Phoenix Spree revalues Berlin holdings despite rent freeze threat

London-listed Berlin residential specialist Phoenix Spree Deutschland issued a trading update recently, and marked up the value of its residential holdings, while at the same time re-iterating its view that the Berlin Mietendeckel, or five-year rent freeze, was likely to be overturned in law.

Despite the threat that the law will NOT be overturned, along with the coronavirus pandemic, the portfolio’s net asset value (NAV) nonetheless rose 2.3% in the first half of the year with no ‘material uncertainty’ clauses, common on many UK real estate investment trusts, placed on any of its properties.  

The company’s surveyors have also factored into valuations a five-year lifespan for the Mietendeckel, although the board is confident the proposed controls will be ‘successfully challenged’ in court.

As at 30th June 2020, the company’s portfolio was valued at €746.7 million (31st December 2019: €730.2 million), representing a 2.3% increase over the six-month period. On a like-for-like basis, excluding the impact of disposals, the portfolio value increased by 2.6% in the six-month period, with the increase reflecting the combined impact of modest yield compression, supported by a decline in interest rates, and the active management of the portfolio.

The June valuation represents an average value per square metre of €3,839 (31st December 2019: €3,741), a gross fully-occupied yield of 2.8% (31 December 2019: 2.9%) and a net yield, using EPRA methodology, of 2.4% (31st December 2019: 2.3%). Included within the company’s portfolio are 6 properties valued as condominiums, with an aggregate value of €33.0 million (31st December 2019: 5 properties, aggregate value €26.5 million).

The company said in its statement that the impact of the COVID-19 pandemic on rent collection levels has been limited with rent collection in the six months to 30 June 2020 broadly in line with the six months to 30 June 2019. Residential rent collection has remained particularly resilient, with 99.6% of rent collected during the first six months of 2020.  Germany's Hartz IV welfare programme includes help for rental payments in instances of financial hardship and is available to tenants impacted by the COVID-19 outbreak.

For its handful of tenants paying commercial rents (11.6% of total rental income), some did experience difficulties, but during the first six months of the financial year, 96.2 % of commercial rents had been collected, compared with 99.7% during the same period of 2019.

The company’s board addressed the issue of the Mietendeckel and expressed the view that there is a high likelihood it will be successfully challenged in law. It said new legislation raises concerns about whether the state of Berlin is competent to pass local rent legislation, as the provisions substantially deviate from existing German federal law. 

Also, on the 16th July, a similar move to introduce a six-year rent freeze was blocked by the Bavarian Constitutional Court. The ruling stated that a federal state may not issue its own regulations that contradict federal rental laws. This ruling is significant in the context of the Berlin Mietendeckel, as the basic legal arguments against the imposition of a rent cap are the same.

However, with the Mietendeckel actually currently in force, the company said it would be monitoring capex carefully, while it had definitely cancelled a number of renovation and modernization projects it would have done in the absence of the rent freeze.

Last year the company introduced a new flexible condominium strategy, involving splitting its buildings into individual condos which can be sold, similar to becoming the freeholder in a block of leasehold apartments. This gives the company the flexibility to exit from individual apartments if the market is just not there, or rental becomes too unattractive. 

The company teamed up last year with Accentro Real Estate AG, a leading German condominium sales platform, which it said should accelerate condominium sales over the next two years. This arrangement guarantees a certain minimum revenue for Phoenix Spree Deutschland, likely to be at least €4.5m in the second half of 2020. Of the company’s holdings, 63% are registered as condominiums, with applications for a further 22% of the portfolio underway.

Robert Hingley, the chairman of Phoenix Spree Deutschland commented: "I am pleased that, to date at least, and, despite a reduced level of market activity,  COVID-19 and the Mietendeckel have not had a significant impact on market values. Our condominium potential continues to underpin our portfolio value and we are focused on maintaining our strategic optionality pending clarification of the legality of the Mietendeckel."