Pure-play Berlin resi investor Phoenix Spree sees valuation rebound

We studied with interest an update by London-listed Phoenix Spree Deutschland (PSD), which can be viewed as a pure-play on Berlin residential housing. The share price has been in solid recovery mode since plumbing the depths at the onset of the pandemic last year as investors take a more positive view of Berlin housing.

And investors have clearly been anticipating that the company was poised for a rebound should the Mietendeckel in Berlin be overthrown, which it subsequently was. A closer look at PSD's figures, not least because of the implications of the Baulandmobilisierungsgesetz, which we report on in this issue, is warranted.

Before the Mietendeckel ruling, PSD had estimated that the financial impact of the Mietendeckel, which became effective on 23rd 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31 December 2020 was in the region of 4% of gross rental income and that, in the event that the Mietendeckel was not repealed, the reduction of annualised net rental income would be up to 20% in 2021.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 now expects that the negative impact on rental income will be reversed. Its interim results are expected on September 24th.

PSD's update highlights how the Berlin market has stabilised in the first half despite subdued transaction levels. Its own portfolio was valued by JLL at €777.7m as of June 30th, up slightly on December's figure of €768.3m, a small rise of 1.2%. However, with a number of disposals, the like-for-like was up 2.5%, reflecting an increase in market rents post-Mietendeckel and further progress in condominium splitting.

PSD said it estimated that the amount of back-dated rent which could be claimed from tenants is about €2.1 million. As at 3rd August, more than 89% per cent of this amount had already been collected. PDS said it will continue to work on a case-by-case basis with any tenants suffering hardship as it collects the remainder of back-dated rents due.

Given the current controversy surrounding conversions of rental apartments into condominums, it's obviously a potentially tricky area for subject for PSD, which they seem to be navigating successfully so far. Nearly 74% of the company's portfolio is registered as condominiums, with a further 11% in application, with more than half of those in the final stages of the process.

During the first half of this year, 13 condominiums units were notarised for sale for an aggregate value of €4.3 million, representing a 45.1% increase versus last year's €3.0 million. The average achieved notarised value per sqm for the residential units was €4,821, representing a 25.4% per cent premium to book value and a 15.9% premium to the average Berlin residential portfolio value.

Notarisations in Q2 were impacted by COVID restriction which made viewing of occupied apartments more difficult, while the Mietendeckel caused record low vacancy rates, reducing the number of units available for sale. PSD said that as the effects of the Mietendeckel unwind, it expects the pace of condominium sales to recover.

Robert Hingley, PSD's chairman, said: "The first six months of the financial year were characterised by significant market disruption caused by the combined effects of COVID-19, the Mietendeckel and its subsequent reversal. It is therefore pleasing that the Portfolio was able to deliver further valuation gains.

"Berlin market dynamics remain attractive, particularly in the light of the recent legal ruling against the Mietendeckel, and affordability comparisons with other German cities are still favourable. It is expected that Berlin demographic trends, particularly net inward migration, will further strengthen when restrictions associated with COVID-19 are permanently removed, providing further support for PSD's reversionary strategies which have historically served investors well."