Phoenix Spree talks to lenders over plan to ramp up condo sales

Berlin residential property fund Phoenix Spree Deutschland wants to ‘significantly’ up the number of condominiums it sells to cut debts and improve shareholder returns.

Berlin residential property fund Phoenix Spree Deutschland (PSDL ) is in talks with its lenders to ‘significantly’ increase the number of condominiums it can sell this year after failed attempts to offload entire buildings.

The £166m investment company said it was also ‘examining other strategic options’ to increase condo sales in a bid to repay debts, resume its dividend suspended last year and return capital to shareholders frustrated by its 55% share price discount.

The company said it had seen a ‘material upturn’ in sales of condos in the second half of last year as buyers returned to the market, encouraged by ‘greater visibility in forward bank lending rates’. Last year, 25 condos were notarised for sale at a total value of €7.2m, representing a 53% increase on the €4.7m worth of sales in 2022.

Mike Hilton, chief executive of QSix which manages Phoenix Spree, said that the condos sold at an average of €3,976 per square metre, a 4.1% premium to their carrying value at the end of 2022, but below the historical average.

Hilton hopes to capture huge upside for shareholders as the fund’s share price only implies a valuation of €2,750 per square metre after a 45% fall in the past three years.

Only 4% of the portfolio is currently valued as condos, although the company has another 73% of assets in units that are legally split into condos but not yet valued as such. Bringing them to market ought ‘to materially increase sales volumes’, the firm said.

Since listing in 2015, Phoenix Spree has set about splitting multi-occupied buildings into condos and has increased the number of properties that have been legally split, even as new legislation was introduced in 2021 that limited the ability of landlords to divide buildings into single dwellings.

While the legislation was not retrospective and did not impact the buildings Phoenix Spree had already split, Hilton said it ‘inevitably…increased the scarcity of condos available for sale, further exacerbating the shortage of supply’ and widened the valuation premium that condo units command versus their rental equivalents.

‘With over 1,900 units, representing 77% of the portfolio, now split as condos, Phoenix Spree is uniquely placed in the listed market to benefit from this trend,’ Hilton said.

Offloading properties has been a key focus for the company, which last year agreed to pay a 1% disposal fee to QSix in order to incentivise sales and return cash to shareholders.

However, Hilton noted that attempts to sell whole buildings had not been successful as market conditions were ‘not conducive to achieving sales’ at a fair value.

‘The few transactions that were agreed generally failed to proceed to sales,’ he said.

While the value of rental apartments may lag the sales value, rental strength remained strong in the second half of last year as inward migration and higher homeownership costs forced more people into rented accommodation at the same time as higher borrowing and construction costs squeezed housebuilding.

This pushed market rents to record levels, with rents signed at a 31% uplift to passing rents, or €13.70 per square meter – a 5.9% increase on 2022. Although Berlin rents are subject to the ‘Mietspiegel’ rent index which caps rent increases in the capital city.

While a new index will be released in mid-2024, Hilton said it is expected that it will ‘provide scope for further permissible rent increases to qualifying tenants, supporting rental growth from the third quarter of 2024 onwards’.

The fund reported a 5.3% slide in the valuation of its assets to €675.6m in the second half of last year as all but one asset experienced valuation declines driven by yield expansion. The exception to this was Donaustrasse, which was the trust’s latest acquisition and rose 26% over the period.

Hilton said the investment market remains ‘fragile’ and investment volumes have been 60% lower in 2023 than the previous year as investor sentiment faltered in the ‘weakening Germany economy’.



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