By Arno Schuetze and Maria Sheahan
FRANKFURT (Reuters) - Vonovia <VNAn.DE>, Germany's biggest residential property company, has agreed to buy Austrian counterpart Buwog <BWOA.VI> in a cash deal valuing the latter at 5.2 billion euros ($6.12 billion), the two companies said on Monday.
The deal will increase the size of Vonovia's portfolio to almost 400,000 flats from around 350,000 now and increase sharply its capacity for building new housing.
Buwog's share price was up 17.2 percent at 28.84 euros by 1008 GMT, slightly below the offer price of 29.05 euros per share.
- PHOTOS: New art and old relics at Mickey Mouse's NYC gallery 25 Pictures
- PHOTOS: See Yes on 3 supporters react to historic transgender rights Question 3 win 11 Pictures
- PHOTOS: A look back at Queen performing in the 1970s and 1980s 22 Pictures
- All of these celebrities have had their nudes leaked 35 Pictures
- PHOTOS: A look at Idris Elba's style through the years 20 Pictures
- PHOTOS: Heidi Klum's annual Halloween party and other amazing celebrity costumes 17 Pictures
- These are the spookiest cities per capita in the U.S. 5 Pictures
- Food Network star talks pumpkin carving 1 Pictures
- Who is Alexander Edwards, Amber Rose's new boyfriend? 9 Pictures
- Is Cardi B pregnant again? This tweet has people guessing 6 Pictures
- Natural Museum's best wildlife photos of the year 5 Pictures
Shares in Vonovia were flat, having risen 40 percent over the last year on increasing demand for housing in Europe's largest economy.
Housing prices in Germany - relatively cheap compared with other European countries in the past - have spiked in recent years, prompting the Bundesbank to warn about the risk of a dangerous bubble developing earlier this year.
Average real estate prices in cities including Berlin, Hamburg, Munich and Frankfurt have increased by more than 60 percent since 2010, the Bundesbank estimates, reflecting solid growth, low unemployment and low borrowing costs.
The housing shortage had played a role in the run-up to Germany's parliamentary election in September.
"Politicians have voiced the legitimate request that we build more apartments," Vonovia Chief Executive Rolf Buch said.
The deal will help Vonovia intensify its construction activities, building on Buwog's extensive expertise in property development, he said, adding that the company will double its target of newly built apartments to 4,000 annually.
Buwog CEO Daniel Riedl said that Buwog owns land on which 10,000 flats can be built, two thirds of which would likely be sold on after completion.
Buwog shareholders are to be offered 29.05 euros per share under the offer, an 18.1 percent premium to Friday's closing price, which Vonovia plans to finance with debt.
Buch said that the valuation was in line with that of comparable deals such as Unibail-Rodamco's <UNBP.AS> acquisition of shopping mall operator Westfield <WFD.AX> and Vonovia's own past deals.
Analysts at brokerage Baader said that the offer price was reasonable, adding that the move was not completely surprising as Buwog has been seen as a takeover target for some time.
The deal reverses Vonovia's strategy in Austria, where it had initially planned to sell its operations. While 55 percent of Buwog's property is located in German cities including Berlin and Hamburg, the rest is in Austria in cities such as Vienna, Graz and Klagenfurt.
Buch said that the companies did not expect major antitrust concerns as the market is still fragmented with Vonovia having a market share of only 2 percent.
Vonovia said it expected joint management of the two companies' flats following the deal would lead to cost savings of around 30 million euros a year, a substantial part of which is to be realized by the end of 2019.
The deal will also have a positive effect on Vonovia's underlying earnings per share and adjusted net asset value per share, Vonovia said.
Buwog will remain as a separate brand within Vonovia and keep its stock market listing.
Further details of the offer are to be announced in February, when the bid will be officially launched.
JP Morgan <JPM.N>, Kempen, Victoria Partners and Freshfields advised Vonovia on the deal, while Buwog worked with Goldman Sachs <GS.N> and Schoenherr.
(Reporting by Maria Sheahan and Arno Schuetze; Editing by Victoria Bryan, Greg Mahlich)