7% to 8%. When do you -- like what do you expect kind of that to do with? Or how do you expect stabilized yield in that country to be, i.e., are they closer to 5%, 6%? And as a result, would you expect some revaluations to come through? And kind of when do you expect that impact to start coming through, if there is any impact on the revaluation from Poland?

[Martin Thiel, CFO & Member of Management Board]

Well, first of all, you're right and that the final valuation should be definitely -- or if this was a question, should be definitely lower than 7% to 8%. That's our yield on cost. Whether this is more 6%, whether this is more 5%, that needs to be seen. And I think this is nothing for 2021, and perhaps nothing for 2022. Perhaps looking a year like 2023. So 2 years from now, then we have really a larger size or a larger number of our partner blocks rented out in 2023. We have hopefully close to 3,000, 4,000 residential units in Poland, that are already rented out. So also for the valuers, it's been quite clear, hopefully, that the business model is working. So I think that needs a little bit more patience. I mean today, the portfolio is still small. And clearly, we need also to deliver, and we're very optimistic on that. And in 2 years from now, I think we will know more and that is going more towards the 5% to 6% than staying on the 7% to 8% gross yield. That should be quite clear from our point of view.

[Operator]

Our next question comes from Thomas Rothaeusler, Jefferies.

[Thomas Rothaeusler, Equity Analyst]

One question on ESG and the potential change of your CapEx and investment program on that. I mean should we expect that currently, you do a lot of focus on vacancy reduction. I think that's your main CapEx approach. And with ESG, can we expect this to change to more larger programs, similar to your peers? And what kind of return do you expect on that?

[Martin Thiel, CFO & Member of Management Board]

Well, thank you for the question, Thomas. We are now talking about really the mid- to long-term investment strategy. It's clear everyone in the sector needs to do more. And perhaps after the German elections in September, everyone's forced to do more. So therefore, it's very likely that we need to invest also more in programs, let's say, which have not only vacancy reduction as a main target. The returns would be quite similar, like you know them from the peer groups, we have been quite careful with these monetization programs in the past as the return in vacancy reduction projects were simply even more attractive. But I think what is on a good way in Germany is the question around subsidies for such programs. I mean you know the laws that are now getting effective or perhaps potentially no one knows what exactly will get into force after the elections. So I'm not worried that we are now getting into a situation where we're forced to invest a lot. And for what reason ever in our regions, the returns are lower than in other regions. And as we've shown in the presentation, for us, it's good to see that the starting point of the energy efficiency level that we have in the portfolio today is definitely a good one. We definitely own a lot of portfolio, especially in Eastern Germany, with very well maintained, modernized [indiscernible] that TAG has acquired some years back and that gives us today an advantage when it comes perhaps to force modernization programs to improve energy efficiencies.

[Thomas Rothaeusler, Equity Analyst]

But it sounds like you -- to a certain extent, you rely on subsidies in order to keep the CapEx returns for these larger programs as attractive as your CapEx returns on vacancy reduction?

[Martin Thiel, CFO & Member of Management Board]

I mean it's clear that subsidies would help, that should be obvious. But even in the current regime, if we need to do more, I mean, we still create absolutely good returns. But yes, to be honest, looking mid- to long-term, I think we need to change, and that's true for everyone, our CapEx plan, I mean, there's simply more investment needed to achieve the CO2 emission goals. Let's see for the whole sector. I don't think that this is specific for one or the other company.

[Operator]

Our next question comes from Kai Klose of Berenberg.

[Kai Malte Klose, Analyst]

As you touched on Page 28 of the presentation, where you show the general portfolio details by region. Could you comment a little bit more on the quite significant change in vacancy across the whole region? I mean you mentioned that, particularly also in Chemnitz, where you guys have spent a lot of CapEx for the last year and we saw an increase CapEx spend wise also in Leipzig. Maybe some more color on a regional basis, that would be helpful.

[Martin Thiel, CFO & Member of Management Board]

Yes. I think perhaps in Leipzig, we had here a larger contribution to -- or important reason for an increase in vacancy rate was the closing of acquisitions in 2020. I mean this is clearly then not, in full, the reason for that because we look at that, as I said, on a like-for-like basis. But it's very typically that after we integrate some new acquisition into our portfolio in the first quarters, vacancy rate increase as we are taking over property management, as you perhaps need to terminate also some contracts from tenants that are not paying as we start first monetization programs. And a region like Rostock, it also includes not only Rostock, but also Leipzig is suffering from students or from less demand for apartments or students, as I explained. Chemnitz and Salzgitter that's something that I tried to give you a sense when I was talking about regions. Where in times of the lockdown, perhaps vacancy reduction programs are not that easy as people are not really forced to move to the next apartment. And in these markets, we clearly try to get tenants into our portfolio by offering them above-average apartment. And I mean that from content too, perhaps that's not really a pressure to do this extremely quickly. So perhaps the wait until the lockdown is over, that's something that we have seen in the second half of 2020 and then start moving again, that clearly helps us.

[Kai Malte Klose, Analyst]

And then a second question on Page 5 on the Polish a question on Poland. Could you indicate how much of the units handed over and sold was a little bit of a spillover or delayed, so to say, actually from last year? And what would you think is -- has there been any change regarding volumes and prices when it comes to the delayed sale activities?

[Martin Thiel, CFO & Member of Management Board]

Well, the share that was delayed from the fourth quarter now into the 1 -- first quarter was quite high, that was around EUR 140 million. And if you look at the units sold, for us, that was actually surprisingly high, that we sold 160 units already in the first quarter of 2021. And it's a little bit misleading if you compare that number to the previous year, where we sold 205. So this is not an outcome of less demand, but we're simply offering less apartments on the market today, as we now are right in the middle of the change of the strategy of Vantage Development, our subsidiary in Poland. We're now have the largest share of apartments that are constructed up for the ready-for-rent business, and the smaller part is for the ready-for-sale business. We expect that from 2021 onwards, we're selling perhaps 400, 500 units a year. That's the plan. So that means that this 163 in the first quarter during the pandemic was definitely a good result. What we have observed on the market in Poland, looking at the sales prices is that they have been extremely stable or even increased. Also volumes have been absolutely in line with 2020, perhaps a little bit weaker than the previous years, if you look at other developers. And that gives us, of course, a lot of confidence that also the Polish residential market is very stable and very attractive even in such a time.

[Operator]

Our next question comes from Manuel Martin, ODDO BHF.

[Manuel Martin, Analyst]

Two questions from my side, please. First question, maybe we take them one by one. Tax situation has been quite favorable in Q1, as we can see. Maybe you can give us some words on that, please?

[Martin Thiel, CFO & Member of Management Board]

Well, we're benefiting clearly today regarding income taxes from the repurchase of an outstanding convertible bond in 2020, in August last year, and that will lead to quite tax -- low tax rate in 2021 and also in 2022. Where we have benefited also a little bit, but this was not a material impact approximately EUR 300,000 in the first quarter that we've got some tax payments from prior years. But you could expect for the full year 2021 and also for 2022, tax or income taxes perhaps in ranges between EUR 3 million, EUR 5 million, which is clearly a low number. Looking into the mid or longer term, this number should increase. But as we, I think, have also said in the past, mid- to long-term tax rates based on a pre-FFO number of around 8%, 9% should be something realistic if you do really a long-term model.

[Manuel Martin, Analyst]

Okay. Okay. That's useful. Second question, on your construction activities in Poland. So picture seems quite good. Volumes remain stable. Prices are going up. Have you observed any development on the construction material prices. Are you feeling there a bit of pressure coming from rising prices?

[Martin Thiel, CFO & Member of Management Board]

Just to be honest, that's the case, and this is something that you observe in Germany as well as you observe in other countries in Europe, perhaps in the whole world. and also in Poland, prices for materials like wood, steel have increased quite strongly in the past month. But still, the projects are running in Poland, are running as planned. The impact that we expect on how the final gross yields should be not that material, but this is clearly something that you can observe. But I mean, we're here, very confident. We know that we have a well-experienced subsidiary working in Poland with really long-term relationships with their suppliers. So this is not an extremely big concern, but it's clearly something that we observe.

[Operator]

Our next question comes from Thomas Neuhold, Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

I have a couple of questions regarding the energy efficiency modernization topic. I was wondering, firstly, if it is technologically possible to upgrade the building with an energy efficiency class of E or F to A or B? And I'm wondering what kind of CapEx required to make such a big improvement? And secondly, I was wondering in terms of modernization strategy. What do you think is the sweet spot in terms of what buildings, in terms of energy efficiency class you should upgrade, to reach efficiency class?

[Martin Thiel, CFO & Member of Management Board]

Yes, Thomas. I mean, clearly, the energy efficiency class C is, for us, a kind of a minimum level that we perhaps want to -- not to achieve it full, but to improve over the next few years. And it's clear that already with our investments in Poland, if we incorporate that into the total number, we will see a strong increase, but also for the German portfolio, that should be something where we're continuously working on. I mean the investments to improve then from C to B or even A, that really depends on the building. And I think it's not possible to give you an average number. But clearly, these are then the more material investments. I think what we were taking care of are the low energy efficiency classes. I mean apartments in the classes G, H, F, if you ask me for a personal opinion, we're talking a lot around regulation risk regarding rent increases, perhaps regulation risks regarding energy efficiency classes that are required to rent our apartments in the future, as we've seen in some other European countries, is something that could come in the next years. And therefore, minimizing these energy classes. So getting the whole portfolio out of these classes, G, H, and -- or even F, that should be clearly more the focus of the mid- and long-term strategy.

[Operator]

[Operator Instructions] Our next question comes from Simon Stippig, Warburg Research.

[Simon Stippig, Analyst]

My first question would be in regard to rental growth? And for the year 2021 on [indiscernible].

[Martin Thiel, CFO & Member of Management Board]

Sorry, Simon, the question was hard to understand. Can you repeat this, please?

[Simon Stippig, Analyst]

Sure. So just in [indiscernible] growth expectations [indiscernible] vacancy reduction. Do you expect a similar level for year '21 as you did 1.4% in last year 2020?

[Martin Thiel, CFO & Member of Management Board]

Well, I mean, the guidance is unchanged between 1.5% and 2% for the total like-for-like rental growth. And if you ask us for a split that could be realistic, that like-for-like rental growth without changes in vacancy stays perhaps at the current level. That should be a realistic assumption. That would be then 1.4%. And then a reduction in vacancy that we expect now to take place over the next quarters should bring them the like-for-like rental growth in total within the guidance.

[Simon Stippig, Analyst]

Great. And just in regard to your 2021 guidance, as a total number, you expected the gap or the data of full year 2020 in regard to net rental income increase to be EUR 14.5 million. And going back to the full year 2020 acquisitions, M&A activity, what do you think is your net impact coming from M&A?

[Martin Thiel, CFO & Member of Management Board]

Well, I can give you the exact numbers. It's 14.0% or 14.5% increase in net rent that we've been guiding. That was based on a total like-for-like rental growth of 1.8%. And then we already penciled in that we have already sold in 2020 some units where the closing will take place in the mid of 2021. I think this was a portfolio of 300 or 400 units. And then the remaining part was coming from the acquisitions that, to a certain part, were already part of the 2020 results, but to the largest part was then, of course, effective in 2021.

[Simon Stippig, Analyst]

Okay. Just to cross check on the net rental income basis, M&A activity, roughly EUR 8 million, would that be very much off?

[Martin Thiel, CFO & Member of Management Board]

Yes. I don't have it in my head exactly, but it sounds reasonable.

[Simon Stippig, Analyst]

Okay. And then just -- again, sorry, one more question towards the M&A side. I think, otherwise, all the questions were asked. Do you see anything in the pipeline, not in Poland, but actually in Germany? And then do you intend to sell any noncore assets during this year?

[Martin Thiel, CFO & Member of Management Board]

Well, selling noncore assets will not be really a big part -- or a big thing in 2021, and we've been continuously doing that, but you should not expect a huge number there, so some something definitely below 1,000 units. And if you ask us for the acquisition pipeline, yes, there are portfolios in the pipeline. As always, it's extremely difficult to predict which acquisitions in the end will really be designed. You know that we're very disciplined in that regard. But it's not the case that we are now looking at a market which is completely dry. Clearly, it's extremely competitive. Meaning what I said about increasing prices is, more competition in good investment markets, staying very helpful for cooperation purposes. It's not that easy for the acquisition market. But it's not the case that there's nothing anymore on the market, especially in our regions. And you know that we also buy portfolios in smaller sizes. And we buy more frequently, so that should enable us also to find new opportunities in the future.

[Operator]

We haven't received further questions at this point. [Operator Instructions] There are currently no further questions. I will hand back to the speakers.

[Martin Thiel, CFO & Member of Management Board]

Yes, many thanks all for joining this call. As always, please feel free to contact us directly for further questions. Thanks again for joining this call. Have a good start into the week, and talk soon. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.