Phoenix Spree Deutschland, the UK listed investment company specialising in German residential real estate, has seen its share rise 6.5% today on the news that the German Federal Court has ruled against the legality of the Mietendeckel rent freezer in Berlin.
Phoenix Spree had estimated that the financial impact of the Mietendeckel, which became effective on 23 November 2020, for the financial year ended 31 December 2020 was in the region of 4% of gross rental income and that, in the event that the Mietendeckel was not repealed, the reduction of annualised net rental income would be up to 20% in 2021. Following the legal ruling, it is expected that the negative impact on rental income will be reversed.
The company said in a statement: “[We] welcome the ruling by the German Federal Court today on the legality of the Mietendeckel. Phoenix Spree Deutschland and its legal advisors have always been firmly of the opinion that the Mietendeckel was unconstitutional and that State law could not supersede Federal law, a view which has now been upheld by the highest court in Germany.”
Positive financial impact
All rental agreements had been structured to revert back to pre-Mietendeckel rent levels and to allow for the back-payment of higher rents now legally due for the period during which the Mietendeckel was in place. As at 31 March 2021, the company estimates that the amount of rent which could be claimed from tenants is around €1.8m. Tenants had been advised by the Berlin government to set aside appropriate reserves for this eventuality and the company will work on a case by case basis with any tenants suffering hardship.
The 2020 portfolio valuation, undertaken by Jones Lang Lasalle, had assumed that the Mietendeckel would be fully implemented for its entire five-year lifespan and therefore incorporated the negative impact on rental income caused by the Mietendeckel. Although market transaction values did not fall during the period in which the Mietendeckel was in place, future portfolio valuations will need to be adjusted to reflect the fact that rental streams will revert back to free-market levels
The removal of rent controls limiting collected rent levels to well below free market levels will allow the company to resume its reversionary rental strategy. In 2020, new lettings in Berlin were signed with a contracted rent at an average premium of 34% to passing rents. The company’s property advisor, Qsix, said it believed this reversionary gap should underpin rental growth in the medium term, irrespective of market rental growth. Additionally, most leases within the portfolio include annual indexation increases which can now be activated.
The company will also continue with its strategy of crystallising condominium reversionary value within the portfolio through the selective sale of individual units as condominiums at a premium to book value. Over 70% of the company’s Berlin portfolio has already been legally split into condominiums, with a further 15% in application. The company has achieved condominium sales value in excess of a 19% premium to the book value.
Outlook
The uncertainty created by the Mietendeckel significantly disrupted the Berlin residential market, with a reduction in transaction activity, availability of rental accommodation for tenants and a sharp decline in investment in housing. The removal of the Mietendeckel should alleviate this uncertainty, the company said, and increase the amount of choice for tenants and allow resumption of investment into Berlin residential.
To listen to a QuotedData interview with Phoenix Spree Deutschland’s Stuart Young, held on 12 March 2021, click here.
PSDL : Phoenix Spree Deutschland boosted by rent freeze ruling