Phoenix Spree D Regulatory News (PSDL)

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

Financial results for the year ended 31 December 2022

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 2022.

Financial Highlights

1 - Portfolio valuation includes investment properties under construction.

2 - Calculated at FX rate GBP/EUR 1:1.128 as at 31 December 2022 (2021: GBP/EUR 1:1.191)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.

Further increase in rental levels, resilient reletting premium

· Like-for-like rental income per sqm increased by 3.9 per cent versus prior year.

· New leases in Berlin signed at an average 32.3 per cent premium to passing rents.

· 320 new leases signed during the year, with the average rent of all new lettings increasing to €13.0 per sqm, a 6.6 per cent increase on the prior year.

· EPRA vacancy of 2.4 per cent as at 31 December 2022 remains at historically low level, reflecting ongoing structural undersupply of available rental property.

Portfolio valuation impacted by interest rate rises and yield expansion

· Like-for-like Portfolio value, adjusted for acquisitions and disposals, decreased by 3.1 per cent versus 2021, reflecting an increase in market yields.

· Including investment properties under construction valued at €5.3 million, the Portfolio was valued at €775.9 million as at 31 December 2022, compared to €801.5 million as at 31 December 2021.

· EPRA NTA per share down 9.7 per cent versus 2022 to €5.10.

· EPRA NTA per share total return of (8.4) per cent.

Condominium sales at a premium to carrying value, reduced volumes

· Condominiums notarised for sale during 2022 of €4.7 million, (2021 €15.2 million), reflecting deterioration in buyer sentiment and the difficulty in selling tenanted units.

· Average achieved value per sqm of €5,502 for residential units, a 22.4 per cent premium to trailing carrying value of each property. 

· Since the financial year end, a further three condominiums have been notarised for sale, for a total consideration of €0.8 million, at an average 62 per cent premium to carrying value as at 31 December 2022.

· Reservations for three additional units, with a combined value of €0.6million, and an average 80.0 per cent premium to carrying value, have recently been received and are pending notarisation.

· 77 per cent of Portfolio assets legally split into condominiums, up from 75 per cent as at 31 December 2021. 

· A number of new condominium projects are being brought to market, resulting in a significant increase in vacant apartments offered for sale.

Portfolio management

· Sales agreed on three non-core properties during the financial year for an aggregate consideration of €12.1 million and at an average 6 per cent discount to December 2021 carrying value.

· Although the Company has been actively marketing both individual assets and portfolios, and continues to do so, liquidity in Berlin has been, and remains, limited.

· The majority of offers received during the last six months have been significantly below carrying value, at levels where the Property Advisor considers that sale is not in shareholders' interests.

· Approximately €16.4 million of capital investment was made into the Portfolio during the financial year for refurbishment of apartments and bringing new residential condominium projects to market.

· This investment is expected to be recouped from 2023 onwards through significant rental uplifts.

· It is expected that total capital investment will be materially lower in 2023.

Dividend suspended, investment in Portfolio prioritised

· Under PSD's business model, cash to pay dividends is substantially dependent on condominium and/or other asset sales.

· Priority for use of available cash is to continue to invest in the Portfolio, underpinning our core reversionary rental business which continues to thrive.

· In light of this, and the persistent very low level of liquidity in the Berlin market, and in line with its peer group, the Company has suspended dividend payments to preserve cash and support its core business.

· Net LTV remains conservative at 39.1 per cent (31 December 2021: 34.7 per cent).

· €42.4 million of Berliner Sparkasse debt successfully refinanced during financial year.

Outlook

· Supply-demand imbalances within Berlin PRS provide support for rental values:

o  Rental growth remains strongly underpinned, with new letting rental values expected to continue to be at significant premia to average in-place rents across the Portfolio.

o  Rising cost of home ownership forcing potential buyers to remain within the rental system for longer.

o  Urban housing shortage further exacerbated by anticipated net inward migration of almost one million from Ukraine to Germany.

o  Rising cost of construction further limiting new-build development.

· Transaction activity and asset values

o  Ongoing impact of 2022's interest rate rises continues to weigh on buyer sentiment.

o  Further declines in property values driven by macro factors such as higher medium-term interest rates are likely in H1 2023.

o  The Company continues to market actively both individual properties and portfolios for sale. The Portfolio remains under continuous review and additional properties will be put up for sale. Disposals at a discount to carrying value will be considered, but only at levels which the Board considers to be in shareholders' interests.

o  Plans to bring additional condominium properties to market have been accelerated and bulk condominium sales are under active consideration.

· Balance sheet and dividend

o  The Board considers the current level of gearing and cash balances to be appropriate at this stage in the real estate cycle.

o  The Company remains conservatively financed with its first loan maturity not due until September 2026.

o  The Company intends to reinstate dividends as soon as practical to do so.

o  Any surplus cash generated over amounts required to reinvest in core Portfolio and reinstate dividends on a sustainable basis will, so long as share price discount to NAV persists, be used for share buy-backs and not to acquire further properties.

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"During 2022, the real estate industry has had to adjust to the combined effects of global inflationary pressures and higher interest rates, both of which have weighed on industry transaction volumes and asset values. Although our core rental business continues to thrive, PSD has not been immune from these broader trends, and the Board has therefore taken the decision to suspend the dividend. Rental values remain well supported and the Company has a strong balance sheet and conservative financing.  Whilst the speed of recovery in transaction volumes and buyer sentiment is uncertain, the Company will seek to resume dividends as soon as the outlook becomes clearer."

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 will submit its Annual Report and Accounts to the National Storage Mechanism in the required format in due course, and it will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

For further information, please contact:

Olivia Peters

James Anderson

Faye Callow

CHAIRMAN'S STATEMENT

Since the onset of the war in Ukraine, the European real estate industry has faced a number of headwinds which have impacted investor confidence, transaction volumes and real estate pricing across much of Europe. In particular, the industry has had to adjust to the combined effects of global inflationary pressures and higher interest rates. PSD has not been immune from these broader trends and so has reported the first decline in the value of its Portfolio.

Financial performance and dividend

As at 31 December 2022, the Portfolio was valued at €775.9 million, a like-for-like annual decline of 3.1 per cent. Reflecting this decline, the Euro EPRA NTA total return per share was (8.4) per cent over the year and the sterling return was (3.2) per cent.

Although our core rental business continues to thrive, condominium sales volumes have been impacted by a significant deterioration in buyer sentiment in the light of more challenging economic circumstances. With cash to pay dividends substantially dependent on revenues generated from condominium and other sales, the Board has taken the difficult decision to suspend the dividend.

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

Our tenants and their homes

We recognise that the current cost of living crisis presents challenges for a number of our tenants, and, at all times, their health and wellbeing remain foremost in our minds. We are committed to providing good-quality affordable homes with a reliable, friendly rental service and continue to work constructively with those in greatest need, wherever we can. Where necessary, the Company endeavours to support its tenants who are experiencing financial hardship.

The Company has continued with its programme of investment to improve the overall standard of our tenanted accommodation and provide a platform for rental growth. To this end, over 80 per cent of the Company's net rental income was reinvested into the Portfolio during the financial year.

"Better Futures"

The Board acknowledges the significance of conducting business with integrity, transparency, and accountability towards shareholders, tenants, and other key stakeholders. We recognize that being a responsible company, balancing the needs of our stakeholders, and addressing our environmental and social impacts, is critical to the success and longevity of our business.

To achieve this, our "Better Futures" Corporate Responsibility (CR) Plan provides a framework to monitor and improve our current activities. The plan has five key pillars that are integrated throughout our business operations: Protecting the Environment; Respecting People; Valuing our Tenants; Investing in our Communities, and Governance.

Protecting our environment

The Board recognises 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. We have 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 2022, with PSD receiving a Gold 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.

Our charities

The Company continues to provide financial support to two charities in Berlin: The Intercultural Initiative, a refuge that helps women and children affected by domestic violence, and Laughing Hearts, which provides assistance to children living in children's homes and under social care.

QSix, our Property Advisor, continues to provide support to two charities in London: SPEAR and SHP. Both organisations work with homeless people. SPEAR receives funding to run an outreach service that provides accommodation to rough sleepers and addresses their health and social care needs. SHP supports an employability programme that helps homeless people or those at high risk of homelessness to find jobs and secure sustainable income. During 2022, QSix additionally agreed funding for Home-Start, a UK community network of trained volunteers and expert support helping families with young children.

Ukrainian Crisis

The tragic humanitarian toll caused by Russia's invasion of Ukraine remains foremost in our minds. The war in Ukraine has caused unimaginable hardship and displaced millions from their homes and, in recognition of this, PSD made available a number of apartments on a rent-free basis for Ukrainian refugees. I am pleased to report that these tenants have transitioned into long-term tenancies with the costs covered by the Berlin district of Teltow Fläming.

Our Board

The Board acknowledges the significance of a robust corporate governance culture and adheres to the principles of good corporate governance as outlined in the Association of Investment Companies Code of Corporate Governance ("AIC Code"). More information on how the Company has implemented the provisions of and adhered to the AIC Code can be found in the Directors' Report.

The death of Greg Branch in August has deeply saddened us, and we express our gratitude for his exceptional service during his tenure on the Board. Greg brought a wealth of knowledge from over 30 years in financial services and real estate. He is greatly missed as a colleague and friend by current and former Directors of the Company, QSix investment professionals, and those in the broader business community who had the opportunity to work with him.

As previously announced, Isabel Robins was appointed as a non-executive Director, effective 14 March 2022. Isabel brings over 23 years of expertise in offshore real estate structures, including property funds, investments, and developments. Her extensive real estate background and knowledge will provide valuable insight and complement the skillset of the Board. She takes the place of Monique O'Keefe, who resigned as Senior Independent Director to accept a senior executive role at another company.

The Board was pleased to announce the appointment of Steven Wilderspin as a non-executive Director in January 2023. A resident of Jersey, Steven has had extensive experience as an independent director for multiple public and private investment funds and commercial companies since 2007.

Outlook

European real estate markets continue to adjust to more challenging economic conditions, particularly higher inflation and interest rates, with consequential impacts on transaction volumes and real asset pricing.

Whilst it is still too early to predict when the current real estate cycle will bottom out, PSD remains well positioned, with a strong balance sheet and conservative debt financing. Moreover, our core rental business continues to thrive, with rental values well supported by the positive demographic trends that continue to exist within the Berlin residential property market. This, combined with the ongoing programme of investment into our buildings, underpins the future reversionary potential that exists within the Portfolio.

The Board and Property Advisor remain fully focussed on delivering the best possible outcome for the Company's stakeholders. We recognise the importance of dividends to our shareholders, and the resumption of dividend payments is a priority, once market conditions and the outlook for future condominium sales become clearer.

Robert Hingley

Chairman

28 March 2023

REPORT OF THE PROPERTY ADVISOR

Financial highlights for the twelve-month period to 31 December 2022

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 1:1.128 (2021: GBP/EUR 1: 1.191)

3 - Further EPRA Net Asset Measures can be found in note 29.

Financial results 

Revenue for the financial year to 31 December 2022 was €25.9 million (31 December 2021: €25.8 million). The Company recorded a loss before tax of €17.5 million (31 December 2021: profit before tax €45.3 million), reflecting the non-cash impact of a revaluation loss of €42.2 million (31 December 2021: revaluation gain of €38.0 million).

Property expenses rose by 6.4 per cent over the year, due primarily to service charge increases and related energy/utility price movements. Administration costs and legal and professional fees were marginally down over the year, with slightly higher legal costs from transactional activity offset by a drop in other professional costs. Reported earnings per share for the period were (0.17) € cents (31 December 2021: 0.39 € cents). 

Reported EPRA NTA per share declined by 9.7 per cent in the period to €5.10 (£4.52) (31 December 2021: €5.65 (£4.74)). After accounting for dividends paid during 2022 of 7.5 € cents (6.45 £ pence), which were paid in June and October 2022, the Euro EPRA NTA total return for the period was (8.4) per cent (2021: 8.4 per cent). The sterling EPRA NAV per share total return was (3.2) per cent (31 December 2021: 1.0 per cent), reflecting the decline in the value of sterling versus the Euro during the financial year.

Dividend and share buybacks

The Company has taken the difficult decision to suspend dividend payments. Although the performance of the Company's core rental business remains strong and its balance sheet and financing remain conservative, this is considered the appropriate course of action in the light of ongoing weakness in buyer confidence, asset pricing and condominium and other sales.

The dividend has always been paid from operating cash flows, including the disposal proceeds from condominium projects and other properties. Subject to the cash requirements of the business, and after full consideration of the impact that the economic and operating environment may have on the portfolio of assets owned by the Company, it is the intention to resume dividends once the outlook is clearer.

In the light of the decision not to pay a final dividend and taking into account the interim dividend paid in October 2022, the total dividend for the financial year to 31 December 2022 is 2.35 € cents per share (2.09 £ pence per share) (31 December 2021: 7.5 € cents, 6.38 £ pence).

During the financial year ended 31 December 2022, the Company bought back a further 974,754 ordinary shares, representing 1.0 per cent of the ordinary share capital, for a total consideration of £3.5 million. The average price paid represents a 20.9 per cent discount to EPRA NTA per share as at 31 December 2022.

Although the Company recognises that PSD's share price remains at a material discount to EPRA NTA, it did not buy-back shares in the second half of the financial year. This reflected a decline in the proceeds from condominium sales and uncertainty on the transaction market for other asset disposals.

The Company will continue to keep its cash commitments under close review and will prioritise continued investment in the core Portfolio. Any surplus cash generated over the amounts required to reinvest in the core Portfolio and reinstate dividends on a sustainable basis will, so long as share price discount to NAV persists, be used for share buy-backs and not to acquire additional properties.

Table: Portfolio valuation and breakdown

1 - Value per sqm provided by JLL based on portfolio valuation excluding assets under construction of €5.3 million

Like-for-like decline in Portfolio Valuation of 3.1 per cent

Pricing in the Berlin residential property market weakened in the second half of the financial year, with higher inflation and interest rates adversely affecting buyer sentiment and, consequently, transaction volumes. Market sales volumes in 2022 were at a 10-year low, reflecting a widening gap between buyer and seller price expectations. These weaker market conditions have impacted the valuation of the Portfolio.

JLL has conducted a full RICS Red Book property-by-property analysis, tied back to comparable transactions in the Berlin market, and provided a portfolio valuation on this basis. As at 31 December 2022, the Portfolio, including investment properties under construction, was valued at €775.9 million (31 December 2021: €801.5 million). Investment properties under construction totalling €5.3 million were valued by the Board on a discounted cost basis (see note 16 of the financial statements for further detail). Across the Portfolio, this represents a 3.2 per cent decline over the year, reflecting an increase in market yields and the subsequent impact on real estate asset valuations.

On a like-for-like basis, after adjusting for the impact of acquisitions net of disposals, the Portfolio valuation declined by 3.1 per cent in the year to 31 December 2022, and by 5.2 per cent in the second half of the financial year.

The valuation as at 31 December 2022 represents an average value per square metre of €4,082 (31 December 2021: €4,225) and a gross fully-occupied yield of 3.0 per cent (31 December 2021: 2.8 per cent). Included within the Portfolio are six multi-family properties valued as condominiums, with an aggregate value of €30.1 million (31 December 2021: eight properties; €38.8 million).

Table:  Rental income and vacancy rate

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 2021. Like-for-like rental income grew 6.0 per cent over the same period. Net cold rent was €10.00 per sqm as at 31 December 2022, an increase from €9.64 per sqm as at 31 December 2021.

The Company recognises the challenges that tenants are facing as a direct consequence of inflation, particularly higher fuel prices. Notwithstanding current cost of living pressures, rent collection levels have remained stable. The Company has always managed rent-to-income multiples for new tenants conservatively. Given this customer demographic, combined with German Federal support initiatives to help mitigate the financial impact of rising fuel costs, the Company expects rent collection levels to remain resilient.

EPRA vacancy remains low

Reported vacancy at 31 December 2022 was 6.2 per cent (31 December 2021: 8.4 per cent). On an EPRA basis, which adjusts for units undergoing development, the vacancy rate was 2.4 per cent (31 December 2021: 3.1 per cent).

Reversionary re-letting premium rises to 29 per cent

During the year to 31 December 2022, 320 new leases were signed (2021: 240 new leases), representing a letting rate of approximately 12.9 per cent of occupied units. The average rent achieved on all new lettings was €13.0 per sqm, a 6.6 per cent increase on the prior year, and an average premium of 29.1 per cent to passing rents, excluding condominium assets. This compares to a 26.8 per cent premium in the period to 31 December 2021.

The reversionary premium for the Portfolio is affected by the inclusion of re-lettings from the acquisition in Brandenburg in 2022, where rents are lower than those achieved in central Berlin. Looking solely at the Berlin portfolio assets held for rental, which represents 90.3 per cent of total lettable space, the reversionary premium achieved was 32.3 per cent, comparable to the prior year (33.8 per cent).

Table: EPRA Net Initial Yield (NIY)

All figures in € million unless otherwise stated

Portfolio investment

During the year to 31 December 2022, €16.4 million was invested across the Portfolio (31 December 2021: €9.5 million). These items are recorded as capital expenditure in the financial statements. A further €1.5 million (31 December 2021: €1.7 million) was spent on maintaining the assets and is expensed through profit or loss.

The year-on-year increase in capital expenditure reflects the intensification in renovation and modernisation activity resulting from the repeal of the Mietendeckel rent cap in April 2021 (which made it economically viable for the Company to resume its programme of vacant apartment improvements), alongside increased renovation expenditure on the asset in Brandenburg and further work on bringing assets into a position to be sold as condominiums.  This investment is expected to be recouped in 2023 and beyond through condominium sales and rental uplifts.

In the light of current weaker market conditions and reflecting that future expenditure on the Brandenburg asset will be lower, it is anticipated that total discretionary capital investment will be materially lower in 2023.

Table: EPRA Capital Expenditure

All figures in €million unless otherwise stated

Disposals

In September 2022, the Company announced that it had exchanged contracts to sell two non-core properties for an aggregate consideration of €8.6million. These buildings were acquired in 2008 and 2017 respectively, for an aggregate purchase price of €3.9 million and had a carrying value of €9.0 million as at December 2021.

The Company exchanged contracts to sell a further property deemed to be non-core in December 2022 for €3.5 million. This building was acquired in 2008 for €1.0 million and had a carrying value of €3.9 million as at 31 December 2021.

Since the financial year end, a number of additional properties have been placed on the market. However, the market for asset disposals has been challenging in 2023 to date, with offers significantly below carrying value, and at prices that would release limited cash after repayment of associated debt. Although the Company has and will consider asset disposals at a discount to carrying value, it will only do so in instances where disposal is clearly in shareholders' interests.

Acquisitions

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 units) for a total agreed purchase price of €18.5 million. This new-build has been forward-funded, with construction expected to complete in the second half of 2024. The projected fully-occupied rental income generated by the property is €0.7 million per annum, equivalent to 3.1 per cent of the Portfolio gross in-place rent as at 31 December 2022. Based on the price paid of €4,323 per sqm, this represents an estimated prospective gross yield of 3.5 per cent.

On 5 May 2022, the Company exchanged contracts to acquire four multi-family houses consisting of 24 residential units for a purchase price of €6.3 million. These properties are located in Hoppegarten

and Neuenhagen, Berlin. Built in 1995 and 1998, they are in good technical condition and offer significant reversionary potential, having benefited from recent positive demographic changes.

On 22 September 2022, the Company exchanged contracts to acquire a multi-family house with 22 residential units and 3 commercial units for €4.9million. This property is located in Berlin-Neukölln, is well maintained, and offers significant reversionary and attic potential. The property was acquired for a price of €2,312 per sqm, a level which the Property Advisor believes is below market value. The purchase is due to complete in Q2 2023.

Acquisitions are financed using the Natixis loan facility. No further acquisitions are planned for 2023, pending an improvement in market conditions, the resumption of dividend payments and a significant narrowing of the Company's discount to EPRA Net Tangible Assets.

Condominium sales

Condominium sales during 2022 were heavily impacted by concerns over increases in the cost of living, higher borrowing costs and uncertainty surrounding the macro-economic environment caused by the crisis in Ukraine. These factors led to a significant deterioration in buyer sentiment and reduced volumes.

During the financial year, 13 condominium units were notarised for sale for an aggregate value of €4.7 million (2021: €15.2 million). The average achieved notarised value per sqm for the residential units was €5,502, representing a gross premium of 22.4 per cent to carrying value and a 34.8 per cent premium to PSD's average Berlin residential portfolio value as at 31 December 2022.

Since the financial year end, a further three condominiums have been notarised for a total consideration of €0.8 million, at an average 62 per cent premium to carrying value. Reservations for a further three units, with a combined value of €0.6million, and an average 80 per cent premium to carrying value have recently been received and are pending notarisation. These condominiums were smaller than the average across the portfolio of condominium assets, and the premium achieved should not be viewed as representative of future condominium valuations.

Buyer confidence in the condominium market remains very fragile, particularly for occupied units. The Company is therefore focussing on plans to bring additional unoccupied condominium properties to market and bulk condominium sales are under active consideration.

German Federal Government legislation enacted in 2022 has placed significant restrictions on the ability of landlords to split their properties into condominiums. This legislation is, however, not retrospective and does not impact assets that have already been split into condominiums. These measures will inevitably increase the scarcity of condominiums available for sale in the future, further exacerbating the supply-demand imbalance which currently exists. With 76.6 per cent of its Portfolio already legally split in the land registry, the Company is well placed to benefit from this trend over the longer term.

Condominium construction

As previously reported, a condominium construction project has commenced in an existing asset bought in 2007, involving the building-out of 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 unit has been notarised for sale, with more units being made available throughout 2023. The total construction budget for this project is €4.5 million, a 15 per cent increase from initial budget due to an industry-wide cost increase in building costs.

The Company also has building permits for another 20 existing assets to create a further 49 attic units for sale as condominiums or as rental stock. This investment will be considered as and when market conditions permit.

Debt and gearing

PSD has loan facilities with two principal bankers, Natixis Pfandbriefbank AG and Berliner Sparkasse, with an average remaining duration of the loan book exceeding three years and none of the Company's debt reaching maturity until September 2026. Despite interest rate rises during 2022, the Company's interest rate hedging policy has largely negated the impact on our cash borrowing costs. The Board considers the current level of gearing and cash balances to be appropriate at this stage in the real estate cycle and will not look to materially increase debt levels until such time as the market outlook becomes more stable.

As at 31 December 2022, PSD had gross borrowings of €315.8 million (31 December 2021: €288.4 million) and cash balances of €12.5 million (31 December 2021: €10.4 million), resulting in net debt of €303.3 million (31 December 2021: €278.0 million) and a net loan-to-value ratio on the Portfolio of 39.1 per cent (31 December 2021: 34.7 per cent).

The change in gross debt in the period results from an additional drawdown from the Natixis facility, which includes borrowings for further capital expenditure, previously announced acquisitions and a tranche of debt related to the new-build project in Erkner. Partly offsetting the drawdowns are repayments of debt on the sale of whole assets and condominiums, alongside amortisation of debt held with Berliner Sparkasse.

The majority of PSD's debt effectively has a fixed interest rate through hedging. As at 31 December 2022, the blended interest rate of PSD's loan book was 2.2 per cent (31 December 2021: 2.0 per cent).

Sustainability

The European Union has set a target of achieving carbon neutrality by 2050 and the real estate sector will play a crucial role in meeting this goal. The broad thrust of government policy is to reduce carbon emissions and incentivize investments in low-carbon and environmentally sustainable solutions.

Most climate related regulation as it affects the Berlin residential sector has the objective of reducing and de-carbonising the heat consumption of buildings. PSD regularly receives updates from third-party experts on environmental legislative developments in Europe, Germany, and Berlin to ensure compliance and plan for future capital expenditure.

One example is green leases. Whilst currently predominantly used in commercial real estate, they are likely to become increasingly popular in the residential sector. Currently, residential landlords in Germany do not have sight of the utility consumption in tenants' homes, as the information is controlled by the tenant. Green leases may eventually be helpful in encouraging landlords and tenants to work together to understand where there can potentially be reciprocal value in working towards shared environmental goals.

Under a green lease, the landlord and tenant may agree to undertake measures such as improving the building's energy efficiency, using renewable energy sources, reducing water consumption and implementing waste management practices. Tenants are encouraged to make changes to their own operations and behaviour, such as using energy-efficient equipment, reducing waste, and conserving resources.

The Property Advisor is monitoring the feasibility of smart metering. Although it is expected that there will soon be an obligatory rollout of smart metering infrastructure in Germany for electricity, it is understood that the responsibility for the implementation of this may reside with the respective meter operators.

The Company has additionally mandated external consultants to begin the process of establishing the carbon footprint of the Portfolio. This work will initially commence on a representative sample of five buildings within the Portfolio. It is anticipated that the outputs of this exercise will help further clarify the processes and any associated capital expenditure required to comply with medium to long-term German residential emissions targets. Any associated carbon emissions that occur as a result of remedial works would also be considered.

The Company remains committed to best practice in ESG reporting and will publish a separate EPRA Sustainability report in the second half of 2023. The Company has additionally committed to making its first Global Real Estate Sustainability Benchmark (GRESB) submission with a view to obtaining full accreditation in 2023.

EPRA Best Practice Financial Reporting Metrics

PSD fully supports the European Public Real Estate Association (EPRA) best practice recommendations (BPR) for financial disclosures by public real estate companies which are designed to improve the quality and comparability of information for investors.

The following table sets out PSD's EPRA KPIs from the released BPR dated February 2022 and references where more detailed calculations supporting the KPIs can be found in the report.

Table: EPRA Metrics

Outlook

With the publication of the 2022 interim results, the Property Advisor cautioned that there had been a deterioration in buyer sentiment leading to reduced transaction volumes and that the outlook for the German property market in the second half was uncertain. Ultimately, the steep upward movement in interest rates has triggered a price correction in real estate markets. Uncertainty about the extent and duration of the correction led to many investors withdrawing from the market. In instances where portfolios of properties were placed on the market, pricing did not match vendor expectations. Effectively, the bid-offer spread widened to an extent that most potential transactions did not complete, and transaction activity fell to a 10-year low.

This process of adjustment has yet to complete and the outlook for property values in the first half of 2023 is likely to remain challenging. Further declines in property values driven by higher medium-term interest rates cannot be discounted. This risk is already being reflected in the share prices of listed German residential companies, all of which currently trade at a significant discount to net asset value.

The Property Advisor retains a wide network of industry practitioners, including potential buyers of assets. Since the beginning of 2023, a significant number of larger participants, that had temporarily withdrawn from the market, have now begun to indicate an appetite for acquiring German residential property again. Although this is an important first step in narrowing the bid-offer spread, it remains uncertain as to when or whether renewed interest is priced at a level that matches vendor expectations.

Whilst there remains uncertainty about real asset values, supply-demand imbalances within the Berlin residential market remain supportive of rental values, underpinning our core rental business. Demand for rental properties continues to rise as higher home ownership costs force potential buyers to remain within the rental system for longer. Demand has been further increased by inward migration in excess of one million refugees into Germany from Ukraine during 2022, placing further pressure on residential vacancy levels, which are already at historically low levels.

At the same time, higher funding, labour and construction costs represent significant headwinds to new-build construction, limiting the future supply of rental accommodation. Set against an annual target set by the German Federal Government of 400,000 new completions per year, less than 250,000 are estimated to have completed in 2022, with forecasts for 2023 and 2024 lower still. Future rental growth should therefore continue to be underpinned, and there remains significant reversionary re-letting potential across PSD's Portfolio.

It remains too early to predict the timing of any industry upswing in sales volumes in the condominium market. Buyer confidence remains fragile, particularly for occupied units. Longer term, Federal Government legislation enacted in 2022 has placed significant restrictions on the ability of landlords to split their properties into condominiums and these measures will inevitably increase the scarcity of stock available for sale in the future, further exacerbating the supply-demand imbalance which currently exists. With 76.6 per cent of its Portfolio already legally split in the land registry, the Company should be well placed to benefit from this trend in the longer term.

With a net LTV of 39.1 per cent and no loans maturing until September 2026, the Company remains conservatively financed. The current level of gearing and cash balances is considered to be appropriate at this stage in the real estate cycle and the Company will not seek to undertake further acquisitions or increase debt levels until such time as the market outlook becomes more stable. Historically, excessive leverage at this stage in a real estate cycle has not been well rewarded by equity and debt capital markets and the Company will therefore continue to seek opportunities to dispose of further assets where appropriate.

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 projections for the period up to March 2024, 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.

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 to 31 December 2025. The Directors have chosen three years because that is the period that 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 on pages 35 to 39. 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 2025:

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

b) the method of payment of the performance fee due to the Property Advisor;

c) seasonal fluctuations in working capital requirements;

d) property vacancy rates;

e) rent arrears and bad debts;

f) capital and corporate expenditure;

g) proceeds from the sale of condominiums and other assets;

h) dividends and share buybacks; and

i) asset acquisitions.

This model assumes stresses to each of a) through to i) in the above list.

Financial modelling and stress testing were carried out on the Group's cashflows, taking into account the following assumptions, which the Directors believe to reflect the conditions present in a reasonable 'worst case' scenario over the forecast period;

· increased regulation of rent levels of tenancies in the Berlin and Brandenburg markets leads to a fall in rental income of 20 per cent;

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

· whole asset sales are not economically viable and therefore reduced by 100 per cent;

· changes in climate related and energy performance legislation 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 development acquisition in Erkner; and

· a 20 per cent reduction in the debt available for future capital expenditure projects.

After applying the assumptions above, individually and collectively, there was no scenario in 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 2024 and headroom could be obtained in the following ways:

· cancellation of larger capital expenditure projects;

· continuing the suspension of the dividend.

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

The projected cash flows include the impact of already contracted property acquisitions. On the basis of this assessment, 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.