London-listed Berlin residential specialist Phoenix Spree Deutschland is buying back 10% of its own shares to take advantage of a weaker share price and a stronger financial position after it locked in a new loan agreement in September.
Along with most of its peers with substantial exposure to the Berlin residential market, Phoenix Spree saw its share price dive over the summer as the Berlin Senate’s plans to radically cap rent increases in the German capital took shape. The share price has lost about a quarter of its value between the Senate announcing its plans and last week’s enactment of the new regulations.
The company has admitted that further growth in rental income would be difficult to achieve. However, it said it was well-placed to respond to the regulatory changes, with a new flexible condominium strategy, 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.
This involves 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, said the company’s fund manager Mike Hilton.
‘We are expecting that one of the results from rent control will be an increase in owner occupiers,’ said Hilton. ‘Just 15% of people in Berlin own and we expect that to increase because of the limited choice in the rental market. With mortgage rates as low as they are it is cheaper to buy than rent.’
Hilton said it was looking again at ‘the commuter area that will benefit from the trend of a shortage in housing’ caused by rent controls, although the company had previously quit buying outside the city to concentrate on buying properties in Berlin itself.
Although property transactions had dropped in response to the new law, Hilton said he did not anticipate a ‘correction’ in prices believing low levels of debt meant this was ‘not a distressed market’.
On the financing front, in September 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.
Phoenix Spree said: "The completion of a new €240 million term loan on improved terms provides additional liquidity to take advantage of opportunities arising from market disruption caused by changes to the rent laws, as well as weaknesses in the share price."
The company said liquidity was also boosted by a rise in condominium sales, ahead of its book value at the end of the interim period.
Phoenix Spree said the average price per square metre was €4,685, 22% higher than the June 30th book value. A total of 10 units have been sold for an aggregate price of €3.8 million, which was also 52% higher than the €2.5 million it secured from four condominium sales in the first half.
Chairman Robert Hingley said, "Our ability to convert units to be sold at a premium to book value underpins the strategic optionality and value within the portfolio. We are also pleased that our refinancing has allowed us to take advantage quickly of the share price weakness and start buying back shares at a significant discount to net asset value."
