Press and Media

30 April 24

Phoenix Spree Deutschland Limited: Financial Results for the year ended 31 December 2023

Phoenix Spree Deutschland Limited (LSE: PSDL.LN), the UK listed investment company specialising in Berlin residential real estate, announces its full year audited results for the financial year ended 31 December 2023. The Board also announces its strategy to significantly accelerate condominium sales and reduce debt. 

Financial Highlights

^{1 – 2022 Portfolio valuation includes investment properties under construction.}

^{2 – Calculated at FX rate GBP/EUR 1:1.153 as at 31 December 2023 (2022: GBP/EUR 1:1.128)}

^{3 –  Net LTV uses nominal loan balances (note 22) rather than the loan balances on the Consolidated Statement of Financial Position which include Capitalised Finance Arrangement Fees.} 
_{4 –  Like-for-like excludes the impact of acquisitions and disposals in the period.} 

^{5 –  EPRA metrics defined and calculated in note 29} 

FINANCIAL AND OPERATIONAL SUMMARY: 

Portfolio valuation reflects a challenging macroeconomic backdrop 

• As reported in the recent Portfolio update published in February, 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. 

Increasing shortage of Berlin rental supply continues to drive strong rental growth 

• 255 new leases were signed during the year 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. 
• EPRA vacancy of 2.0 per cent (2022: 2.4 per cent) at a record low. 
• New rent table (Mietspiegel), expected to be released in May 2024 and to support in-place rent growth. 

Condominium sales momentum and further disposals 

• Condominiums notarised for sale during H2 2023 of €5.2 million, a 203 per cent increase versus H2 2022, resulting in total condominium sales of €7.2m for 2023. 
• Since the financial year-end, the Company has notarised a further 9 condominiums, with an aggregate value of €3.4 million. 
• Reservations for a further 5 units, with a combined value of €1.7 million, have recently been received and are pending notarisation. 
• Two rental properties sold for €7.3 million during 2023. Two further buildings have been notarised for sale since year end, with a value of €7.4 million. 
• Termination of forward funding commitment to the Erkner development, removing the requirement to invest €13m and with €1.2m real estate transfer tax reclaimed. 

UPDATED CONDOMINIUM STRATEGY 

Context 

• Although only 6 per cent of the Company’s Portfolio is currently being marketed for sale as condominiums, PSD is unusual among its listed peers in that 78 per cent of its Portfolio is already legally split into condominiums. 
• Conditions in the German real estate investment market have been challenging and are expected to remain so in the near term. This contrasts with the condominium market where, despite some reductions, sales prices and market volumes, particularly for vacant units, remain robust. 
• In the current Berlin market, there is now a significant valuation gap between the average per sqm value of an apartment block and the resale value of an individual apartment as a condominium. 
• During 2023, the average sales value of a vacant condominium unit was €5,345 per sqm, compared to a Portfolio average valuation of €3,587 per sqm for rental units and €2,600 per sqm for the whole Portfolio implied by the current PSD share price. 

Considering these factors, the Company intends to pivot its business model further from the Private Rented Sector (PRS) to condominium sales. 

Updated Strategy 

• The Company plans to materially increase condominium sales and unlock the inherent value within its Portfolio. Initially, the proceeds will be used to reduce debt, creating a platform to refinance the current debt facility on more beneficial terms ahead of maturity in September 2026. Once this has been achieved, the Company plans to return excess capital to shareholders. 
• To facilitate this, the Company plans to modify its financing arrangements, which currently limit the number of units that can be offered to the market to around 6 per cent of the Portfolio. The Company is in advanced discussions with its principal lender, Natixis, and aims to conclude these discussions within the next few months. 
• If the proposed amendment to its financing arrangements can be concluded, around half the split Portfolio is expected to be made available for sale as condominiums, increasing the number of buildings that could be sold as condominiums by over 500 per cent. Units will be sold as they become vacant, and occupied units will be offered for sale to both tenants and investors. The Company aims to achieve annualised condominium sales in excess of €50m by 2025. 
• Properties not part of the condominium pool will continue to operate on a PRS model, receiving targeted investment to improve their energy efficiency and raise EPC ratings to a minimum of C in the medium term. This investment is expected to enhance property values, lower running costs and facilitate more favourable longer-term financing. By improving energy performance of these buildings, the pool of potential buyers, such as pension funds and insurance companies, will expand when market conditions improve. 
• The Company will continue to review the possible sale of rental properties and portfolios at discounts to carrying value, where the board believes it is in shareholders’ interest to do so, particularly with the aims of i) facilitating the modification of the Company’s current financing arrangements so as to increase the number of units which can be offered for sale as condominiums; ii) reducing overall debt levels and enhancing the Company’s ability to obtain new longer-term financing on acceptable terms; and iii) providing sufficient capital for targeted investments in existing condominium properties to optimise their values. 

Outlook 

• The Company’s rental business is expected to continue to perform well, driven by structural imbalances that support strong and accelerating rental growth. 
• The tight rental market has caused market churn rates to decline and, consequently, the number of new lettings in 2024 is expected again to decline, with a greater proportion of growth expected to be achieved through in-place rental growth. 
• Rental growth is expected to be supplemented by further rent increases for qualifying tenants in the second half of 2024, following the introduction of the new Mietspiegel. 
• Subject to the successful conclusion of revised financing arrangements, the Company plans a significant uplift in condominium sales. 
• Vacant condominium sales values are expected to be at a significant premium to the average per sqm valuation across the Portfolio, and an even larger premium to values implied by the current share price. 
• Although conditions in the investment market are expected to remain challenging for the remainder of 2024, the Company will continue to actively market single blocks of apartments and portfolios of buildings. 
• The Company plans to use cash generated from future asset sales principally to pay down debt and to provide capital for targeted investment in existing condominium properties. 

Annual Report and Accounts 

The full Annual Report and Accounts will shortly be available to download from the Company’s webpage www.phoenixspree.com. All page references in this announcement refer to page numbers in the Annual Report and Accounts. The Company will submit its Annual Report and Accounts to the National Storage Mechanism in the required format in due course, and it will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. 

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To read the full report, click here