07 February 2023

Phoenix Spree Deutschland Limited
(the "Company" or "PSDL")

Investment property valuation and business update

Phoenix Spree Deutschland (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 31 December 2022 and an update on business activity.

Key highlights

·    Like-for-like Portfolio value, adjusted for acquisitions and disposals, decreased by 3.1 per cent versus 2021, reflecting an increase in market yields.

·    Including investment properties under construction valued at €5.3 million, the Portfolio was valued at €775.9 million, compared to €801.5 million as at 31 December 2021.

·    Condominiums notarised for sale during 2022 of €4.7 million, (2021 €15.2 million).

·    First condominium notarised in 2023 at a record value of €7,551 per sqm, a 119.9 per cent premium to carry value, with a further three reservations signed since the financial year end for a total consideration of €0.8million.

·    Three properties sold or notarised for sale in the second half of 2022 for a combined value of €12.1 million. Further disposals planned for 2023.

·    Supply-demand imbalance for Berlin residential growing, placing additional pressure on already low vacancy levels.

·    Future rent growth continues to be strongly underpinned, significant reversionary rental potential across PSD's Portfolio remains.

Portfolio valuation

As at 31 December 2022, the Portfolio, including investment properties under construction, was valued at €775.9 million (31 December 2021: €801.5 million).

On a like-for-like basis, after adjusting for the impact of acquisitions net of disposals, the Portfolio valuation declined by 3.1 per cent in the year to 31 December 2022, and by 5.2 per cent in the second half of the financial year.

The valuation as at 31 December 2022 represents an average value per square metre of €4,082 (31 December 2021: €4,225) and a gross fully occupied yield of 3.0 per cent (31 December 2021: 2.8 per cent). Included within the Portfolio are six multi-family properties valued as condominiums with an aggregate value of €30.1 million (31 December 2021: eight properties; €38.8 million).

Condominium sales

Condominium sales during 2022 were impacted by increases in the cost of living, higher borrowing costs and uncertainty surrounding the macro-economic environment caused by the crisis in Ukraine. These factors led to a deterioration in buyer sentiment and reduced volumes.

During the financial year, 13 condominiums units were notarised for sale for an aggregate value of € 4.7 million (2021: €15.2 million). The average achieved notarised value per sqm for the residential units was €5,502, representing a gross premium of 22.4 per cent to carry value and 34.8 per cent to PSD's average Berlin residential portfolio value as at 31 December 2022.

The Company recorded a valuation per sqm of €7,551 for its first condominium notarisation of 2023, a small, fully refurbished unit, at a premium of 119.9 per cent to the 31 December 2022 carry value.  Since then, reservations for a further three units have been received and are pending notarisation. These have a combined value of €0.8 million, representing a gross premium of 45.5 per cent to carry value and 21.7 per cent to PSD's average Berlin residential portfolio value as at 31 December 2022.

Portfolio management.

Since the half year ended 30 June 2022, the Company has completed the sale of two non-core properties for an aggregate consideration of €8.6 million. These buildings were acquired in 2008 and 2017, for an aggregate purchase price of €3.9 million and had a carrying value of €8.9 million as at 30 June 2022.

The Company has also exchanged contracts to sell a further property for €3.5 million. This building was acquired in 2008 for a purchase price of €1.0 million and had a carry value of €3.9 million as at 30 June 2022. 

No further acquisitions will be made pending an improvement in market conditions and a narrowing of the Company's discount to EPRA Net Tangible Assets.

Around €16 million of capital investment was made in the Portfolio for refurbishment and in order to bring new residential condominium projects to market. This investment is expected to be reflected in 2023 through condominium sales and rental uplifts. It is anticipated that total capital investment will be materially lower in 2023.

EPRA net asset value guidance

Based on the Company's year-end Portfolio valuation, and including the impact of share buybacks during the financial year, it is expected that the reported EPRA NTA per share as at 31 December 2022 will be within a range of €5.09 - €5.14 (£4.51 - £4.56) (31 December 2021: €5.65 (£4.74)). This represents a Euro EPRA NTA per share total return with a range of -8.2 per cent to -7.3 per cent and a Sterling EPRA NTA per share total return within a range of -3.4 per cent to -2.5 per cent for the financial year to 31 December 2022. 

Outlook

The economic outlook for Germany has been improving in recent weeks, largely thanks to a significant reduction in energy prices and the Government's fiscal support package. With natural gas prices having fallen by more than half since early December and inflation falling more rapidly than expected, the German economy is now expected to avoid recession in 2023.  Notwithstanding this, the outlook for property values in 2023 is likely to remain challenging and further declines in property values purely driven by macro factors such as higher medium term interest rates cannot be discounted.

Although there remains uncertainty about real asset values, supply-demand imbalances within the Berlin PRS market remain firmly supportive of rental values. Demand for rental properties continues to rise as higher home ownership costs force potential buyers to remain within the rental system for longer. Demand has been further increased by inward migration of in excess of one million refugees into Germany from Ukraine during 2022, placing further pressure on residential vacancy levels which are already at historically low levels.

At the same time, higher funding, labour and construction costs present significant headwinds to new-build construction, limiting the future supply of rental accommodation. Against an annual target set by the Federal Government of 400,000 new completions per year, only 280,000 are estimated to have completed in 2022, with forecasts for 2023 and 2024 significantly lower still.  Future rent growth should therefore continue to be underpinned, and there remains significant reversionary rental potential across PSD's Portfolio.

Although it is too early to accurately predict a recovery in buyer sentiment in the condominium market, 2023 has started encouragingly. Longer term, Federal Government legislation enacted in 2022 has placed significant restrictions on the ability of landlords to split properties into condominiums, further restricting supply. With in excess of 76 per cent of its condominium portfolio already legally split in the land registry, the Company is well placed to benefit from this trend.

The Company remains conservatively financed with no loans maturing until September 2026. The Board considers the current level of gearing and cash balances to be appropriate at this stage in the real estate cycle and will not seek to undertake further acquisitions or increase debt levels until such time as the market outlook becomes more stable. The Company will additionally continue to review its portfolio of assets to ascertain the potential for disposals that are deemed to be non-core.

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"During 2022, the real estate industry has had to adjust to the combined effects of global inflationary pressures and higher interest rates. Although PSD has not been immune from these broader trends, the Board considers the Company to be well positioned, with a strong balance sheet and conservative financing.  Whilst the speed of recovery in transaction volumes and buyer sentiment is uncertain, rental values remain well supported, reflecting the positive demographic trends which remain in the Berlin residential market."

Legal Entity Identifier: 213800OR6IIJPG98AG39

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