Business update and Portfolio valuation

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:

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