Phoenix Spree Deutschland sees difficult rental growth path ahead

The UK-listed Phoenix Spree Deutschland, which specializes in investing in Berlin residential property, presented half-year results this week which showed a drop in profit and rental income. The company maintained its interim dividend, while pointedly commenting on the clouding of prospects for the sector in view of imminent legislation freezing rent increases in the German capital for the coming five years.

In numbers, Phoenix Spree’s pre-tax profit for the six months to June fell by 38% to €12.0m from €19.4m the year before, mainly due to a higher performance fee due to an advisor and a doubled net finance charge of €10.6m. Gross rental income dropped by 9.5% to €10.8m from €11.9m the prior year.

The company’s EPRA net asset value per share as at June 30 rose by 12% to €4.73 from €4.23 the same date the year before, as the company's investment portfolio was valued at €665.2 million, up 14% from €583.7 million the prior year. The company declared an interim dividend of 2.35 cents per share, in line with the year before.

Looking ahead, Phoenix Spree said despite the upcoming changes to rental regulations in Germany, it does not expect a material impact on rental income in 2020 if implemented.

However, it did admit that further growth in rental income would become difficult to achieve.

The company said it was well-placed to respond to regulatory changes, with a new flexible condominium strategy (relating to the legal definition of ‘condominium’ for the purpose of the new rental laws), along with a new agreement with Accentro Real Estate AG, a leading German condominium sales platform, which should accelerate condominium sales over the next two years.

Earlier this month Phoenix Spree completed a new €240m term loan facility with Natixis Pfandbriefbank. The loan comprises two tranches, the first for €190m and the other for €50m, and is intended to improve Phoenix Spree's loan-to-value (LTV), to bring it closer to the company's stated goal in the listing prospectus, the firm said.

The €190m tranche covers debts of around €119m, with a seven-year, interest-only loan. Following drawdown, the company's LTV will increase from 28.6% to 39.2%, while the overall cost of financing will decrease from 2.19% to 2.13%. The weighted average financing term remains unchanged at around 7 years. The remainder of the facility serves to pursue other market opportunities, Phoenix Spree said.

On the interim figures, chairman Robert Hingley said in his statement, "I am pleased with the continued strong performance in the first half of this year. However, the new rental laws proposed by the Berlin Senate have created significant market uncertainty which has been reflected in Phoenix Spree's share price. Although there are serious concerns regarding their legality and constitutionality, we have taken steps to mitigate any short-term impact on the portfolio while ensuring we maintain our strategic optionality in the event the proposals are found to be unconstitutional."

The shares finished the week just shy of GBP 300p, having lost about a quarter of their value since the summer when the announcements about rental freezing and capping struck the German residential listed sector hard.