Company Announcements

Phoenix Spree Deutschland Limited 
(the "Company" or "PSD")

 

Financial results for the year ended 31 December 2021

 

Strong performance with continued NAV growth and positive long-term trends

 

Phoenix Spree Deutschland Limited (LSE: PSDL.LN), the UK listed investment company specialising in Berlin residential real estate, announces its full year audited results for the financial year ended 31 December 2021. 

 

Financial Highlights

 

	Year to 31 December 2021	Year to 31 December 2020	2021 v 2020 % change
Income Statement
Gross rental income (€m)	25.8	23.9	7.9
Profit before tax (€m)	45.3	37.9	19.4
Dividend (€ cents (£ pence))	7.50 (6.27)	7.50 (6.59)	-
Balance Sheet
Portfolio valuation (€m)	801.5	768.3	4.3
Like-for-like valuation growth (%)	6.3	6.3	-
IFRS NAV per share (€)	4.74	4.48	5.8
IFRS NAV per share (£)1	3.98	4.04	(1.5)
EPRA NTA per share (€ cents)2	5.65	5.28	7.0
EPRA NTA per share (£ pence)1,2	4.74	4.76	(0.4)
EPRA NTA2 per share total return (ˆ%)	8.4	8.8	-
Net LTV3 (%)	34.7	33.1	-
Operational Statistics
Portfolio valuation per sqm (€)	4,225	3,977	6.2
Annual like-for-like rent per sqm growth (%)	3.9	(15.8)	-
EPRA vacancy (%)	3.1	2.1	-
Condominium sales notarised (€m)	15.2	14.6	4.1

 

^{1 - Calculated at FX rate GBP/EUR 1:1.191 (2020: GBP/EUR 1:1.11 )
2 - New EPRA Best Practice guidelines from October 2019 introduced three new measures of net asset value: EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV). EPRA NTA is calculated on the same basis as EPRA NAV, and is the most relevant measure for PSD and therefore now acts as the primary measure of net asset value. Further information can be found on in this report.
3 - Net LTV uses nominal loan balances (note 22) rather than the loan balances on the Consolidated Statement of Financial Position which include Capitalised Finance Arrangement Fees.}

 

 

 

 

EPRA NTA growth underpinned by significant condominium potential

·    Record condominium notarisations of €15.2 million (37 condominium units) during the year to 31 December 2021.

·    Average achieved value per sqm of €5,031 for residential units, a 21.7 per cent premium to 31 December 2020 book value of each property.

·    Over 75 per cent of Berlin portfolio legally split into condominiums as at 31 December 2021, with a further 10 per cent in application.

 

New loan facility and refinancing, resumption of acquisitions

·    New €60 million loan facility agreed with Natixis and announced on 25 January 2022, offering flexibility to pursue potential further acquisitions as well as continued investment into existing portfolio.

·    Successful refinancing of €49.7 million of Berliner Sparkasse debt, releasing a further €14.9 million of cash.

·    Net LTV remains conservative at 34.7 per cent (31 December 2020: 33.1 per cent).

·    First acquisition since removal of Mietendeckel announced on 21 March 2022 - 17 semi-detached, residential properties in Berlin beltway as a new build, at a purchase price €18.5 million and projected fully occupied rental income of €652,670 per annum.

 

Continued value delivered through share buy-backs and dividend

·    During the financial year ended 31 December 2021, the Company bought back a further 4,514,788 ordinary shares, representing 4.5 per cent of the ordinary share capital, for a total consideration of £17.7 million.

·    Average price paid represents a 17.8 per cent discount to the EPRA net tangible assets per share as at 31 December 2020.

·    Unchanged annual final dividend of €5.15 cents. Dividend increased or maintained since listing in June 2015.

 

Continued strong demand for Berlin residential property

·    New leases in Berlin signed at an average 33.8 per cent premium to passing rents.

·    240 new leases signed during the year, with the average rent of all new lettings increasing to €12.2 per sqm, a 4.4 per cent increase on the prior year.

·    €9.5 million invested across the Portfolio (31 December 2020: €4.2m), allowing the Company to continue improving the quality of accommodation for its tenants.

·    Collection of backdated Mietendeckel rents progressing well; as at 31 December 2021, in excess of 95 per cent had already been collected.

·    A number of furnished apartments made available for refugees impacted by the Ukraine crisis for a rent-free period.

 

Outlook: Long-term Berlin demographic trends expected to remain positive

·    Decreased availability of rental stock, exacerbated by the recently removed Mietendeckel, continues to support market rents and offers significant potential in surrounding 'Beltway' area.

·    Net inward migration expected to strengthen when restrictions associated with COVID-19 are permanently removed.

·    Potential for further valuation creation through condominium projects and sales. Condominium pricing expected to remain strong, particularly for centrally located Berlin apartments.

·    Significant reversionary potential underpins future rental growth - increased capital expenditure expected to drive acceleration in reversionary rental income growth.

·    New debt facility provides scope for further acquisitions, subject to strict acquisition criteria and benchmarked against alternative of share buybacks.

 

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"I am pleased that the Company has been able to deliver another strong performance with continued growth in property values and overall net asset value. The reversionary potential that existed within the Portfolio before the introduction of the Mietendeckel is again evident following its withdrawal, and the value within our Portfolio has been further underpinned by our ongoing ability to sell condominiums at a premium to book value.

Our new debt facility and refinancing has strengthened our balance sheet strength and liquidity, and it is pleasing that we have successfully completed our first acquisition since the removal of the Mietendeckel.

We are confident in the ongoing strength of the Berlin residential market and remain focused on continuing to deliver value to shareholders through further investment in our portfolio growth and quality.

Our thoughts are with those impacted directly and indirectly by the events that are unfolding in Ukraine and I am pleased to announce that PSD has made available a number of furnished apartments on a rent-free basis for refugees affected by the crisis. Although PSD has no direct exposure, we are prepared for the possible secondary effects in the form of higher energy prices and impact of inflation and continue to prioritise the wellbeing of our tenants."

 

Annual Report and Accounts

The full Annual Report and Accounts will shortly be available to download from the Company's webpage www.phoenixspree.com. All page references in this announcement refer to page numbers in the Annual Report and Accounts.

 

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism, and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

 

For further information, please contact:                                          

Phoenix Spree Deutschland Limited Stuart Young	+44 (0)20 3937 8760
Numis Securities Limited (Corporate Broker) David Benda	+44 (0)20 3100 2222
Tulchan Communications (Financial PR) Elizabeth Snow Oliver Norgate	+44 (0)20 7353 4200

 

CHAIRMAN'S STATEMENT

I am pleased to report that PSD has delivered another strong performance. As at 31 December 2021, the Portfolio was valued at €801.5 million by Jones Lang LaSalle GmbH, a like-for-like annual increase of 6.3 per cent. The Euro EPRA NTA total return per share was 8.4 per cent over the year and the sterling return was 1.0 per cent, reflecting a rise in the value of sterling. The Company has additionally delivered record condominium sales and made further progress in condominium splitting. 

 

This result has been achieved despite the full implementation of the Berlin rent controls (the "Mietendeckel"), subsequent reversal in April 2021 and the ongoing impact that COVID-19 has had on the German economy.

 

Although the Mietendeckel did not cause transaction values in the Berlin residential property market to fall during the period in which it was in place, equity markets attached a significant risk premium to the valuation of listed Berlin residential property businesses. The removal of the Mietendeckel and the uncertainty it created, combined with our share buyback programme (at an average discount to 2020 yearend NAV of 17.8 per cent) and the notarisation of condominiums at a premium to prevailing book value, has underpinned a positive share price performance for the Company. During the financial year, PSD's share price significantly outperformed both the UK FTSE All-Share index and its listed German residential peers.

 

Further details relating to the Company's financial performance can be found in the Report of the Property Advisor.

 

Working with our stakeholders

The Board recognises the importance of operating with integrity, transparency and clear accountability towards its shareholders, tenants and other key stakeholders. We understand that being a responsible Company, balancing the different interests of our stakeholders and addressing our environmental and social impacts, is intrinsically linked to the success and sustainability of our business.

 

To this end, our 'Better Futures' Corporate Responsibility ('CR') Plan provides a framework to monitor existing activities better. It has five key pillars that have been integrated throughout our business operations: Protecting our Environment; Respecting People; Valuing our Tenants; Investing in our Communities and Governance.

 

During what has been a period of significant disruption caused by the dual impacts of the Mietendeckel and COVID-19, the Company's overriding priority has been the health and wellbeing of its tenants, work colleagues and wider stakeholders. Where necessary, the Company continues to support its tenants, both residential and commercial, through agreeing, on a case-by-case basis, the payment of monthly rents or deferring rental payments. The Company will continue to carefully monitor any future impacts that COVID-19 might have on our stakeholders and is committed to acting responsibly at all times.

 

In recent weeks, we have witnessed scenes of unimaginable suffering in Ukraine. Western European nations, including Germany, are already preparing for what is likely to be the largest movement of refugees since the end of the Second World War. In recognition of this, I am pleased to announce that our Board has taken the decision to make available to Ukrainian refugees a number of fully furnished apartments from the PSD portfolio for a rent-free period.

 

Improving our tenanted accommodation

The Company takes its responsibilities to its tenants extremely seriously and, where viable, invests heavily in improvements to its properties. Following the removal of the Mietendeckel, which specified rent levels well below free market levels, the Company has been able to resume its historically high level of investment into the Portfolio. During 2021, the Company invested over 36 per cent of its gross revenue on improvement programmes, and it is anticipated that this high level of investment will continue during the year ahead.

Governance and compliance

The Board recognises the importance of a strong corporate governance culture and maintains the principles of good corporate governance, as set out in the Association of Investment Companies Code of Corporate Governance ("AIC Code"). Further details of how the Company has applied the provisions of, and complied with, the AIC Code can be found in the Directors' Report.

 

During the year, the Company announced that Monique O'Keefe has notified the Board of her intention to step down as Senior Independent Director in order to take up a senior executive position at another company. Monique has made an exceptional contribution in her five years as a Director and the PSD Board would like to wish her every success in her new role.

 

As previously announced, Isabel Robins joined the Board of PSD as a non-executive Director with effect from 14 March 2022.  Mrs Robins has over 23 years' experience of complex offshore real estate structures, encompassing a broad range of property funds, investments, and developments. Her real estate experience and insight will add a valuable perspective to complement and enhance the skill set of the Board.

 

Our charitable initiatives

PSD takes a strategic approach to its charitable giving which is guided by our Community Investment Policy and focuses on supporting charities where there is a connection with either 'homelessness' or 'families.' Since February 2019, we have provided support to a women's refuge (The Intercultural Initiative) that helps women affected by domestic violence, providing emergency shelter, advice and counselling to the women and their children. I am pleased to report that, during the first half of 2021, PSD committed to supporting an additional Berlin charity, Laughing Hearts. This charity supports children living in children's homes and social care.

 

Protecting our environment

The Board believes that taking a sustainable and socially responsible approach to our business delivers long-term success and benefits for all of our stakeholders. We recognise that the nature of our business has environmental and social impacts and that we have a responsibility to consider and minimise these impacts, where possible. As a member of EPRA, we want to contribute to greater transparency in reporting and so, in 2020, we strengthened our commitment to delivering against our environmental and social impacts by introducing EPRA's Sustainability Best Practices Recommendations and capturing our ESG measurements within their framework.

 

I am therefore delighted to report that this commitment has been recognised in the EPRA Sustainability Awards 2021, with PSD receiving both a Silver and Most Improved award in recognition of the Company's commitment to best practice in its reporting. This recognition further encourages us to continue to approach the future in a consistent, ethical, safe and environmentally friendly way.

Outlook

We are deeply concerned at the tragic humanitarian situation in Ukraine and our thoughts remain with all those affected at this time. Although PSD has no direct exposure, we are prepared for the possible secondary effects in the form of higher energy prices, inflationary pressures and the impact this may have on the outlook for economic growth. At all times, we will continue to prioritise the wellbeing of our tenants and broader stakeholders.  

The Company is well placed to resume its reversionary rental strategy and the removal of the Mietendeckel has allowed the Company to restore the level of investment into the Portfolio to pre-Mietendeckel levels. The fact that new lettings in Berlin during 2021 were signed at an average premium of 33.8 per cent to passing rents should underpin rental growth in the medium term, irrespective of market rental growth.

Uniquely among its listed peers, over 75 per cent of the Company's Berlin portfolio has already been legally split into condominiums. PSD will continue with its strategy of crystallising condominium reversionary value within the Portfolio through the selective sale of individual units as condominiums at a premium to book value.

Our recently completed loan facility and refinancing provide scope for further potential acquisitions in the event that suitable opportunities can be sourced. Our acquisition criteria remain strict and all potential opportunities will continue to be benchmarked against the alternative of share buy-backs.

Berlin market dynamics remain positive and affordability comparisons with other German cities are still favourable. Moreover, it is expected that Berlin demographic trends, particularly net inward migration, will further strengthen when restrictions associated with COVID-19 are permanently removed. This will provide further support for PSD's reversionary strategy.

 

REPORT OF THE PROPERTY ADVISOR

The Property Advisor's priority throughout 2021 has been to protect and support the Company's tenants, colleagues and communities throughout the period of disruption caused by the COVID-19 pandemic. Since the removal of the Berlin rent controls ("the Mietendeckel"), but subject to property and tenancy regulations which still apply, the Property Advisor has also been proactively realigning the Company's portfolio and strategy to reflect the fact that rents can once again be set at free market levels.

 

Federal Court rules against the legality of the Berlin Mietendeckel in April 2021

Regulations introduced by the Berlin Red-Red-Green coalition during 2020 to cap or reduce rents for private non-subsidised rental properties aimed to prevent rents being set at free market levels. This was despite the fact that Germany already had in place, at the Federal level, tenant protections which ranked amongst the strongest in the Western world. 

 

The Company and its legal advisors had always been firmly of the opinion that the Mietendeckel was unconstitutional, and that State law could not supersede Federal law, and, on 15 April 2021, the German Federal Constitutional Court ruled that the Mietendeckel was unlawful and thus void.

The Mietendeckel presented challenges to the Company's rental business model, which had traditionally relied on re-letting at market rates to justify the considerable investment that significantly improves the standard of accommodation available to our tenants. During the period in which the Mietendeckel was in place, the Company reduced its programme of apartment renovations and modernisations on the basis that this investment could not be recouped in the form of rent uplift on re-letting. 

The Portfolio continues to display significant reversionary potential, as evidenced by the fact that, during the current financial year, new lettings in Berlin were signed at an average premium of 33.8 per cent to passing rents. Reflecting this, and the fact that the Mietendeckel is no longer in place, the Company has been able to resume its extensive capital expenditure programme.

Prior to the Federal Court ruling, all rental agreements had been structured to allow for the back-payment of higher rents now legally due for the period during which the Mietendeckel was in place. Tenants had been advised by the Berlin government and tenant organizations to set aside appropriate reserves for this eventuality.

 

The Company estimated that the amount of back-dated rent which could be claimed from tenants is approximately €2.1 million. As at 31 December 2021, in excess of 95 per cent of this amount had already been collected. The Company will continue to work constructively with any tenants suffering hardship as it collects the remainder of back-dated rents due.

 

 

 

 

 

 

Financial highlights for the twelve-month period to 31 December 2021

 

	€ million (unless otherwise stated)	Year to	Year to
		31-Dec-21	31-Dec-20
Gross rental income		25.8	23.9
Investment property fair value gain		38.0	41.5
Profit before tax (PBT)		45.3	37.9
Reported EPS (€)		0.39	0.31
Investment property value		801.5	768.3
Net debt (Nominal balances)1		278.0	254.4
Net LTV (%)		34.7	33.1
IFRS NAV per share (€)		4.74	4.48
IFRS NAV per share (£)2		3.98	4.04
EPRA NTA per share (€)3		5.65	5.28
EPRA NTA per share (£)2		4.74	4.76
Dividend per share (€ cents)		7.5	7.5
Dividend per share (£ pence)		6.27	6.59
€ EPRA NTA per share total return for period (%)		8.4	8.8
£ EPRA NTA per share total return for period (%)2		1.0	16.0

^{1 - Nominal loan balances as per note 22 rather than the loan balances on the Consolidated Statement of Financial Position which consider Capitalised Finance Arrangement Fees in the balance as per IAS 23.}

^{2 - Calculated at FX rate GBP/EUR 1:1.191 (2020: GBP/EUR 1:1.11 )}

^{3 - Further EPRA Net Asset Measures can be found in note 30.}

 

Financial results 

Revenue for the financial year to 31 December 2021 was €25.8 million (31 December 2020: €23.9 million). Profit before taxation was €45.3 million (31 December 2020: €37.9 million) which was positively affected by a revaluation gain of €38.0 million (31 December 2020: €41.5 million).

 

The year-on-year rise in profit before tax is driven by a gain on the interest swaps during the year, offset by a smaller gain on disposal of condominiums and a charge to the performance fee due to the Property Advisor, whereas the prior year fee was a credit.

 

Property expenses fell over the year, reflecting increased service charge recoveries on the acquisition in Brandenburg which were not present in the prior year. Administration costs and legal and professional fees remained flat over the year. Reported earnings per share for the period were 0.39 cents (31 December 2020: 0.31 cents). 

  

Reported EPRA NTA per share rose by 7.0 per cent in the period to €5.65 (£4.74) (31 December 2020: €5.28 (£4.76)). After accounting for dividends paid during 2021 of 7.5 cents (6.43 pence), which were paid in May and October 2021, the Euro EPRA NTA total return for the period was 8.4 per cent (2020: 8.8 per cent). The sterling EPRA NAV per share total return was 1.0 per cent (31 December 2020: 16.0 per cent), reflecting the strengthening of sterling versus the Euro during the financial year.

 

 

Dividend

The Board is pleased to declare an unchanged final dividend of EUR 5.15 cents per share (GBP 4.29 pence per share) (31 December 2020: EUR 5.15 cents, GBP 4.45 pence). The dividend is expected to be paid on or around 9 June 2022 to shareholders on the register at close of business on 13 May 2022, with an ex-dividend date of 12 May 2022. Taking into account the interim dividend paid in October 2021, the total dividend for the financial year to 31 December 2021 is EUR 7.5 cents per share (GBP 6.27 pence per share) (31 December 2020: EUR 7.5 cents, GBP 6.59 pence).

 

Since listing on the London Stock Exchange in June 2015 to 31 December 2021, including the announced dividend for 2021 and bought-back shares held in treasury, €85.4 million has been returned to shareholders. The dividend is paid from operating cash flows, including the disposal proceeds from condominium projects, and the Company will seek to continue to provide its shareholders with a secure dividend over the medium term, subject to the distribution requirements for Non-Mainstream Pooled Investments, and after full consideration of any ongoing impact associated with COVID-19 and the geopolitical and economic impact of the war in Ukraine.

 

Share buybacks at a discount to EPRA NTA

During the financial year ended 31 December 2021, the Company bought back a further 4,514,788 ordinary shares, representing 4.5 per cent of the ordinary share capital, for a total consideration of £17.7 million. The average price paid represents a 17.8 per cent discount to EPRA NTA per share as at 31 December 2020.

The capital made available for the buyback programme has been funded through a combination of existing cash balances, refinancing and condominium sale proceeds. This allocation has been achieved without compromising the organic growth prospects of the company, which are based on reversionary re-letting, the preparation and sale of new condominiums and the construction of new attic living space.

 

Table: Portfolio valuation and breakdown

	31 December 2021	31 December 2020
Total sqm ('000)	189.7	193.2
Valuation (€m)	801.5	768.3
Like-for-like valuation growth (%)	6.3	6.3
Value per sqm (€)	4,225	3,977
Fully occupied gross yield (%)	2.8	2.4
Number of buildings	97	98
Residential units	2,569	2,618
Commercial units	138	139
Total units	2,707	2,757

 

 

Like-for-like increase in Portfolio Valuation of 6.3 per cent

The Berlin residential property market has remained resilient during the financial year, with transaction volumes and investment demand observed by Jones Lang LaSalle GmbH ("JLL"), the Company's external valuers, recovering significantly following a stabilising political backdrop, namely the removal of the Mietendeckel and the completion of the German Federal Elections.

 

JLL has conducted a full RICS Red Book property-by-property analysis, tied back to comparable transactions in the Berlin market, and have provided a portfolio valuation on this basis.

As at 31 December 2021, the total Portfolio was valued at €801.5 million by JLL, an increase of 4.3% over the twelve-month period (31 December 2020: €768.3 million).

On a like-for-like basis, after adjusting for the impact of acquisitions net of disposals, the Portfolio valuation increased by 6.3 per cent in the year to 31 December 2021, and by 3.7 per cent in the second half of the financial year. This increase reflects the combined impact of increased market rents, improvement in the micro locations of certain assets, and the further progress of splitting certain assets at the land registry.

The valuation as at 31 December 2021 represents an average value per square metre of €4,225 (31 December 2020: €3,977) and a gross fully occupied yield of 2.8 per cent (31 December 2020: 2.4 per cent). Included within the Portfolio are eight properties valued as condominiums with an aggregate value of €38.8 million (31 December 2020: nine properties; €52.4 million).

Table:  Rental income and vacancy rate

	31 Dec 2021	31 Dec 2020
Total sqm ('000)	189.7	193.2
Annualised Rental Income (€m)	20.3	20.3
Gross in place rent per sqm (€)	9.6	9.3
Like-for-like rent per sqm growth (%)	3.9	4.1
Vacancy %	8.4	6.8
EPRA Vacancy %	3.1	2.1

 

Like-for-like rental income per square metre growth of 3.9 per cent

After considering the impact of acquisitions and disposals, like-for-like rental income per square metre grew 3.9 per cent compared with 31 December 2020. Like-for-like rental income grew 1.3 per cent over the same period.

 

Gross in-place rent was €9.6 per sqm as at 31 December 2021, an increase of 3.7 per cent compared with 31 December 2020.

 

Limited impact from COVID-19 on rent collection

The impact of COVID-19 on rent collection continues to be limited, with over 97 per cent of all residential and commercial rents collected in 2021, in line with rent collections in 2020. Rent collection during the months of January and February 2022 has also remained stable.

The Company continues to monitor carefully further developments concerning the COVID-19 pandemic and will continue to work with tenants in arrears because of COVID-19 by agreeing workable repayment schedules.

EPRA vacancy remains low

Reported vacancy at 31 December 2021 was 8.4 per cent (31 December 2020: 6.8 per cent). On an EPRA basis, which adjusts for units undergoing development, the vacancy rate was 3.1 per cent (31 December 2020: 2.1 per cent).

 

The rise in EPRA vacancy versus the half year stage (30 June 2021: 1.3 per cent) reflects a significant increase in capital expenditure during the second half of the year following the removal of the Mietendeckel which, in turn, has resulted in a higher number of newly modernised apartments returning to market for re-let.

 

Table: EPRA Net Initial Yield (NIY) and "Topped up" Net Initial Yield (NIY)

^{All figures in € million unless otherwise stated}

	2021	2020
Investment property	801.5	768.3
Reduction for NCI share and property under development	(12.8)	(11.3)
Completed property portfolio	788.7	757.0
Estimated purchasers' costs	65.1	62.7
Gross up completed property portfolio valuation	853.8	819.7
Annualised cash passing collected rental income	20.3	16.4
Property outgoings	(3.4)	(2.8)
Annualised collected net rents	16.8	13.6
Expected increase from Mietendeckel rent cap expiry1	-	3.2
"Topped up" Annualised net rents	16.8	16.8
EPRA NIY (%)	2.0	1.7
EPRA "Topped Up" NIY (%)	2.0	2.1

^{1 - Under EPRA guidelines, legally allowed lease incentives and contracted step rents are included in the "Topped up" yield calculation, since the Mietendeckel was declared unconstitutional in April 2021, the difference between annualised contracted rents and annualised collected rents for 2020 has been included in this line.}

 

Berlin reversionary re-letting premium of 33.8 per cent

During the year to 31 December 2021, 240 new leases were signed, representing a letting rate of approximately 10.2 per cent of occupied units. The average rent achieved on all new lettings was €12.2 per sqm, a 4.4 per cent increase on the prior year, and an average premium of 26.8 per cent to passing rents.  This compares to a 25.2 per cent premium in the period to 31 December 2020.

 

The reversionary premium is negatively impacted by the inclusion of re-lettings from the acquisition in Brandenburg in 2021, where rents are lower than those achieved in central Berlin. Looking solely at the Berlin portfolio, which represents 91.4 per cent of total lettable space, the reversionary premium achieved was 33.8 per cent, in line with the prior year (year to 31 December 2020: 33.9 per cent).  

 

Portfolio investment

During the year to 31 December 2021, a total of €9.5 million was invested across the Portfolio (31 December 2020: €4.2 million). These items are recorded as capital expenditure in the financial statements. A further €1.7 million (31 December 2020: €1.6 million) was spent on maintaining the assets and is expensed through profit or loss. The year-on-year increase in investment reflects the intensification in renovation activity resulting from the repeal of the Mietendeckel in April 2021, alongside increased renovation expenditure on the asset in Brandenburg and further work on bringing assets in a position to be sold as condominiums .

 

Table: EPRA Capital Expenditure

^{All figures in € ,000 unless otherwise stated}

	31 December 2021	31 December 2020
Acquisitions	0	0
Like-for-like portfolio	4,674	3,645
Development	4,406	274
Other	397	252
Total Capital Expenditure	9,477	4,171

 

Acquisition of portfolio of properties under construction for €18.5 million 

On 21 March 2022, the Company announced that it has exchanged contracts to acquire a portfolio of 17 new-build, semi-detached, residential properties (34 houses) for a purchase price of €18.5 million. This new-build has been forward-funded with construction expected to complete in the second half of 2024.  It marks an important milestone for the Company, representing the first acquisition completed post the withdrawal of the Mietendeckel.  

 

The price paid of €4,323 per sqm represents an estimated prospective gross yield of 3.5 per cent and the projected fully occupied rental income generated by the property is €652,670 per annum, representing 3.2 per cent of the Portfolio gross in-place rent as at 31 December 2021.  

 

The acquisition will be financed using the new loan facility recently agreed with Natixis, announced in January 2022.

 

The Company will continue to review future potential acquisition opportunities. These will be pursued only in instances where they meet the Company's strict investment return criteria and compare favourably against the alternative of share buy-backs.  

 

Record condominium notarisations at an 18.3 per cent premium to book value

PSD's condominium strategy involves the division and resale of selected apartment blocks as private units. This is subject to regulatory approval and involves the legal splitting of the freeholds in properties that have been identified as being suitable for condominium conversion.  

 

Condominium price growth across all major German cities has remained robust during 2021, having been largely unaffected by COVID-19. Industry data shows that average prices in Berlin increased by approximately 10 per cent versus the same period in 2020.

 

In total, the Company notarised for sale condominiums with an aggregate value of €15.2 million during the year to 31 December 2021, a record high and a 4.1 per cent increase compared with the prior year. A total of 37 residential and commercial condominium units were notarised (31 December 2020: 41 units) with an average achieved notarised value per sqm of €4,988, representing a 18.3 per cent premium to 31 December 2020 assessed book value of each property. Residential condominiums were notarised at a 21.7 per cent premium to 31 December 2020 book value.

Condominium sales for the second half of the financial year were particularly strong, with 24 condominium units being notarised for an aggregate value of €10.9 million. These sales represent a significant increase compared with the first half of the financial year, during which 13 residential units were notarised for sale, with an aggregate value of €4.3 million.

As at 31 December 2021, over 75 per cent of the Berlin portfolio had been legally split into condominiums, providing opportunities for the implementation of further condominium sales projects where appropriate. A further 10 per cent are in application, over half of which are in the final stages of the process.

The Company notes that new Federal Government legislation is likely to limit the ability of landlords to split their properties into condominiums in the future. Although this legislation is not retrospective and does not impact assets that have already been split into condominiums, it does have the potential to impact applications which are currently in process. These measures will inevitably increase the scarcity of condominiums available for sale in the future, further exacerbating the supply-demand imbalance which currently exists. The Company, therefore, believes the valuation impact on the Portfolio is likely to be positive given the high proportion of properties that have already legally split into condominiums. 

Condominium construction

Prior to the removal of the Mietendeckel, the Property Advisor had completed an exercise to examine the financial viability of the creation of new condominium units within the footprint of the existing Portfolio.   

 

After the overturning of the Mietendeckel, a condominium construction project commenced in an existing asset bought in 2007. The project involves building out the attic and renovating existing commercial units to create seven new residential units. Construction on this project started in the second half of 2021, and the first units are projected to be available for sale or rental in the second half of 2022. The total construction budget for this project is €3.9 million.

 

The Company also has building permits to renovate attics in 19 existing assets to create a further 45 units for sale as condominiums or as rental stock.

 

Debt and gearing

As at 31 December 2021, PSD had nominal borrowings of €288.4 million (31 December 2020: €291.4 million) and cash balances of €10.4 million (31 December 2020: €37.0 million), resulting in net debt of €278.0 million (31 December 2020: €254.4 million) and a net loan to value on the Portfolio of 34.7 per cent (31 December 2020: 33.1 per cent).

On 29 December 2021, the Company signed a new €60 million facility with its lending partner, Natixis Pfandbriefbank AG, which comprises of two components: a €45 million Acquisition Facility (the "Acquisition Facility") and a €15 million Capital Expenditure Facility (the "Capex Facility"). 

 

The new facility matures alongside the existing Natixis facility, in September 2026, and carries an interest rate of 1.15 per cent over 3-month Euribor. It can be used to finance up to 100 per cent of the total cost of both acquisitions and capital expenditure. When drawn, it is non-amortising and terms to protect against future adverse interest rate movements have been agreed. As at 31 December 2021, €0.9 million of this facility had been drawn.

 

The Acquisition Facility provides the Company with additional flexibility to pursue potential future acquisitions if suitable opportunities, which offer clear value for shareholders, arise.  

 

The Capex Facility will allow the Company to continue to undertake its extensive capital expenditure programme. The Company remains committed to improving living standards for its tenants and fulfilling its environmental obligations and, following the overturning of the Mietendeckel, has been able to resume its comprehensive programme of vacant apartment renovations and modernisations.  

 

In January 2022 the Company signed contracts to refinance existing debt provided by Berliner Sparkasse. The refinancing leverages the increase in valuation of certain underlying assets within the Portfolio, releasing a further €14.9 million of equity. Following completion, the total value of the loans that have been refinanced is €49.7 million and the maturities remain unchanged at between five and six years.

 

The interest rate payable on these loans is lower than the current portfolio average and no additional hedging instruments for adverse interest rate movements are required. The debt is being drawn down in three instalments, of which €9.9 million was drawn in February 2022, and the remainder is expected to be drawn in the first half of the year.

 

The equity released by the refinancing can be reinvested into the Portfolio, including future potential share buy-backs. 

 

The decrease in gross debt in the period partly results from the repayments of debt on sale of condominiums alongside amortisation of the debt held with Berliner Sparkasse, offset slightly by the drawdown of the debt from the newly signed facility with Natixis.

Nearly all PSD's debt effectively has a fixed interest rate through hedging. As at 31 December 2021, the blended interest rate of PSD's loan book was 2.0 per cent (31 December 2020: 2.0 per cent). The average remaining duration of the loan book at 31 December 2021 had decreased to 4.9 years (31 December 2020: 6.0 years)

^{1 Section uses nominal loan balances as per note 16 rather than the loan balances on the Consolidated Statement of Financial Position which take account of Capitalised Finance Arrangement Fees in the balance.}

 

EPRA Best Practice Reporting Metrics

In October 2019, the European Public Real Estate Association (EPRA) published new best practice recommendations (BPR) for financial disclosures by public real estate companies. PSD supports this reporting standardisation approach designed to improve the quality and comparability of information for investors.

The following table sets out PSD's EPRA KPIs from the released BPR, and references where more detailed calculations supporting the KPIs can be found in the report.

Table: EPRA Metrics

Metric	Balance	Note reference
EPRA Earnings (€m)	(0.8)	29
EPRA Net Tangible Assets / share (NTA) (€)	5.65	30
EPRA Net Reinvestment Value / share (NRV) (€)	6.35	30
EPRA Net Disposal Value / share (NRV) (€)	4.77	30
EPRA Capital Expenditure (€m)	9.5	N/A
EPRA Net Initial Yield (%)	2.0	N/A
EPRA "Topped up" Yield (%)	2.0	N/A
EPRA Vacancy (%)	3.1	N/A
EPRA Like-for-Like rental income (%)	3.9	N/A

 

 

Statement on Ukraine and Russia

We are deeply concerned and profoundly saddened at the tragic humanitarian toll caused by the deplorable Russian military invasion of Ukraine. Whilst PSD's business is not directly affected, it is possible that there will be second derivative consequences on the global economy following the unprecedented package of sanctions imposed by the West. These include the possible effects of higher energy prices, the risk of supply shortages in basic materials, the possible knock-on impact of inflation leading to higher interest rates, changes to consumer behaviour and demographic changes as Western European countries seek to accommodate the growing Ukrainian refugee crisis.  These circumstances have created a degree of uncertainty across global equity markets from which PSD is not immune. We will, of course, take into account all the relevant implications of this crisis into our forward planning as events unfold.

 

Unsurprisingly, given the extraordinary fiscal stimulus response to the pandemic, global inflationary pressures have built up, a trend which is likely to be exacerbated in the light of supply-side constraints caused by the Ukrainian crisis.  Germany has been no exception, with inflation reaching 5.3 per cent by end 2021. However, the risk of a major fiscal tightening, as happened in the aftermath of the 2008−09 financial crisis, is low and financing conditions are likely to stay relatively benign. After such a deep recession, central banks are expected to proceed with caution as they withdraw pandemic support. Notwithstanding this, equity markets have reacted cautiously to the prospect of rising rates, attaching a significant risk premium to valuations of listed residential real estate companies, all of which are currently valued at a discount to their Net Asst Value. This phenomenon is not new and is cyclical in nature.

 

Update on German political backdrop and continued housing shortage

There have been a number of supportive political developments including the Mietendeckel being declared void and the new Federal government consisting of the SPD, Greens and FDP which holds out the prospect of a more stable framework for the foreseeable future.

 

Although the general direction of new government policy initiatives will continue to be towards tightening tenant protections, particularly in areas with overstretched housing markets, there now appears to be broad political recognition that blunt policy instruments, such as the Mietendeckel, are not the best way to address housing market imbalances. Sensibly, the new government appears to be shifting its focus towards increasing the supply of housing and, with a target of 400,000 new homes per year, the new coalition is ahead of the previous government´s goals.

 

Whilst we consider increasing the supply of housing to be the correct policy response, it will take many years to address the chronic shortage of affordable German housing, particularly in Berlin, where there are currently 174 applicants per rental flat and with last year's building permits accounting for less than one per cent of Berlin housing stock. In the event that net inward migration, which had ceased during the pandemic, begins to feature again, the shortage of available housing stock could be exacerbated still further.  

 

A major reason for low supply is the persistent large discount of the cost of existing housing stock to replacement cost.  In Berlin, where prices have increased the most (from a significantly lower level than other German cities), the discount to replacement cost remains. Given significant increases in material costs, labour shortages and the additional cost of new green initiatives that the construction industry will seek to pass on to end-buyers, the relative attractiveness to investors of existing stock versus new-build is expected to endure.

 

Tenant location decisions within Berlin's private rental market have also shown some signs of change in the wake of COVID-19. Scarcity of supply of affordable rental property, coupled with a growing realisation that working remotely is a viable alternative to a daily city centre commute, have begun to impact tenant settlement choices.  Less densely populated areas in the greener suburban areas of Berlin, where supply is less constrained, with more affordable rents and strong commuter links, now hold increasing appeal for tenants seeking to relocate, particularly in areas where new employers are expanding or relocating.  This trend has been particularly evident in certain micro locations such as Erkner, where the Company recently announced its first acquisition since 2019.

 

A lack of available central Berlin rental properties, coupled with favourable mortgage versus market rent dynamics, has also provided a favourable tailwind for condominium pricing. 2021 saw double digit increases in condominium prices, a trend that was evident in PSD's own portfolio, and further price inflation is anticipated in the year ahead. Recent federal policy initiatives have further empowered state governments to restrict condominium splitting in the future and it is anticipated that the Berlin authorities will take advantage of these new powers. This will serve to compound further the supply-demand imbalance. With over three quarters of PSD's portfolio already legally split into condominiums, it is expected that the valuation impact on the Portfolio will be positive.

Focus on sustainability

An increasingly important theme during recent years has been the focus on providing more sustainable, socially and environmentally friendly accommodation. The Europe-wide drive towards climate neutrality by 2050 has ensured that ESG considerations are now a core part of investment decision making among real estate investors and landlords alike. This trend will continue to gather pace in the years ahead.

Whilst an increasing number of landlords and investors are bolstering their environmental credentials, the full scope of prescribed ESG criteria is not yet fully known. Currently, the direction of travel appears to be driving investment strategy towards new build as opposed to the refurbishment of existing properties on the basis that the reduction of emissions is focused on the operational (as opposed to building) phase. However, the refurbishment and modernisation of existing buildings, which is a central pillar of PSD's strategy, is widely regarded as more sustainable than the alternative of new build.  This is because the CO2 emissions produced during demolition, construction and the production of building materials (embedded carbon) represents over three quarters of all emissions across the entire life cycle of a new build completed to modern efficiency standards. In addition, embedded carbon is released almost entirely during the demolition and construction phases, with an immediate impact on the environment. This contrasts with long-term existing stock where the same emissions would have already been depreciated.  

A more considered approach is required, one which fully recognises the role of embedded carbon as the largest source of emissions throughout the life cycle of a building. Should the road ahead include the introduction of a comprehensive CO2 tax inclusive of embedded carbon generated during the construction phase, refurbishments of existing property would become relatively more attractive versus the alternative of new construction, which would have to absorb a proportionately higher proportion of emission costs. Currently, it is uncertain as to whether future policy initiatives will shift in this direction although it is encouraging that the new German federal coalition government has already declared its intention to look more closely at the use, impact and measurement of embedded carbon.

 

What is clear is that the potential consequences of ESG regulation on the investment markets will be an enduring theme for years to come. PSD recognises this and will continue to monitor and report on its ESG activities. For the financial year ended 2021, the Company intends to report on its ESG emissions and strategy in a separate report, compliant with EPRA ESG reporting standards.

 

Outlook

Finally, looking specifically at PSD, the Property Advisor looks to the year ahead with optimism. Following the removal of the Mietendeckel, the Company is well placed to resume its reversionary rental strategy. This will support future rental growth across the Portfolio irrespective of market rental growth.

 

The Company believes it can continue to provide capital growth and income to its investors through a disciplined approach to reinvestment into the existing portfolio, condominium sales at a premium to NAV, share buybacks at a discount to NAV and acquisitions if, and only if, they screen favourably versus alternative uses of capital.

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The Board recognises that effective risk evaluation and management needs to be foremost in the strategic planning and the decision-making process. In conjunction with the Property Advisor, key risks and risk mitigation measures are reviewed by the Board on a regular basis and discussed formally during Board meetings.  

RISK	IMPACT	MITIGATION	MOVEMENT
Conflict in Ukraine	The current Russian invasion of Ukraine does not yet appear to have any direct impact on PSD; however, the secondary effects of the conflict may have significant adverse effects. The conflict may raise the risk to the Company in the following areas.   Cyber risk - The Russian state has been linked to cyber-attacks on Government and international infrastructure and the risk of an increase in these attacks is highly likely now that the Russian state is subject to sanctions from countries in Western Europe and the USA.   Financial risk - The likely deterioration in the macro-economic environment may lead to a more "wait-and-see" attitude from investors and financial institutions which may lead to an inability for the Company to refinance its debt. The rise in inflation may also lead to an increase in interest rates, causing the cost of refinancing its debt to rise.   Market Risk - The conflict is likely to affect investor sentiment across Europe, convincing financial institutions and other companies to operate a "wait-and-see" approach to their cash reserves rather than investing them, potentially affecting economic growth prospects. Furthermore, as with supply chain risk below, the sanctions imposed on the Russian Government are likely to push up prices of energy raw materials as they become more difficult to obtain. The increase in prices of raw materials is likely to lead to increased inflation across Europe.   Supply chain risk - The German Government and German Companies have procured significant amounts of fuel and raw materials from Russia over the previous years. With the advent of significant sanctions on the Russian Government, the availability of these is likely to be significantly reduced, potentially harming the Company's ability to source raw materials to aid its refurbishment and construction programmes.   Vulnerable tenants - The economic dislocation caused by the Ukraine conflict is likely to cause an increase in the number of vulnerable tenants in Company units as rising inflation and unemployment could lead to tenants being unable to meet their rent payments as they fall due. An increase in the number of vulnerable tenants may increase the scrutiny on the Company should these tenants not be treated in a fair manner.	Cyber Risk - The mitigation of this risk is addressed in the Cyber risk section below.   Financial risk - The mitigation of this risk is addressed in the financial risk section below.   Market risk - The mitigation of this risk is addressed in the market risk section below.   Supply chain risk - The Company has operated in the German market since 2007 and has developed a diversified supply chain across Germany in both Berlin and the cities in which it used to operate; the Company would be able to source raw materials from these suppliers should they be required.   Vulnerable tenants - The Company has a policy of engaging directly with vulnerable tenants through its Vulnerable Tenant Policy which sets out procedures to follow to assist tenants who may require additional protection.	New - Increasing
Tenant / Letting and Political risk	Property laws remain under constant review by both the "Red-Red-Green" coalition government in Berlin and the recently elected "Traffic Light Coalition" Federal Government.   The new Federal Government has issued its coalition intentions paper "Koalitionsvereinbar-ung" and, while no policies have been brought into law yet, the intentions paper indicates that the new government is looking at nationwide rent moratoriums, caps on permitted rent increases and tightening of rental brakes.	The Property Advisor regularly monitors the impact that existing and proposed laws or regulations could have on future rental values and property planning applications. The Property Advisor considers that the Company has a flexible business model, which should enable it to adapt to any new rent regulations proposed by the Federal Government. Furthermore, to a significant extent, the proposals of the new Federal Government are similar to rules already in place in the State of Berlin and, therefore, there is not expected to be a significant impact on the Company's operations from these proposed regulations.	Unchanged
Market risk	Economic, political, fiscal and legal issues can have a negative effect on property valuations. A decline in Group property valuations could negatively impact the ability of the Group to sell properties within the Portfolio at valuations which satisfy the Group's investment objective.   The rapidly developing situation in Ukraine has the possibility to impact negatively gas, energy and raw material supplies to Germany and the rest of Europe. This could lead to rises in overall costs both for the Company and its tenants.   COVID-19 remains prevalent in Germany and potential restrictions to work and assembly have the possibility of negatively impacting the Company's operations and tenants' ability to pay rents as they fall due. The Federal Government is currently considering introducing new laws which would allow States to block the partitioning of apartment blocks into condominiums. The Berlin Government has recently adopted similar proposals.	Although the Board and Property Advisor cannot control external macro-economic risks, economic indicators are constantly monitored by both the Board and Property Advisor and Company strategy is tailored accordingly.   The Board and the Property Advisor are continuing to monitor the deteriorating situation in Ukraine. While it is not clear as yet what effect the announced sanctions from the German and other European governments on the Russian Government are likely to have on the Company's finances and operations, the Company has been able to operate in unfavourable economic environments before, including the COVID-19 pandemic and the Mietendeckel.   The effects of COVID-19 on the Company's operations and finances have been limited, with strong rent collection during 2021. Its outsourced service providers have also managed to continue operating with limited disruption.   The blocking of the ability for landlords to split assets at the land registry would likely be a net positive for the Company since the supply of condominiums would be materially reduced, increasing the value of the stock of over 1,700 units already split owned by the Company.	Increasing
Financial risk	A fall in revenues could result in the Group breaching financial covenants of a lender, and also lead to the inability to repay any debt and related borrowing costs. A fall in revenue or asset values could also lead to the Company being unable to maintain dividend payments to investors.   The current situation in Ukraine may lead to financial institutions operating a "wait-and-see approach" to lending and investing, which may lead to an inability for the Company to refinance its Portfolio in the future. The potential for interest rate rises in response to rising inflation could also lead to increasing interest costs for the Company.	The Group took on new covenants when signing its facility with Natixis: Interest coverage ratio (ICR), debt yield and loan-to-value covenants. Only the debt yield and ICR covenants are "hard" covenants, resulting in an event of default in case of breach. The loan-to-value covenant is a "cash trap" covenant alone (the requirement to hold all related rental income in Natixis accounts until sufficient debt is repaid to return to with the covenant level), with no event of default. The Company carried out extensive sensitivity analysis prior to signing the facility and, even in the most stressed rent scenarios, no covenants were breached.   The Property Advisor continues to model expected revenues and covenant levels, and these are reported to the Board as part of its Viability Assessment which can be seen in the annual report.   If rent levels or property values were to fall to a point where the covenants were in danger of being affected, the Company expects to use its surplus cashflow and cash reserves to pay down debt balances to rectify the situation. At the most recent covenant test date, in January 2022, all covenants were cleared.   The Company also continues to monitor its balance sheet and to review potential refinancing opportunities as part of its day-to-day operations. However, opportunities in these areas may become limited due to current uncertain macro-economic environment stemming from the economic dislocation caused by Russian military action in Ukraine. The Property Advisor will look to accelerate or delay, as appropriate, potential refinancing opportunities in response to the changing macro-economic environment.	Increasing
IT and Cyber Security risk	The Company is dependent on network and information systems of various service providers - mainly the Property Advisor, Property Manager and Administrator, and is therefore exposed to the risk of cyber-crimes and loss of data.   As cyber-crime remains prevalent across Europe, this is considered a significant risk by the Group. A breach could lead to the illegal access of commercially sensitive information and the potential to impact investor, supplier and tenant confidentiality and to disrupt the business of the Company.   The Russian state has been linked to cyber-attacks on Government and international infrastructure and the risk of an increase in these attacks is highly likely now that the Russian state is subject to sanctions from countries in Western Europe and the USA.	There is a constant review of IT systems and infrastructure in place for the Company to ensure these are as robust as possible. Service providers are required to report to the Board on request, and at least annually, on their financial controls and procedures.   A detailed review has been undertaken during the year of the cyber security of the Company and its outsourced processes. From this review, the Company has required all its key service providers to report to the Company their procedures and protocols around cyber security on an annual basis. Additionally, the Company has requested that all service providers carry out cyber penetration testing and report back to the Board with any significant observations.   Service providers are also required to hold detailed risk and controls registers regarding their IT systems. The Property Advisor and the Board reviews service organisations' IT reports as part of Board meetings each year.   The Board believes that, while the risk of cyber-attacks has increased due to the sanctions imposed on the Russian Government, the risk to its service providers directly remains relatively low. The secondary risk from cyber-attacks on digital infrastructure, such as payment systems, remains high and the Board, and the Property Advisor, will continue to monitor the situation.	Increasing
Lack of Investment opportunity	Availability of potential investments which meet the Company's investment objective can be negatively affected by supply and demand dynamics within the market for German residential property and the state of the German economy and financial markets more generally.	The Property Advisor has been active in the German residential property market since 2006. It has specialised acquisition personnel and an extensive network of industry contacts, including property agents, industry consultants and the principals of other investment funds. It is expected that future acquisitions will be sourced from these channels.   Since the overturning of the Mietendeckel in April 2021, regulation has focussed more on slowing down the market by extension of Milieuschutz areas and the prohibition of splitting assets at the land registry. The Property Advisor believes that this attempt to slow down the market will create other opportunities, including densification projects within the current Portfolio and acquiring in the suburbs of Berlin, outside the scope of these regulations, where the growth potential is more promising. An example of this being the recently signed forward funding acquisition in Erkner, which is detailed in this report.	Decreasing
Outsourcing risk	The Group's future performance depends on the success of its outsourced third-party suppliers, particularly the Property Advisor, QSix, but also its outsourced property management, IFRS (International Financial Reporting Standards) and German GAAP accountants and its administrative functions. The departure of one or more key third-party providers may have an adverse effect on the performance of the Group.	Since the Company listed on the London Stock Exchange, the Property Advisor has expanded headcount through the recruitment of several additional experienced London and Berlin-based personnel. Additionally, senior Property Advisor personnel and their families retain a stake in the Group, aligning their interests with other key stakeholders.   The key third parties responsible for property management, accounting and administration are continually monitored by the Property Advisor and must provide responses annually to a Board assessment questionnaire regarding their internal controls and performance. These questionnaires are reviewed annually by the Board.	Unchanged

 

 

Going concern

The Directors have reviewed projections for the period up to 31 March 2023, using assumptions which the Directors consider to be appropriate to the current financial position of the Group with regard to revenues, its cost base, the Group's investments, borrowing and debt repayment plans. These projections show that the Group should be able to operate within the level of its current resources and expects to manage all debt covenants for a period of at least 12 months from the date of approval of the financial statements. The Group's business activities together with the factors likely to affect its future development and the Group's objectives, policies and processes from managing its capital and its risks are set out in the Strategic Report. After making enquiries and having regard to the FRC's Guidance for Companies on COVID-19 issued on 4 December 2020, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and, therefore, continue to adopt the going concern basis in the preparation of these financial statements.

 

Viability Statement

The Directors have assessed the viability of the Group over a three-year period. The Directors have chosen three years because that is the period that broadly fits within the strategic planning cycle of the business. The Viability Statement is based on a robust assessment of those risks that would threaten the business model, future performance, solvency or liquidity of the Group, as set out in the assessment of principal risks in this document. For the purposes of the Viability Statement the Directors have considered, in particular, the impact of the following factors affecting the projections of cash flows for the three-year period ending 28 February 2025:

a) the potential operating cash flow requirement of the Group;

b) seasonal fluctuations in working capital requirements;

c) property vacancy rates;

d) rent arrears and bad debts;

e) capital and administration expenditure (excluding potential acquisitions as set out below) during the period;

f) condominium sales proceeds;

g) expected debt releases;

h) the potential impact of COVID-19;

i) the potential impact of the war in Ukraine;

j) asset construction development costs.

 

Under normal scenarios, this base case model assumes stresses to each of a) through to g) in the above list. However, this year the Group has additionally considered points h, i and j.

 

The effect of COVID-19 and its associated restrictions, as they relate to the Company, were assessed by the Board as part of this viability statement. The Board considers that it is not necessary to model any adverse assumptions with respect to the impact of further COVID-19 restrictions as the Company believes it has demonstrated throughout the pandemic that its financial and operational results have remained robust and that it is able to operate effectively in the most difficult of environments. Furthermore, it is increasingly evident that there is little appetite in Germany, and throughout Europe for a return to restrictions to try and stem the spread of COVID-19, and the focus appears to be towards "living with" the virus as it becomes endemic. Therefore, on this basis it is appropriate not to separately model any adverse effects on Viability due to COVID-19.

 

The rapidly developing situation in Ukraine has the possibility to affect negatively gas and energy supplies to Germany and the rest of Europe. This could, in turn, lead to rises in overall property and corporate costs both for the Company and its tenants. The effect on the Company's business and viability is extremely difficult to determine at this early stage, but the Directors believe that the stress testing set out below would accurately reflect a reasonable "worst case" scenario that may arise as a result of the current position.

Financial modelling and stress testing was carried out on the Group's cashflows taking into account the following assumptions, which the directors believe to reflect the conditions present in a 'worst case' scenario.

 

·    Increased regulation of rent levels of tenancies in the Berlin & Brandenburg markets leads to a fall in rental income of 20 per cent over the forecast period;

·    a fall in asset values due to an external market shock leading to an inability to refinance properties over the forecast period;

·    projected condominium sales are reduced by 20 per cent as a response to the Berlin and/or Federal authorities attempting to slow down the condominium sales;

·    changes in ESG regulations lead to a mandated 20 per cent increase in capital expenditure to reach the required regulatory level. This includes a 20 per cent increase in the costs of the forward funding acquisition in Erkner; and

·    a cyber-attack on the Company which leads to a GDPR data breach fine of 4 per cent of annual revenue in 2023.

 

After applying the assumptions above, individually and collectively, there was no scenario by which the viability of the Company over the next 12 months was brought into doubt from a cashflow perspective. Under the stresses set out above, cashflow mitigation may be required in 2023 and headroom could be obtained in the following ways:

 

·    reducing the dividend to preserve cash;

·    cancellation of larger capital expenditure projects; and

·    selling individual assets, or condominiums to release cash.

 

Under these stressed assumptions used to assess viability, the Group is able to manage all banking covenant obligations during the period using the available liquidity to reduce debt levels, as appropriate.

 

The projection of cash flows includes the impact of further potential property acquisitions in order to draw the full acquisition facility signed with Natixis in December 2021. However, as the facility is a 100 per cent loan to cost then the impact on the cashflows is limited to a rise in the interest paid on the loan balance over the forecast period. Furthermore, the Directors complete a formal review of the working capital headroom of the Group for material acquisitions.

 

On the basis of the above, and assuming the principal risks are managed or mitigated as expected, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.