Press and Media

04 February 21

Phoenix Spree Deutschland: Investment property valuation & business update

Phoenix Spree Deutschland (LSE: PSDL.LN), the UK listed investment company specialising in Berlin residential real estate, announces the valuation for the portfolio of investment properties held by the Company and its subsidiaries (the “Portfolio”) as at 31 December 2020.

Further increase in portfolio value

The Berlin residential property market has remained resilient during the financial year and, although transaction volumes remained below peak levels, investment demand observed by Jones Lang LaSalle GmbH (“JLL”), the Company’s external valuers, continues to support current pricing. JLL have conducted a full RICS Red Book property-by-property analysis, tied back to comparable transactions in the Berlin market, and have provided a portfolio valuation with no matters of concern or material uncertainty raised. The discounted cash flow methodology used by JLL assumes that the Berlin rent cap (“the Mietendeckel”) is fully implemented by PSD and remains in place for its full five-year lifespan.

As at 31 December 2020, the total Portfolio was valued at €768.3 million by JLL, an increase of 5.2% over the twelve-month period (31 December 2019: €730.2 million).

On a like-for-like basis, after adjusting for the impact of acquisitions net of disposals, the Portfolio valuation increased by 6.3% in the year to 31 December 2020, and by 3.6% in the second half of the financial year. This increase reflects the combined impact of yield compression, supported by a further decline in interest rates during the financial year.

The valuation as at 31 December 2020 represents an average value per square metre of €3,977 (31 December 2019: €3,741) and a gross fully occupied yield of 2.4% (31 December 2019: 2.9%). Included within the Portfolio are nine properties valued as condominiums, with all sales permissions granted, with an aggregate value of €52.4 million (31 December 2019: €26.5 million). 

EPRA net asset value guidance

Based on the Company’s year-end Portfolio valuation, and including the impact of share buybacks during the financial year, it is expected that the reported EPRA NAV per share as at 31 December 2020 will fall within a range of €5.27 – €5.33 (£4.75 – £4.81) (31 December 2019: €4.92 (£4.16)). This represents a Euro EPRA NAV per share total return with a range of 8.6 per cent to 9.9 per cent and a Sterling EPRA NAV per share total return within a range of 15.8 to 17.1 per cent for the financial year to 31 December 2020.

COVID-19 Update

The Company’s overriding priority is the health and wellbeing of its tenants, work colleagues and wider stakeholders in this period of unprecedented disruption. Where necessary, the Company continues to support its tenants, both residential and commercial, through agreeing, on a case-by-case basis, the payment of monthly rents or deferring rental payments.

The impact of COVID-19 on rent collection has been limited, with over 99% of all residential and commercial rents collected in 2020, in line with rent collections in 2019. Rent collection during the month of January 2021 has also remained stable and, where necessary, the Company will continue to work with any tenants in arrears to agree appropriate and workable repayment schedules.

Berlin rent controls (“the Mietendeckel”)

Pending clarification of the legality of the Mietendeckel rules, the Company continues to explore all options within the existing portfolio to optimise strategic flexibility. This includes condominium sales at a premium to book value, share buybacks at a discount to EPRA net asset value, careful monitoring of capital expenditure projects and new tenant contracts which allow the retrospective collection of  market rents in the event that the Mietendeckel is ruled to be unlawful.

By necessity, the 2020 Portfolio Valuation conducted by JLL assumes that the Mietendeckel will be in place for its full five-year term. However, the Company and its legal advisors remain firmly of the view that the Berlin rent-cap is unconstitutional and, although a formal timetable for a legal ruling has yet to be published, it is currently expected that the Federal Court will reach a final decision in the first half of 2021. In the event that the Mietendeckel is successfully challenged, any negative impact on net rental income caused by the Mietendeckel would be removed from property valuations thereafter.

PSD’s tenancy contracts stipulate that if the Mietendeckel or any part thereof is voided, suspended, repealed, or otherwise abolished, any higher contracted rent permissible under the German Civil Code shall once again be payable. If the voiding or suspension were to be applied on an ex-tunc basis (i.e. from the outset), back-payments could be sought to cover the difference between the rent actually collected and the higher contracted rent for the entire term of the agreement. Tenants have, therefore, been advised by the Berlin government to set aside appropriate reserves to cover this possibility. 

Condominium notarisations at a 20% per cent premium to book value

As previously announced on 6 January 2021, since the financial half year ended 30 June 2020, a further 30 condominium units were notarised for sale, with an aggregate value of €10.5 million. Condominium pricing has remained strong during 2020, with the average achieved residential value per sqm at €4,276, representing an average 20.2% premium to the most recent assessed book value of each property.

The Company is additionally guaranteed €1.2m of condominium revenues in relation to the financial year ended 31 December 2020 through its agreement with Accentro Real Estate AG for 3 remaining unsold units at its Boxhagenerstrasse condominium project.

These sales represent a significant increase compared with the first half of the financial year, during which eight residential units and two attic spaces were notarised for sale, with an aggregate value of €3.0 million. In total the Company has notarised for sale condominiums with an aggregate value of €14.6m during the year to 31 December 2020, a 65% increase compared with the prior year.

As at 31 December 2020, 70% of the Berlin portfolio had been legally split into condominiums, providing opportunities for the implementation of further condominium sales projects where appropriate. A further 17% are in application, over half of which are in the final stages of the process.

The Company notes that the Federal Government has previously discussed the introduction of legislation which may limit the ability of landlords to split their properties into condominiums. The Company believes that, should such legislation be introduced, the valuation impact on the Company’s portfolio is likely to be positive given the high proportion of properties which the Company has already legally split into condominiums.  

Continuation of share buybacks at a discount to NAV

PSD has authority to buy back up to 10% of its ordinary share capital. Share buybacks were resumed following the release of the Company’s interim results on 15 September 2020, by which time it had become clear that the financial impact of the COVID-19 pandemic on the Company has been limited.

As at 31 January 2021, the Company had bought back a further 1,408,500 ordinary shares since September 2020, representing 1.4% of the ordinary share capital, for a total consideration of £4.5m. The average price paid represents a 30% discount to EPRA net asset value per share as at 30 June 2020.

Debt refinancing

As previously announced on 6 January 2021, the Company was pleased to announce the refinancing of €21.4m of existing loans. The new facility, agreed with Natixis Pfandbriefbank AG, is on more flexible terms, releases a further €8.1m of cash and has a maturity profile in line with the debt retired and the Company’s existing debt facilities.

The new debt is non-amortising, whereas the debt it replaced incurred amortisation at 1.5% per annum. Additionally, it allows the sale of assets as condominiums, offering more flexibility than the previous debt provider terms. 

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented: 

“I am pleased that the Company has been able to deliver further increases in property values and net asset value. The fact that this result has been achieved despite the introduction of the Berlin Mietendeckel and the impact of COVID-19 is testament to the resilience of our business model during these unprecedented times.

The strategic optionality and value within our portfolio has been underpinned by our continued ability to sell condominiums at a premium to book value. Our balance sheet strength and liquidity allow us to continue to deliver value to shareholders by buying back shares at a significant discount to Net Asset Value, pending a final legal ruling on the Berlin rent-cap, expected in 2021.”

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