Phoenix Spree D Regulatory News (PSDL)

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

Financial results for the year ended 31 December 2020

Phoenix Spree Deutschland Limited (LSE: PSDL.LN), the UK listed investment company specialising in German residential real estate, announces its full year audited results for the financial year ended 31 December 2020. 

Financial Highlights

1 - Calculated at FX rate GBP/EUR 1:1.112 - 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 page 16.3 - Net LTV uses nominal loan balances as per note 23 rather than the loan balances on the Consolidated Statement of Financial Position which take into account Capitalised Finance Arrangement Fees in the balance.

EPRA NTA underpinned by significant condominium potential

· Record condominium notarisations of ˆ14.6 million (43 condominium units) during the year to 31 December 2020, a 65.4 per cent increase from ˆ8.8 million in the prior year.

· Average achieved value per sqm of ˆ4,320 for residential units, a 19.2 per cent premium to book value of each property.

· 70 per cent of Portfolio assets legally split into condominiums, up from 58 per cent as at 31 December 2019.

· A further 15 per cent are in application, over half of which are in the final stages of the process.

Berlin rent controls ("Mietendeckel") and COVID-19

· Collected rental income per sqm as at 31 December 2020 fell by 15.8 per cent, reflecting the implementation of the final phase of the Mietendeckel in November 2020.

· Contracted rental income per sqm as at 31 December 2020 grew by 4.1 per cent year on year. The Company may have the right to collect the difference between rents at the contracted level and the rates set by the Mietendeckel in the event that the Mietendeckel is successfully challenged.

· New tenant contracts which provide for the reversion to market rents in the event that the Mietendeckel is ruled to be unlawful.

· Underlying EPRA vacancy of 2.1 per cent, a near record low, reflecting the limited impact of COVID-19 and the Mietendeckel on the supply of available rental property.

· Final legal ruling by the Federal Constitutional Court on the Mietendeckel anticipated in H1 2021. The Company and its legal advisors remain of the view that the Berlin rent-cap is unconstitutional and will be removed.

· Limited impact on rent collection from COVID-19. In excess of 99 per cent of rents collected during 2020, with the collection rate remaining consistent in 2021 to date.

Continued shareholder value and robust balance sheet

· Successful refinancing of ˆ37.8 million releasing ˆ12.0 million of cash. Net LTV remains conservative at 33.1 per cent.

· Unchanged annual dividend of 7.50 cents. Dividend increased or maintained since listing in June 2015.

· Resumption of share buy-back programme in second half of 2020.

· As at 26 March 2021, 1.5 per cent of the issued share capital had been repurchased since the resumption of the share buyback programme in September 2020 at an average 32 per cent discount to year-end 2020 EPRA NTA.

Outlook

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

o Decreased availability of rental stock, exacerbated by the Mietendeckel, continues to support market rents;

o Condominium pricing expected to remain strong, particularly for centrally located Berlin apartments.

· Mietendeckel will continue to materially impact Collected Rents in 2021 compared to 2020 unless legal challenge is successful.

· Pending clarification of the legality of Mietendeckel rules, the Company will continue to explore all options within the existing Portfolio to optimise strategic flexibility.

· Two new condominium construction projects, representing a combined total of 34 units, are under construction, with expected completion in early 2022.

· Condominium sales of ˆ2.9 million to 26 March 2021, a 240 per cent increase versus Q1 2020.

· Robust business model, a strong balance sheet and good levels of liquidity mean PSD remains well positioned regardless of the outcome of the Mietendeckel constitutional review.

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"I am pleased to report another resilient performance for the year. We have adapted our strategy to mitigate any short-term impact on the portfolio and maintained our strategic optionality as we await a successful challenge of the new Berlin rent controls. Further progress on condominium splitting, combined with an acceleration in condominium sales at a premium to book value, highlights the intrinsic value within the Portfolio. We remain confident in the longer-term demographics for Berlin residential rental market."

Notes to the preliminary announcement

This announcement has been extracted from the annual report and financial statements for the year ended 31 December 2020 (the "Annual Report"), which will shortly be available on the Company's website, www.phoenixspree.com/investors. All page references in this announcement refer to page numbers in the Annual Report.

The Annual Report has also been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. Printed copies of the Annual Report will be distributed to shareholder on or around 21 April 2021.

For further information, please contact:

CHAIRMAN'S STATEMENT

I am pleased to report that PSD has delivered another resilient performance. As at 31 December 2020, the Portfolio was valued at ˆ768.3 million by Jones Lang LaSalle GmbH, a like-for-like increase of 6.3 per cent. The Euro EPRA NTA total return per share was 8.8 per cent over the year and the sterling return was 16.0 per cent, reflecting a fall 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 during the financial year of the new Berlin rent controls (the "Mietendeckel") and the negative impact that COVID-19 has had on the German economy.

Adapting our strategy

During the course of 2020, the Company has complied with, and fully implemented, the various components of the Mietendeckel. All of our tenants have been notified as to how they will be affected by the new rules and, where necessary, rent reductions have been implemented in accordance with the new rent caps.

PSD has adapted its strategy to mitigate any short-term impact on the Portfolio, while ensuring it maintains maximum strategic optionality if, as expected, the Mietendeckel is found to be unconstitutional. More details of the measures we have taken can be found in the Report of the Property Advisor.

The financial impact on the Company and its medium-term strategy are largely dependent on the timing and eventual outcome of the legal ruling on the Mietendeckel. However, it is encouraging that the increase in the Portfolio valuation reported by JLL during the financial year assumes that it is fully implemented for its entire five-year term. PSD is well positioned to withstand any financial impact in the event that the new rental regulations are not overturned. However, PSD and its legal advisors remain of the view that this legislation will be successfully challenged in the German Federal court during the first half of 2021.

COVID-19

The Company's overriding priority is the health and wellbeing of its tenants, work colleagues and wider stakeholders during what has been a period of significant disruption. 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.

Although the pandemic has caused unprecedented shrinkage in Germany's post war economy, I am pleased to report that the impact of COVID-19 on PSD's rent collection has been very limited, with the level of rent arrears in line with 2019. 

I am pleased that PSD and its Property Advisor have continued to support all of their charitable causes and initiatives during the pandemic and that PSD has committed to supporting an additional Berlin charity, Laughing Hearts, in 2021. This charity supports children living in children's homes and social care.

Share buy-backs and dividend

After fully considering the potential impact of both the Mietendeckel and COVID-19, the Board is pleased to recommend an unchanged further dividend of 5.15 cents per share (GBP 4.65 pence per share). Since listing on the London Stock Exchange in June 2015 and including the announced dividend for 2020 and bought-back shares held in treasury, ˆ57.9 million has been returned to shareholders. The Board is committed to continue to provide shareholders with a secure dividend over the medium term.

During the past year, PSD has secured more flexible and cost-efficient financing to support the medium and long-term strategic objectives of the business, providing liquidity in order to take advantage of opportunities arising from market disruption caused by changes to the rent laws. However, following the onset of the COVID-19 pandemic, the Board considered it prudent, at that time, to suspend PSD's share buy-back programme pending greater clarity on the financial impact that it might have. As it became clearer that the pandemic was not materially affecting rent collection levels, share buy-backs were resumed in September 2020.

Property Advisor

On 21 September 2020 the Company announced that its Property Advisor, PMM Residential Limited, had changed its name and rebranded as QSix Residential Limited. This name change has no impact on the existing property advisory and investor relations agreement as it relates to PSD and the Board look forward to continuing its valued partnership in the years to come.

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 the appointments of Antonia Burgess and Greg Branch as independent, Jersey-based, non-executive Directors. Antonia and Greg bring with them a wealth of experience and insight across the real estate, legal and financial services worlds, which complement and enhance the skill set of the Board. As previously announced, Charlotte Valeur retired as a non-executive board member in May 2020. I would like to welcome Antonia and Greg and thank Charlotte for her service and contribution to the Company.

Quentin Spicer has signalled his intention to retire from the Board at the forthcoming Annual General Meeting. Quentin has overseen the transformation of the Company from inception in 2007, through to listing on the London Stock Exchange in 2015 and its expansion thereafter. On behalf of the entire Board and of QSix, I would like to express our gratitude for his dedicated service over the past fourteen years. He has provided invaluable guidance and leadership through a period of considerable change and leaves with all of our very best wishes.

Corporate responsibility

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 four key pillars that have been integrated throughout our business operations: Protecting our Environment; Respecting People; Valuing our Tenants and Investing in our Communities. This year, we have evolved our CR pillars to align with EPRA's Environmental, Social and Governance (ESG) reporting.

Protecting our environment

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. Our Environment Policy sets guidance as to how PSD, QSix and other key suppliers should operate to reduce this impact.

Our aim is to strengthen our ESG monitoring and reporting by introducing EPRA's Sustainability Best Practice Recommendations and capturing our ESG measurements within their framework. During the financial year, the Company introduced measures to capture relevant environmental data for all our buildings that use oil-based energy and plans to increase coverage in the coming years to include the buildings using gas and district heating.

Outlook

As we await the outcome of the legal challenge to the Mietendeckel in 2021, the Board remains confident in the long-term outlook for PSD, particularly given the strength of demand for housing in Berlin and the strategic flexibility available to the Company.

PSD remains well positioned to mitigate any short or medium-term impact associated with the Mietendeckel and COVID-19. The Company continues to be supported by a strong balance sheet with good liquidity and we have maintained our strategic optionality in the event the rules are found unconstitutional. There continues to be positive condominium pricing trends and, with 70 per cent of the portfolio now legally split into condominiums, there is ample scope to launch further condominium projects, where appropriate.

We are closely monitoring the recent spike in COVID-19 infection rates in Germany and will continue to support our tenants as we await further progress on the planned European vaccination programme.

REPORT OF THE PROPERTY ADVISORThe Property Advisor's priority throughout 2020 has been to protect and support the Company's tenants, colleagues and communities throughout this period of disruption. The Property Advisor has also continued to manage the impact on the Portfolio of the introduction of the Mietendeckel (outlined in further detail below) and the successful acceleration of the condominium strategy, reaching record levels in 2020.

The Berlin Mietendeckel

Regulations introduced by the Berlin Red-Red-Green coalition during 2020 to cap, or potentially reduce rents for private non-subsidised rental properties ("the Mietendeckel") aim to prevent rents being set at free market levels. This is despite the fact that Germany already has in place, at the federal level, tenant protections which rank amongst the strongest in the Western world. 

The uncertainty created by the Mietendeckel has significantly disrupted the Berlin market. This has been reflected by a reduction in Berlin transaction activity from prior peak levels, a significant reduction in the availability of rental accommodation for tenants who require it most, and a sharp decline in investment in the stock of Berlin housing. Notwithstanding these impacts, Jones Lang LaSalle GmbH, the Company's independent property valuers, have confirmed that, as of 31 December 2020, there had been no material adverse effect on Berlin residential sales prices.

These measures have presented challenges to the Company's rental business model, which has traditionally relied on re-letting at market rates to justify the considerable investment that significantly improves the standard of accommodation available to our tenants. However, PSD is well positioned to withstand any financial impact if the new rental regulations are not overturned. Scenarios in the event that the Mietendeckel is not successfully challenged have been rigorously stress-tested, including any potential impact on rental income growth and loan covenants. Moreover, with over 70 per cent of the Portfolio now legally split into condominiums, the Property Advisor believes the Company has significant strategic flexibility to adapt its business model by selling parts of its Portfolio as individual apartments at a premium to book value if required.

The 2020 Portfolio valuation undertaken by Jones Lang Lasalle, the Company's independent property valuer, assumes that the Mietendeckel is implemented for its full five-year lifespan and therefore incorporates the negative impact on rental income caused by the Mietendeckel measures. Notwithstanding the fact that the majority of the Portfolio is now split into condominiums, just 7 per cent were valued under a condominium scenario (see note 17) as at 31 December 2020 as these were the only active sales projects.

Legal developments

Whilst the exact timing of a legal decision remains unclear, developments challenging the legality of the Mietendeckel during 2020 have been encouraging.

In May 2020, the opposition in the Berlin House of Representatives and a quorum of Federal Parliament MPs lodged cases in Berlin's Regional Constitutional Court and the Federal Constitutional Court. Additionally, in June 2020, twelve constitutional complaints from private owners were filed with the Federal Supreme Court.

In July 2020, a similar move to introduce a six-year rent freeze in Bavaria 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. Whilst this ruling does not directly impact the legality of the Berlin Mietendeckel, many of the basic legal arguments against the imposition of a rent-cap are the same, namely that in Germany, residential tenant law is governed by the German Civil Code and is therefore a matter for the Federal and not State Government.

Maintaining strategic flexibility

Pending clarification of the legality of the Mietendeckel rules, the Company has explored all options within the existing Portfolio to optimise strategic flexibility. This includes condominium splitting and sales at a premium to book value, share buybacks at a discount to EPRA NTA, careful monitoring of capex projects and new tenant contracts which could allow the retrospective collection of market rents in the event that the Mietendeckel is ruled to be unlawful. These measures have been outlined in greater detail below.

New tenancy agreements

To avoid uncertainty among tenants as to their contractual rental obligations during the period when the legality of Mietendeckel remains unresolved, PSD has amended its tenancy agreements in line with the rest of the industry. These new agreements specify both rents currently payable as prescribed by the Mietendeckel whilst in place ("Collected"), and free market rents which would have been permissible under the German Civil Code ("Contracted"). 

The new tenancy contracts stipulate that, if the Mietendeckel or any part thereof is voided, suspended, repealed, or otherwise abolished, any higher Contracted rent permissible under the German Civil Code shall once again be payable. If the voiding or suspension were to be applied on an ex-tunc basis (i.e. from the outset), back-payments could be sought to cover the difference between the Collected rent and Contracted rent for the entire term of the agreement. Tenants have, therefore, been advised by the Berlin government to set aside appropriate reserves to cover this possibility. 

Measures introduced to comply with the Berlin Mietendeckel

Specifically, the measures introduced by PSD to comply with the Mietendeckel in 2020 were as follows:

Post 23 February 2020:

· First time letting and reletting: New rents may not exceed the prescribed upper rent limit. In some instances, PSD has had to lower the rent to a level below the rent paid by the previous tenant.

· Rent freeze on existing leases: For existing leases, a rent freeze initially applied, but with no requirement to lower rents, provided the rent level set at 18 June 2019 had not been increased since that date. In instances where there had been a rent increase, PSD reduced rental payments to the June 2019 level.

Post 23 November 2020:

· Rent reductions: Where the rent limit (adjusted for location surcharges or discounts) was exceeded by more than 20 per cent, PSD has had to reduce the rent to 120 per cent of the prescribed rent limit. Around 44 per cent of tenants have received rent reductions.

Financial impact

Reported rental income for the financial year ended 31 December 2020 includes the impact of the Mietendeckel measures that have been implemented to date.

The Property Advisor estimates that the financial impact of these combined measures for the financial year ended 31 December 2020 was in the region of 4 per cent of gross rental income over the full year. In the event that the Mietendeckel is not repealed during 2021, it is estimated that the reduction of annualised net rental income would be up to 20 per cent, reflecting the implementation of all rental reductions for a full financial year.

Financial highlights for the twelve-month period to 31 December 2020

1 - nominal loan balances as per note 23 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 1:1.11

3 - Further EPRA Net Asset Measures can be found in note 31.

Financial results 

Reported revenue for the financial year to 31 December 2020 was ˆ23.9 million (31 December 2019: ˆ22.6 million). Profit before taxation was ˆ37.9 million (31 December 2019: ˆ28.6 million) which was positively affected by a revaluation gain of ˆ41.5 million (31 December 2019: ˆ41.5 million).

The year-on-year rise in profit before tax is driven by a property valuation increase alongside a smaller loss on the value of interest rate swaps than in prior year, a larger gain on disposal of condominiums and a decline in the performance fee due to the Property Advisor.

Property expenses rose over the year, reflecting service charge costs on the new acquisition in Brandenburg not present in the prior year. The increase in administrative expenses reflects an acceleration in the volume of assets undergoing separation into condominiums at the land registry. Reported earnings per share for the period were 0.31 cents (31 December 2019: 0.22 cents). 

Reported EPRA NTA per share rose by 7.3 per cent in the period to ˆ5.28 (£4.76) (31 December 2019: ˆ4.92 (£4.16)). After taking into account the dividends paid during 2020 of 7.5 cents (6.5 pence), which were paid in June and October 2020, the Euro EPRA NTA total return for the period was 8.8 per cent (2019: 9.1 per cent). The sterling EPRA NAV per share total return was 16.0 per cent (31 December 2019: 2.9 per cent), reflecting a favourable exchange rate movement during the financial year.

Dividend

The Board is pleased to declare an unchanged further dividend of 5.15 cents per share (GBP 4.65 pence per share) (31 December 2019: 5.15 cents, GBP 4.40 pence). The dividend is expected to be paid on or around 7 June 2021 to shareholders on the register at close of business on 14 May 2021, with an ex-dividend date of 13 May 2021. Taking into account the interim dividend paid in October 2020, the total dividend for the financial year to 31 December 2020 is 7.50 cents per share (GBP 6.75 pence per share) (31 December 2019: 7.50 cents, GBP 6.30 pence).

Since listing on the London Stock Exchange in June 2015 to 29 March 2021, including the announced dividend for 2020 and bought-back shares held in treasury, ˆ57.9 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 the impact of the Mietendeckel and any ongoing impact associated with COVID-19.

Table: Portfolio valuation and breakdown

1 Unit increase year-on-year down to units due to units in the new acquisition in Brandenburg being available for rent while being under construction in prior year

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

The Berlin residential property market has remained resilient during the financial year and, although transaction volumes remained below peak levels, investment demand observed by Jones Lang LaSalle GmbH ("JLL"), the Company's external valuers, continues to support increased pricing. JLL have 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 with no matters of concern or material uncertainty raised. The discounted cash flow methodology used by JLL assumes that the Berlin rent cap ("the Mietendeckel") is fully implemented by PSD and remains in place for its full five-year lifespan.

As at 31 December 2020, the total Portfolio was valued at ˆ768.3 million by JLL, an increase of 5.2 per cent over the twelve-month period (31 December 2019: ˆ730.2 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 2020, and by 3.6 per cent in the second half of the financial year. This increase reflects the combined impact of yield compression, supported by a further decline in risk-free interest rates during the financial year.

The valuation as at 31 December 2020 represents an average value per square metre of ˆ3,977 (31 December 2019: ˆ3,741) and a gross fully occupied yield of 2.4 per cent (31 December 2019: 2.9 per cent). Included within the Portfolio are nine properties valued as condominiums, with all sales permissions granted, with an aggregate value of ˆ52.4 million (31 December 2019: five properties, ˆ26.5 million).

Table:  Rental income and vacancy rate

1 - New tenant agreements specify both rents currently payable as prescribed by the Mietendeckel whilst in place ("Collected"), and free market rents which would have been permissible under the German Civil Code ("Contracted"). This is discussed further under 'New tenancy agreements' section above.

"Collected" like-for-like rental income per sqm decreased by 15.8 per cent

Collected rental income includes the impact of the Mietendeckel measures that have now been fully implemented. It includes only rental income that can be legally "Collected" under the terms of the new Mietendeckel regulations.

As at 31 December 2020, Collected like-for-like rental income per sqm was ˆ7.5, a decrease of 15.8 per cent compared with the prior year. This decline reflects the implementation of the final phase of the Mietendeckel in November 2020, included in December 2020 rent per sqm disclosure.

On an annualised basis, Collected rental income for the month of December 2020 was ˆ16.4 million, a decrease of 16.7 per cent compared with the prior year. On a like-for-like basis, excluding the impact of acquisitions and disposals, Collected like-for-like rental income was down 16.1 per cent over the same period.

"Contracted" like-for-like rental income per sqm increased by 4.1 per cent

Including any higher contractual rents permissible under the German Civil Code, Contracted like-for-like rental income per sqm was ˆ9.3 as at 31 December 2020, an increase of 4.1 per cent compared with the prior year.

On an annualised basis, Contracted rental income for the month of December 2020 was ˆ20.3 million, an increase of 2.8 per cent during the financial year. On a like-for-like basis, excluding the impact of acquisitions and disposals, Contracted rental income was up 3.8 per cent over the same period.

The Property Advisor believes that Contracted rental growth slowed primarily due to the impact of COVID-19 in temporarily pausing the inward flow of population. This modest slowing compares to a significant drop in rents in other capital cities such as London and New York.

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

All figures in ˆ million unless otherwise stated

1 - Under EPRA guidelines, legally allowed lease incentives and contracted step rents are included in the "Topped up" yield calculation, since the expectation is that the Mietendeckel is declared unconstitutional in 2021, the difference between annualised contracted rents and annualised collected rents has been included in this line.

Vacancy at record lows

Reported vacancy as at 31 December was 6.8 per cent (31 December 2019: 6.7 per cent). On an EPRA basis, which adjusts for units undergoing renovation, development or made available for sale, the vacancy rate reduced to 2.1 per cent (31 December 2019: 2.8 per cent), driven by a significant decline in available Berlin rental property, caused by industry capacity withdrawal following the introduction of the Mietendeckel.

Berlin Reversionary re-letting premium of 25.2 per cent

During the year to 31 December 2020, 269 new leases were signed, representing a letting rate of approximately 11.6 per cent of occupied units. The average Contracted rent achieved on new lettings was ˆ11.7 per sqm, a 1.5 per cent decrease on the prior year, and an average premium of 25.2 per cent to passing rents. This compares to a 36.4 per cent premium in the period to 31 December 2019. The decline in reversionary premium partially reflects the inclusion of the re-lettings from the recent acquisition in Brandenburg, where rents are lower than those achieved in central Berlin. Looking solely at the Berlin portfolio, the reversionary premium achieved was 33.9 per cent, down from 36.4 per cent in the prior period and reflecting the fact that the Company has reduced unit renovation spend compared to 2020 and offers the majority of its apartments in an "as is" state.

Following the introduction of the final phase of the Mietendeckel on 23 November 2020, which required an automatic rent reduction to all tenants in line with the new prescribed Mietendeckel levels, the average reletting rental level on a Collected basis for the Berlin portfolio was ˆ7.6 per sqm, a reversionary discount of 7.7 per cent. The Property Advisor believes this rent level is little more than half the current market rent and is required to be applied City-wide, regardless of apartment micro location, size or condition. For this reason, the Property Advisor believes the policy primarily benefits wealthier households, in contrast to the main policy intention which was to make housing more affordable for low-income households.

Limited impact from COVID-19 on rent collection

The Company's overriding priority is the health and wellbeing of its tenants, work colleagues and wider stakeholders throughout this period of unprecedented disruption. 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.

To date, the impact on rent collection has been limited. During the year to 31 December 2020, 99.6 per cent of rents due had been collected in total compared to 99.2 per cent in the prior year.

Residential rent collection remained particularly resilient and, although a small number of the Company's commercial tenants were impacted, 99.3 per cent of commercial rents were collected, compared with 98.6 per cent in 2019.

Rent collection during the months of January and February 2021 has remained stable and the Company will continue to work sensitively with any tenants in arrears to agree appropriate and workable repayment schedules.

Portfolio investment

During the year to 31 December 2020, a total of ˆ4.2 million was invested across the Portfolio (31 December 2019: ˆ6.5 million). These items are recorded as capital expenditure in the financial statements. A further ˆ1.6 million (31 December 2019: ˆ1.7 million) was spent on maintaining the assets and is expensed through the profit and loss account. The year-on-year decline in investment reflects ongoing uncertainty in the Berlin rental market and the decision to cease the programme of apartment renovations since this investment cannot currently be recouped in the form of a rent uplift on re-letting. As a result, apartments are mainly rented in an "as is" condition, with expenditure focussed on areas which guarantee tenant safety.

Table: EPRA Capital Expenditure

All figures in ˆ ,000 unless otherwise stated

Record condominium sales

PSD's condominium strategy involves the division and resale of selected apartment blocks as private units. This is subject to full 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 2020 having been largely unaffected by COVID-19 related disruptions. Industry data shows that, in the fourth quarter of 2020, prices in Berlin had increased by 5 per cent versus the same period in 2019.

During the financial year to 31 December 2020, 41 condominium units and two undeveloped attic spaces were notarised for sale (31 December 2019: 18 units). The average achieved notarised value per sqm for the residential units was ˆ4,320, representing a 19.2 per cent premium to the most recent assessed book value of each property and an 8.6 per cent premium to the average residential Portfolio value as 31 December 2020.

These sales represent a significant increase compared with the first half of the financial year, during which eight residential units and two attic spaces were notarised for sale, with an aggregate value of ˆ3.0 million. In total, the Company has notarised for sale condominiums with an aggregate value of ˆ14.6 million during the year to 31 December 2020 (31 December 2019: ˆ8.8 million), a 65 per cent increase compared with the prior year.

As at 31 December 2020, 70 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 15 per cent are in application, over half of which are in the final stages of the process.

The Company notes that the Federal Government has previously discussed the introduction of legislation which may limit the ability of landlords to split their properties into condominiums. The implementation of any such measures would be likely to reduce the stock of apartments available on the market. Given the high proportion of the Portfolio already split into condominiums the valuation impact on the Company's Portfolio is expected to be positive.

Condominium construction

The Property Advisor has completed an exercise to examine the financial viability of the creation of new condominium units within the footprint of the existing Portfolio. Two new construction projects, representing a combined total of 34 units across two assets, have been granted planning approval.

The first project is for the construction of a new 23-unit apartment block located in the footprint of a property acquired in 2018. Alongside this, the undeveloped attic of the same property will be built out with the creation of four new units for sale as condominiums, or for rental. The second project involves building out the attic and renovating existing commercial units to create seven new residential units in an existing asset bought in 2007.

Construction on both projects is expected to commence in the middle of 2021 and the first units are projected to be available for sale or rental in the first half of 2022. The total construction budget for two combined projects is expected to be ˆ11.8 million.

The Company also has building permits to renovate attics in 20 existing assets to create a further 49 units for sale as condominiums, or as rental stock.

Debt and gearing

As at 31 December 2020, PSD had gross borrowings of ˆ291.4 million (31 December 2019: ˆ280.2 million) and cash balances of ˆ37.0 million (31 December 2019: ˆ42.2 million), resulting in net debt of ˆ254.4 million (31 December 2019: ˆ237.8 million) and a net loan to value on the Portfolio of 33.1 per cent (31 December 2019: 32.6 per cent).

Following a strategic review of PSD's liability structure, a new ˆ240 million term loan on improved terms was completed in September 2019. The new facility was agreed with Natixis Pfandbriefbank AG and comprised of two tranches, being a refinancing facility for ˆ190 million which was drawn down in September 2019, and a further acquisition facility for ˆ50 million which was drawn down in two parts in 2020.

The first drawdown of the acquisition facility comprised a ˆ20.3 million facility signed in April 2020, replacing the existing ˆ16.4 million facility acquired as part of the share deal acquisition of the apartment complex in Brandenburg in December 2019. The new loan was signed on improved terms with an extended duration and lower interest rate.

The second drawdown comprised the remaining ˆ29.7 million of the acquisition facility. The ˆ29.7 million drawdown refinanced ˆ21.4 million of existing loans and offered more flexible terms, released ˆ8.1 million of cash and had a maturity profile in line with the Company's existing debt facilities. The new debt does not amortise, whereas the replaced debt incurred amortisation of 1.5 per cent per annum. Additionally, the new debt allows the sale of assets as condominiums, offering more flexibility than the previous debt provider terms.

The increase in gross debt in the period partly results from the refinancing discussed above, offset by debt repayments associated with the sale of condominiums during the year, and scheduled repayments on existing debt.

Nearly all PSD's debt effectively has a fixed interest rate through hedging. As at 31 December 2020, the blended interest rate of PSD's loan book was 2.0 per cent (31 December 2019: 2.0 per cent). The average remaining duration of the loan book at 31 December 2020 had decreased to 6.0 years (31 December 2019: 6.6 years)

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 BPR introduced three new measures of net asset value: EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV). The Company has adopted these new guidelines early and applies them in our 2020 Annual Report. EPRA NTA is calculated in the same way as EPRA NAV has been calculated in previous reports and is the most relevant measure for our business and therefore now acts as our primary measure of net asset value. Where relevant, the previously reported EPRA measures of net assets are also included below for comparative purpose.

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

Table: EPRA Metrics

Outlook

Predictably, the effect of Berlin rent controls, limiting rent levels to well below free market levels, has been to reduce the supply and quality of rental property. Since the Mietendeckel has been implemented, the number of properties constructed prior to 2014 available for rent has fallen by 70 per cent. Moreover, at a time when the need for sustainable, environmentally friendly housing has become ever more apparent, levels of investment in the fabric of existing properties in the wider market have reduced. These trends are likely to continue whilst the Mietendeckel remains in place.

Germany's National Statistics Office estimates that gross domestic product fell 5 per cent in 2020, as the pandemic ended a 10-year growth period. However, the recession in Germany is expected to be among the least severe in Europe, assisted by a decisive fiscal response. By comparison, national output in 2020 is estimated to have dropped by more than 9 per cent in Italy and France, and by 11 per cent in the UK. After eight years of budget surpluses, Germany recorded a budget deficit of almost 5 per cent of GDP at the end of 2020. By contrast, the UK is expected to record a deficit of 17 per cent of GDP for the financial year ending March 2021. Under the German system of wage subsidies to protect workers' jobs - similar to the UK furlough scheme - the peak number of people accessing the support was the equivalent of 13 per cent of the labour force, compared with 26 per cent in the UK.

Notwithstanding these headwinds, investor demand for German residential property remains high, with CBRE reporting record investment in 2020. The experience of German residential property during a year of unprecedented economic disruption has been stable and reliable cash flows. Whilst rental yields have fallen, residential property has, compared to negative interest rates available on German Bunds, offered an attractive risk adjusted alternative.

The monetary policy pursued by the European Central Bank in the wake of the COVID-19 pandemic has been extremely accommodating and is set to remain so in the years ahead, as economies seek to regain lost momentum. With interest rates set to remain at historically low levels, relatively higher yields from residential real estate will remain attractive to institutional investors, such as insurance companies, pension funds and wealth managers, who are increasingly looking favourably on multi-family housing as an alternative to government bonds and other long-dated fixed income instruments.

Low interest rates will continue to benefit the Condominium market as well. Favourable mortgage rates, coupled with a lack of available rental properties, and favourable mortgage versus market rent dynamics, will continue to provide a tailwind for Condominium pricing.

Demographic trends to date in Berlin's private rental market have shown some signs of change in the wake of the Mietendeckel and COVID-19. Scarcity of supply of high-quality rental property, coupled with a growing realisation that working remotely is a viable alternative to a daily city centre commute, has 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. This effect is likely to be seen in increased demand for apartments in PSD's 2019 acquisition of the apartment complex in Brandenburg. This phenomenon is by no means Berlin specific, with accelerating rent momentum and yield compression being observed in many suburban areas across Germany.

Looking specifically at PSD, the 2020 Portfolio valuation conducted by JLL, by necessity, assumes that the Mietendeckel will be in place for its full five-year term. However, the Company and its legal advisors remain firmly of the view that the Berlin rent-cap is unconstitutional and, although a formal timetable for a legal ruling has yet to be published, it is currently expected that the Federal Court will reach a final decision in the first half of 2021. 

Prior to the announcement of the Mietendeckel laws, the shares were valued at, or around, Net Asset Value. Although the shares are currently valued at a significant discount to Net Asset Value, a positive ruling on the Mietendeckel has the potential to materially reduce this.

If the Mietendeckel were to be ruled to be legal then the Property Advisor believes that there is unlikely to be an immediate impact on the EPRA NTA of the Company but it may impact future market volumes and ultimately prices of market transactions. The Company, however, remains well positioned since it expects condominium prices to continue to rise.

The German Federal Elections are due to be held in September 2021. Currently, there is a "Grand Coalition" led by Angela Merkel between the CDU and the SPD which has been in power since the previous Federal Elections in 2017. Any change in the Federal Government make-up could lead to changes in the current regulations around tax, compliance and tenant law. The Property Advisor believes that the Company has a flexible enough business model to adapt to new regulations caused by a change in Government.

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.

Going concern

The Directors have reviewed cashflows for the period of 12 months from the date of signing 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 and 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 twelve months from the date of approval of the financial statements. The Group's going concern assumption is based on the outcome of a variety of scenarios that show the Group's ability to withstand the potential market disruption arising from events such as the Mietendeckel, and COVID-19. The Group's business activities together with the factors likely to affect its future development and the Group's objectives, policies and processes for managing its capital and its risks are set out in the Strategic Report and in notes 3 and 32. After making enquiries and having regard to the FRC's Guidance for Companies on COVID-19 issued in 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 the 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 financing and development 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 risks described earlier 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 31 December 2023:

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) the impact of the Mietendeckel in the event a legal challenge is unsuccessful, which the Board considers to be unlikely; and

h) the continuing impact of COVID-19; and

i) condominium construction development costs

The assumptions on the effect of the Mietendeckel and COVID-19, as they relate to the Company, were assessed by the Board. They are intended to demonstrate the degree of stress that the Company is able to withstand over an extended period. The Board considers that it is unlikely that the more severe assumptions made with respect to the Mietendeckel and COVID-19 will represent a real-life scenario as the Company believes that the Mietendeckel will be found unconstitutional and, as the Company's revenues and general operations were relatively unaffected by COVID-19 in 2020, there is not expected to be any significant impact from COVID-19 either in 2021.

In response to the risks posed by the Mietendeckel the Directors applied additional stresses to the model as described below.

In the event that the Mietendeckel is not reversed, the Group has estimated that it could have a material impact on its revenues as set out in page 9. The cash impact of this fall in revenues could be mitigated in full by reducing capital expenditure down to a level of essential maintenance only, to preserve the condition of the assets to required standards. Furthermore, as demonstrated in 2020, the Group could increase sales of condominiums over the forecast period to mitigate any falls in revenue.

Financial modelling and stress testing was carried out on the Group's cashflows taking into account the Mietendeckel and COVID-19, and the following assumptions, which the Directors consider to be reasonable estimates of a worst case scenario, were made with respect to the operating metrics of the Company:

· COVID-19 leads to an increase in tenant arrears up to December 2021 - current tenant arrears stand at around 1 per cent of total revenues;

· Major changes in tenant law lead to necessary increases in legal and administrative expenses;

· Regulatory authorities move to impede sales of condominiums, leading to a fall in revenue arising from these sales;

· Changes in local building regulations lead to an increase in mandatory capex across all assets, as well as new projects;

· dividends are maintained at current levels throughout the projected three-year period but remain a potential source of mitigation from interim 2021 onwards if cash retention is required; and

· the Mietendeckel remains in force throughout the projected period.

After applying the assumptions above, individually and collectively, there was no scenario in which the viability of the Company over the next three years was brought into doubt from a cashflow perspective. Under the stresses set out above, mitigation may be required in 2022 and 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, including the impact of COVID-19, the Group is projected to be 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 does not include the impact of further potential property acquisitions over the three-year period, as these acquisitions are discretionary in nature, though the cashflows do include the proposed condominium construction referred to on page 15. In this respect, the Directors complete a formal review of the working capital headroom of the Group for all 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 over the three-year period of their assessment.