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
2023
|
30 June
2023
|
31
December
2022
|
30 June
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
(€ million)
|
€7.2
|
€2.0
|
€4.7
|
€3.0
|
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 31st 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