The Phoenix Spree 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. 

We maintain regular communication with key shareholders and conducts presentations and roadshows to provide investors with relevant information on the company, its strategy and key personnel.

Risk Impact Mitigation

Legal risk

Failing to comply with current laws and regulations in Germany, the UK and Jersey, as well as proposed changes to laws, and failing to implement changes in policies and procedures to take into account new laws could lead to financial penalties and/or loss of reputation of the Company.

The Property Advisor regularly monitors the impact that existing and proposed laws or regulation could have on future rental values and property planning applications.

The Company has appointed legal advisors in Jersey, the UK and Germany who advise of any relevant changes in legal requirements and are periodically invited to Board meetings to report any changes.

The Company recently underwent a detailed review of its structure, carried out by EY to ensure it was working within the confines of the law and regulations of Jersey.

Tenant/Letting and Political risk

Property laws remain under constant review by the ‘Red-Red-Green‘ coalition government in Berlin and changes to property regulation and rent controls for all tenancies have negatively affected rental values in 2020. The most recent tenant law changes involve the Mietendeckel rent cap, which was passed into law in February 2020. The Company’s response to this and the legal situation regarding appeals to the German Constitutional Court are set out in pages 12 to 13 of this Annual Report.

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 regularly monitors the impact that existing and proposed laws or regulations could have on future rental values and property planning applications. The Property Advisor feels that the Company has a flexible enough business model to adapt to new regulations caused by a change in Government.

The Company has sought independent legal advice regarding the Mietendeckel and has been advised that the legislation is likely to be found unconstitutional and illegal and should be successfully challenged in the courts of law in the first half of 2021.

The Company set out last year how it intends to adapt its strategy during the period in which the Mietendeckel remains in law to mitigate any short-term impact on the Portfolio. These measures, together with the financial impact in 2020 are summarised on pages 12 to 13.

Market risk

Economic, political, fiscal and legal issues can have a negative effect on property valuations. A decline in Group property valuations could negatively impact the ability of the Group to sell properties within the Portfolio at valuations which satisfy the Group’s investment objective.

COVID-19 remains prevalent in Germany and potential restrictions to work and assembly have the possibility of negatively impacting the Company’s operations and tenants’ ability to pay rents as they fall due.

Although the Board and Property Advisor cannot control external macro-economic risks, economic indicators are constantly monitored by both the Board and Property Advisor and Company strategy is tailored accordingly.
The effects of COVID-19 on the Company’s operations and finances have been limited, with strong rent collection during 2020. Its outsourced service providers have also managed to continue operating with limited disruption. The Company does not anticipate potential further disruption negatively impacting its operations in 2021 but will continue to monitor the situation.

The German Federal Government is currently considering introducing new laws which would allow States to block the partitioning of apartment blocks into condominiums. The Berlin Government is likely also to adopt this stance should the proposals proceed into law. This would likely be a net positive for the Company since the supply of condominiums would be materially reduced, increasing the value of the stock of over 1,700 split units owned by the Company.

Financial risk

A fall in revenues could result in the Group breaching financial covenants of a lender, and also lead to the inability to repay any debt and related borrowing costs. A fall in revenue or asset values could also lead to the Company being unable to maintain dividend payments to investors.

The Group took on new covenants when signing the €240 million debt with NATIXIS; Interest coverage ratio (‘ICR’), debt yield, and loan-to-value covenants. Only the debt yield and ICR covenants are ‘hard’ covenants resulting in an event of default in case of breach. The loan-to-value covenant is a cash trap covenant alone, with no event of default. The Company carried out extensive sensitivity analysis prior to signing these covenants and even in the most stressed Mietendeckel rent scenarios, no covenants were breached.

The Company’s debt with Berliner Sparkasse contains annual reporting rental requirements but does not contain any specific covenants.

The Property Advisor continues to model its expected revenues and covenant levels, and these are reported to the Board as part of its viability assessment which can be seen on pages 48 to 49. At no point in the three-year projection process were any covenants projected to be breached. Furthermore, these projections also did not anticipate any reduction in the dividend to meet other requirements.

In the event that rent levels or property values were to fall to a point where the covenants were in danger of being affected, the Company would use its surplus cash flow and cash reserves to pay down the debt balances to rectify the situation. At the most recent covenant test date, in January 2021, all covenants were cleared.

Outsourcing risk

The Group’s future performance depends on the success of its outsourced third-party suppliers, particularly the Property Advisor, QSix, but also its outsourced property management, IFRS and German GAAP accountants, and its administrative functions. The departure of one or more key third-party providers may have an adverse effect on the performance of the Group.

Since the Company listed on the London Stock Exchange, the Property Advisor has expanded headcount through the recruitment of several additional experienced London and Berlin-based personnel. Additionally, senior Property Advisor personnel and their families retain a stake in the Group, aligning their interests with other key stakeholders. In November 2018, the Company announced that it had signed a new Property Advisor agreement with QSix, committing the Property Advisor to the Company for the foreseeable future.

The key third parties responsible for property management, accounting and administration are continually monitored by the Property Advisor, and also have to provide responses annually to a Board assessment questionnaire regarding their internal controls and performance. These questionnaires are reviewed annually by the Board.

IT and Cyber Security risk

The Company is dependent on network and information systems of various service providers – mainly the Property Advisor, Property Manager and Administrator, and is therefore exposed to cyber-crimes and loss of data. As cyber-crime remains prevalent across Europe, this is considered a significant risk by the Group. A breach could lead to the illegal access of commercially sensitive information and the potential to impact investor, supplier and tenant confidentiality and to disrupt the business of the Company.

Review of IT systems and infrastructure in place to ensure these are as robust as possible. Service providers are required to report to the Board on request, and at least annually via the Board questionnaires, on their financial controls and procedures.

A detailed review of all IT processes led to the introduction of new invoice payment software, as well as introducing new IT and Communication platforms to ensure all communications are carried out in a secure environment.

Service providers are also required to hold detailed risk and controls registers regarding their IT systems. The Board reviews service organisations’ IT reports as part of Board meetings each year.

Lack of investment opportunity

Availability of potential investments which meet the Company’s investment objective can be negatively affected by supply and demand dynamics within the market for German residential property and the state of the German economy and financial markets more generally.

The Property Advisor has been active in the German residential property market since 2006. It has specialised acquisition personnel and an extensive network of industry contacts including property agents, industry consultants and the principals of other investment funds. It is expected that future acquisitions will be sourced from these channels. While the market in Berlin is currently challenging due to the recently introduced Mietendeckel, the Property Advisor believes that this will create other opportunities, including densification projects within the current Portfolio and acquiring in the suburbs of Berlin, outside the scope of the Mietendeckel, where the growth potential is more promising.