Difficult year for Phoenix Spree Deutschland, focus now on condominium sales

Berlin residential landlord Phoenix Spree Deutschland has reported a 22.4% fall in EPRA net tangible assets to €3.96 per share (24.0% drop in sterling terms) in the year to 31 December 2023.

The fall was mainly due to a 11.9% like-for-like drop in the value of its portfolio to €675.6m as buyer sentiment and transaction volumes stalled in the face of higher interest rates.

On an operational level, the company grew gross rental income by 5.9% to £27.5m, with annual like-for-like rental growth of 5.6%. Vacancy across the portfolio fell to 2.0% (2022: 2.4%), following the signing of 255 new leases during the year (at an average premium of 31% to passing rents, or €13.70 per sqm, a new record high).

Condominium sales and further disposals

• Total condominium sales of €7.2m for 2023
• Since the financial year-end, the company has notarised a further nine condominiums, with an aggregate value of €3.4m
• Reservations for a further five units, with a combined value of €1.7m, have recently been received and are pending notarisation
• Two rental properties sold for €7.3m during 2023. Two further buildings have been notarised for sale since year end, with a value of €7.4m.

Updated condominium strategy

Although only 6% of the company’s portfolio is currently being marketed for sale as condominiums, 78% of its portfolio is already legally split into condominiums.

The company said that conditions in the German real estate investment market are expected to remain challenging in the near term, which contrasts with the condominium market where sales prices and market volumes, particularly for vacant units, remain robust.

It added that there was 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 share price.

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

It 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% 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. 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 investment to improve their energy efficiency and raise EPC ratings to a minimum of C in the medium term (which is expected to enhance property values, lower running costs and facilitate more favourable longer-term financing). The company said that 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.

Robert Hingley, chairman of Phoenix Spree Deutschland, commented:

“Our core rental business has remained resilient, despite the ongoing challenges posed by economic and geopolitical uncertainty. The supply-demand imbalances in the Berlin rental market are currently at their widest in recent memory, leading to record market rents.

“Our strategy of increasing asset sales, reducing debt and, ultimately, returning excess capital to investors from disposals remains the Company’s priority. There now exists a significant gap in in the Berlin residential market between the average per square metre value of an apartment as a rental unit and the resale value per square metre of an apartment to a private buyer as a condominium.  Reflecting this, the Company now intends to place a greater emphasis on condominium sales.”