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.


Decline in property valuation

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

The Property Advisor believes German housing affordability metrics remain favourable relative to other European countries and that German residential supply-demand dynamics are supportive, with limited supply of rental stock in urban locations putting upward pressure on rents.


Adverse interest rate movements

Future interest rate rises could increase the borrowing cost to the Group which, in turn, could negatively affect the Group’s financial performance.

The Property Advisor has a record of securing financing across the Portfolio. The Group mitigates its exposure to adverse interest rate movements through the use of interest rate swaps or by fixing its interest rates.  All new debt drawn in the year was fixed using interest rates swaps. The average blended interest rate of the Group’s debt profile is now 2.0% with a blended maturity of 7.7 years. During the past 24 months, 100% of the Group's debt has been refinanced.


Inability to sell condominiums

Inability to sell condominiums in the Berlin market due to changing political or economic conditions could affect the Company’s cashflows in the short term, which may affect the ability of the company to fund its capital expenditure programme or fund its annual dividend.

The Company currently has split over half the properties in the German land registry, the final step to allowing the sale of properties as individual condominiums. The Property Advisor reviews the condominium profile of the Company on a monthly basis and the Company can onboard new condominium properties quickly for sale if required.


Breach of covenant requirements

Should any fall in revenues result in the Group breaching financial covenants given to any lender, the Group may be required to repay such borrowings in whole or in part, together with any related costs.

The Group has no loan to value covenants on debt held. The group does have debt service coverage covenants on its finance with DZ Hyp bank which are assessed annually in January. DZ Hyp loan covenant requirements have always been met with significant headroom, and were most recently met in January 2019, again with significant headroom. The Property Advisor regularly monitors all debt service coverage covenants and would seek to take remedial measures in advance of any covenant being breached.


Insufficient capital to support expansion

Lack of capital may restrict the ability of the Group to pursue future investment opportunities consistent with the overall investment objectives.

At year end the Group had cash reserves of €26.9m and has signed debt in 2018 of €28.9m, €27.6 of which was drawn. The Group always maintains very conservative long term forecasts regarding its cash balances to ensure a three year viability projection. Taking this into accounts and current and future spending commitment on improving the portfolio and returns to shareholders, without further debt the Group has limited capacity for acquisitions. It continues to look for methods to achieve further capital on an ongoing basis.


Insufficient investment opportunity

Availability of potential investments which meet the Group’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.


Changes to property and tenant law

Property laws remain under constant review by the new “Red-Red-Green” coalition government in Germany and future changes to property regulation and rent controls for new tenancies could negatively affect rental values and property valuations.

The Property Advisor regularly monitors the impact that existing and proposed regulation could have on future rental values and property planning applications. In order to reduce the dependency upon statutory rent increases, the majority of the new leases signed within the Portfolio include annual indexation (or ‘Staffel’) increases.


Occupancy and tenant risk

Unexpected vacancy and tenant default trends across the Portfolio could lead to a rental income shortfall which, in turn, may adversely impact Group profitability and investment returns.

The Property Advisor implements strict vetting and screening processes to improve tenant quality across the Portfolio. Where appropriate, apartments becoming vacant are renovated and modernised and then re-let at rents which are at a significant premium to that paid by outgoing tenants.


Reliance on the Property Advisor and its key personnel

The Group’s future performance depends on the success of the Property Advisor’s strategy, skill, judgement and reputation. The departure of one or more key employees may have an adverse effect on the performance of the Group and any diminution in the Property Advisor’s reputation may have an adverse effect on the Group’s performance.

Since Listing 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 Group announced that it had signed a new Property Advisor agreement with PMM, committing the Property Advisor to the Fund for the foreseeable future.


Reputational risk

Adverse publicity and inaccurate media reporting could reflect negatively on stakeholders’ perception of the Group, its strategy and its key personnel.

The Group has retained an external public relations consultancy and press releases are approved by the Board prior to release. The Group maintains regular communication with key shareholders and conducts presentations and roadshows to provide investors with relevant information on the Group, its strategy and key personnel. The Group also has a dedicated CSR committee of the Board which ensures the company ethos is in line with societal expectations.


Macro economic environment

A deterioration in economic growth and a recessionary environment could adversely affect tenant demand and vacancy, leading to a reduction in rental and property values.

Although the Board and Property Advisor cannot control external macroeconomic risks, economic indicators are constantly monitored by both the Board and Property Advisor and Group strategy is tailored accordingly. The Fund is a Jersey & Guernsey based entity operating in Germany, and therefore Brexit should not affect the fund as it currently operates outside the UK. However, the uncertainty surrounding Brexit continues to affect the macroeconomic environment around Europe and the situation continues to be monitored by both the Board and Property Advisor


Non- compliance with new regulatory accounting and taxation legislation

Failure to identify and respond to the introduction of new financial regulation in a timely manner. Risk of reputational damage, penalties or fines.

The Group employs internal compliance and corporate governance advisors to provide updates and boardroom briefings on regulatory changes likely to impact the Group. The Group works closely with external accountants and tax advisors to keep up to date with changes to financial regulation in the UK, Channel Islands and Germany.


Loss of data due to cyber security attack on IT systems

Illegal access of commercially sensitive information and potential to impact investor, supplier and tenant confidentiality.

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 on their financial controls and procedures. Service providers are also required to hold detailed risk and controls registers regarding their IT systems. The board is currently reviewing its IT procedures and controls for the 2019 financial year.