REG - Phoenix SpreeDeutsch - Business update and Portfolio valuation

Phoenix Spree DeutschlandAnnouncement

07/02/2024 07:00

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RNS Number : 2477C  Phoenix Spree Deutschland Limited  07 February 2024

7 February 2024

Phoenix Spree Deutschland Limited

(the "Company", the "Group" or "PSD")

 

 

Business update and Portfolio valuation

 

Phoenix Spree Deutschland (LSE: PSDL.LN), the UK listed investment company
specialising in Berlin residential real estate, announces an update on
business activity and the valuation of the portfolio of investment properties
held by the Company and its subsidiaries (the "Portfolio") as at 31 December
2023.

Financial Summary:

 Financial metric:                         31 December  30 June 2023  31 December  30 June 2022

2023
2022
 Portfolio Valuation, as at (€ million)    €675.6       €714.3        €775.9       €812.4
 Valuation per square metre, as at (€)     €3,598       €3,808        €4,082       €4,318
 Condominium notarisations during period   €7.2         €2.0          €4.7         €3.0

(€ million)

 

Summary:

 

Strong rental market

·    Growing shortage of available rental property in Berlin continues to
drive strong market rental growth.

·    New lettings across the Portfolio signed at an average premium of 31
per cent to passing rents, or €13.7 per sqm, a new record high, and a 5.9
per cent increase versus 2022.

·    Berlin EPRA vacancy of 1.6 per cent (2022: 2.4 per cent) at a record
low.

·    New rent table (Mietspiegel), expected to be released in May 2024 and
result in material in-place rent growth.

Condominium sales accelerating

·    Condominiums notarised for sale during H2 2023 of €5.2 million, a
206 per cent increase versus H2 2022, resulting in total sales of €7.2m for
2023.

·    A strong start to 2024 to date, with 4 further condominiums notarised
for a combined value of €1.9 million.

·    Material gap between the per sqm valuation of condominium units
versus rental unit equivalents, with sales prices per sqm of €4,885 per
vacant unit compared to a portfolio average of €3,587 per sqm for rental
units held within the portfolio.

·    Given this, the Company is evaluating options, including with respect
to its financing, to increase significantly the number of condominiums made
available for sale in 2024.

 

Investment market remains subdued

·    Buyer sentiment and transaction volumes remain fragile; like-for-like
Portfolio value decreased by 5.3 per cent during H2 2023 (11.9 per cent versus
Dec 2022), reflecting an increase in market yields, partially offset by rental
growth.

·    As previously announced, PSD's forward funding commitment to the
Erkner development project has been terminated, removing the Company's
requirement to fund a further €13m of development payments in 2024.
Approximately €1.2m in real estate transfer tax previously incurred is
expected to be reclaimed.

·    Strategy of increasing asset sales (both as individual condominiums
and multi-unit assets), reducing debt and, ultimately, returning excess
capital to investors from disposals remains the Company's priority.

Rental market remains strong

Rental market conditions remain strong. Further net inward migration and
higher home ownership costs, which have forced potential buyers to remain
within the rental system for longer, continue to increase demand. At the same
time, higher funding and construction costs are challenging the economics of
new-build. Fewer new residential construction projects are being started and
many projects that have already been initiated are being postponed or
cancelled. The supply-demand imbalances within the Berlin rental market are at
their widest for the last several years.

 

Against this backdrop, market rents are at record levels, with new lettings
across the Portfolio signed at an average premium of 31 per cent to passing
rents, or €13.7 per sqm (a 5.9 per cent increase versus 2022). The average
rent across the Portfolio now stands at €10.4 per sqm, a like-for-like
increase of 4.1 per cent versus 2022, with vacancy at an all-time low. The
shortage of available apartments is expected to result in fewer new lettings
in 2024. Therefore, we expect that in-place rent increases will be a more
important driver of overall rental growth going forward.

 

The Company welcomed the release by The Senate Department for Urban
Development, Building and Housing of a new transitional Berlin Mietspiegel
(rent index). Announced on 15 June 2023, this replaces the previous rent index
of 2021 and all rents for all qualifying tenants have been adjusted to reflect
permissible increases.

 

A new qualified Mietspiegel is scheduled to be released in mid-2024 and it is
expected that this will provide scope for further permissible rent increases
to qualifying tenants, supporting rental growth from the third quarter of 2024
onwards.

 

Upturn in condominium sales

The second half of 2023 saw a material upturn in condominium sales. This was
driven by tentative signs of an improvement in buyer sentiment, an increase in
condominiums made available for sale, targeted price adjustments and greater
visibility in forward bank lending rates for buyers.

 

During the year to 31 December 2023, 25 condominium units were notarised for
sale for an aggregate value of €7.2 million (2022: € 4.7 million). This
represents a 53 per cent increase versus the prior year, with notarisations in
the second half of the financial year increasing significantly (H1 2023:
€2.0 million). Since the year-end, the Company has notarised a further 4
condominiums, representing a value of €1.9 million.

 

The average achieved notarised value per sqm for the residential units during
the financial year was €3,976, representing an average 4.1 per cent premium
to the average carrying value as 31 December 2022, with vacant units achieving
an average sale value of €4,885 per sqm. This premium is lower than has been
achieved historically, following price reductions in the second half of the
financial year to stimulate demand. Importantly in this context, only 4 per
cent of the Company's Portfolio is already valued as condominiums. PSD's
portfolio has a further 73 per cent of units which are legally split into
condominiums but not valued as such and, subject to certain constraints in the
Group's financing arrangements, could be brought forward to the market to
materially increase sales volumes.

 

Investment market remains fragile

The financial year ended 31 December 2023 was characterised by historically
high interest rates and a weakening German economy. Buyer sentiment and
investment transaction volumes have remained fragile, and prices have fallen
as rental yields rise. Against this backdrop, the Company has reported a
decline in the valuation of its properties during the financial year.

 

As at 31 December 2023, the Portfolio was valued at €675.6 million. This
valuation represents an average value per square metre of €3,598 and a gross
fully occupied yield of 3.3 per cent. Included within the Portfolio are seven
multi-family properties valued as condominiums, with an aggregate value of
€35.1 million (31 December 2022: six properties; €30.1 million). On a
like-for-like basis, after adjusting for the impact of disposals, the
Portfolio valuation declined by 11.9 per cent during the year to 31 December
2023. This represents a decline of 17 per cent since peak prices in June 2022.

 

With the exception of Donaustrasse, the last acquisition that the Company
notarised in 2022, which rose in value by 26 per cent, all rental assets
within the Portfolio experienced valuation declines driven by yield expansion,
partially offset by rental growth.

 

Whilst further valuation declines cannot be ruled out in 2024, recent
developments on the outlook for interest rates have been positive, with a
growing consensus that interest rates have peaked and are on a downward trend.
Notwithstanding this, buyer sentiment in the investment market for single
buildings and portfolios of buildings remains fragile, with investment volumes
in 2023 over 60 per cent lower than in 2022. During 2023, the Company marketed
a significant proportion of its Portfolio as single-building sales. However,
market conditions were not conducive to achieving sales which the board
believes represents fair value for assets. The few transactions that were
agreed generally failed to proceed to sales. However, the beginning of 2024
has shown some signs of buyer sentiment improving with offers accepted on two
buildings with a combined value of €7.4million. Both bidders have been
granted exclusivity periods to run due diligence processes.

 

Strategy and outlook

Our core rental business is expected to continue to prosper, with structural
imbalances underpinning strong and accelerating rental growth, supplemented by
expected rent increases for qualifying tenants in the second half of 2024
following the introduction of the new Mietspiegel.

 

Although conditions in the investment market remain challenging, recent
activity in the condominium market has been encouraging. Since listing in
2015, the Company has laid the foundations for a programme of selectively
reselling apartment blocks as individual units. This strategy was designed to
take advantage of the significant arbitrage that existed in the market between
the average per sqm value of a Berlin apartment block and the resale value of
an individual apartment as a condominium.

 

Since listing, the Company has progressively increased the proportion of
properties within the Portfolio that have been legally split as condominiums.
In 2021, new legislation was introduced, limiting the ability of landlords to
split their properties into condominiums. This legislation was not
retrospective and does not impact PDS's assets that have already been split.
Inevitably, these measures have increased the scarcity of condominiums
available for sale, further exacerbating the shortage of supply. Moreover,
since the onset of the current real estate downturn, there has been a
significant widening in the valuation premium that condominium units command
versus their rental equivalents. With over 1,900 units, representing 77 per
cent of the Portfolio, now split as condominiums, PSD is uniquely placed in
the listed marketplace to benefit from this trend.

 

Given that the current share price implies a value for rental apartments
within the Portfolio in the region of €2,750 per square metre, versus an
average sales price for condominiums during 2023 of €3,976 per square metre,
the Company is in the process of discussions with its lenders and examining
other strategic options which will allow for a significant increase in the
number of individual units which can be made available for sale in the future.

 

The Company has no loans maturing until September 2026 and, with cash
generated from future asset sales planned to be used principally to pay down
debt, the Board remains confident that the Company will be able to refinance
its outstanding debt well ahead of maturity.

 

 

Full-year results

The Company intends to publish its full-year results for the twelve months to
31(st) December 2023 on 30 April 2024.

 

For Further Information, Please Contact:

Phoenix Spree Deutschland Limited
 
+44 (0) 20 3937 8760

Stuart Young

 

Numis Securities Limited (Corporate Broker)
        +44 (0) 20 7260 1000

David Benda

 

Teneo (Financial PR)
                                  +44 (0) 20 7353 4200

Lizzie Snow

Faye Callow

 

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