Investment Property Valuation

11 August 2020

Phoenix Spree Deutschland Limited

("PSD" or the "Company")

Investment property valuation and business update

Phoenix Spree Deutschland Limited (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 30 June 2020.

Further increase in portfolio value

The Berlin residential property market has remained stable in the first half of the financial year and, although transaction volume has reduced, investment demand observed by Jones Lang LaSalle GmbH continues to support current pricing. JLL have conducted a full RICS red book property-by-property analysis and have provided a portfolio valuation, with no matters of concern or material uncertainty raised. The methodology used by JLL assumes that the Berlin rent cap ("the Mietendeckel") is fully implemented by PSD and is in place for its five-year lifespan.

As at 30 June 2020, the Portfolio was valued at €746.7 million (31 December 2019: €730.2 million). This represents a 2.3% increase over the six-month period. On a like-for-like basis, excluding the impact of disposals, the Portfolio value increased by 2.6% in the six-month period. This increase reflects the combined impact of modest yield compression, supported by a decline in interest rates, and the active management of the portfolio.

The valuation as at 30 June 2020 represents an average value per square metre of €3,839 (31 December 2019: €3,741), a gross fully occupied yield of 2.8% (31 December 2019: 2.9%) and a net yield, using EPRA methodology, of 2.4% (31 December 2019: 2.3%). Included within the Portfolio are 6 properties valued as condominiums, with an aggregate value of €33.0 million (31 December 2019: 5 properties, aggregate value €26.5 million).

Limited impact from COVID-19

To date, the impact of the COVID-19 pandemic on rent collection levels has been limited with rent collection in the six months to 30 June 2020 broadly in line with the six months to 30 June 2019.

Residential rent collection has remained particularly resilient, with 99.6% of rent collected during the first six months of 2020.  Germany's Hartz IV welfare programme includes help for rental payments in instances of financial hardship and is available to tenants impacted by the COVID-19 outbreak.

Commercial rents represent a small proportion of total rents, accounting for only 11.6% of contracted rental income in the six months to 30 June 2020. The COVID-19 restrictions initially resulted in the temporary closure of many Berlin commercial businesses, including several of our commercial tenants. Most COVID-19 restrictions have now been lifted and businesses have now reopened or are in the process of doing so. During the first six months of the financial year, 96.2 % of commercial rents have been collected, compared with 99.7% during the same period of 2019.

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.

Update on proposed Berlin rent controls ("The Mietendeckel")

The board of PSD and its legal advisors remain of the view that there is a high likelihood the Mietendeckel will be successfully challenged. In particular, the new legislation raises concerns about whether the state of Berlin is competent to pass local rent legislation, as the provisions substantially deviate from existing German federal law.

Recent legal developments challenging the legality of the Mietendeckel have been positive. In May 2020, the opposition in the Berlin House of Representatives and a quorum of Federal Parliament MPs lodged cases at both Berlin's Regional Constitutional Court and the Federal Constitutional Court. Additionally, in June 2020, twelve constitutional complaints from private owners were filed with the Federal Supreme Court. 

In Bavaria, a similar move to introduce a six-year rent freeze was blocked by the Bavarian Constitutional Court on July 16. The ruling stated that a federal state may not issue its own regulations that contradict federal rental laws. This ruling is significant in the context of the Berlin Mietendeckel, as the basic legal arguments against the imposition of a rent cap are the same.

As previously reported, pending legal clarity on the Mietendeckel, the company will continue to monitor capex carefully. Regrettably, a number of renovation and modernisation projects which would previously have been justified at free market rents have been postponed or cancelled ahead of a final ruling.

Condominium notarisations at a 16 per cent premium to book value

During the first half of 2020, eight condominium units were notarised for sale, with an aggregate value of €2.5 million (H1 2019: €2.5 million). Condominium pricing has remained strong, with the average achieved residential value per sqm at €4,392, representing a 15.7% premium to book value and a 14.4% premium to the average portfolio value per sqm as at 30 June 2020. Additionally, undeveloped attic space with condominium permission for a further two units was notarised for sale with a value of €0.4m.

Following the relaxation of Berlin COVID-19 lockdown restrictions, and conditional on these restrictions not being re-imposed, it is anticipated that condominium sales will normalise in the second half of the financial year. PSD's condominium sales agreement with Accentro Real Estate AG guarantees further condominium revenues of at least €4.5m in the second half of 2020.

As at 10 August 2020, 63% of the Portfolio had been registered as condominiums, providing opportunities for the implementation of further projects where appropriate. Applications representing a further 22% of the portfolio are underway, with 10% of the portfolio now in the final stage of the application process.

Interim results

The Company intends to publish its interim results for the six months to 30 June 2020 in September 2020.

 Robert Hingley, Chairman of Phoenix Spree Deutschland commented:

"I am pleased that, to date at least, and, despite a reduced level of market activity,  COVID-19 and the Mietendeckel have not had a significant impact on market values. Our condominium potential continues to underpin our portfolio value and we are focused on maintaining our strategic optionality pending clarification of the legality of the Mietendeckel. I am confident that our strategies, together with the strength of our balance sheet, mean we are well placed for the longer-term."

This announcement contains inside information.

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