Principal risks

Economic and political risk

The global economic and political environment remains uncertain, heightened by the ongoing conflict in Ukraine.

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

The ongoing war in Ukraine has negatively impacted gas, energy and raw material supplies to Germany and the rest of Europe. This has led to, and could lead to, further rises in overall costs both for the Company and its tenants.

Rising inflation has directly impacted the cost of building materials and the construction workforce, which could negatively impact the Company’s development, renovation and modernisation projects.

The Federal Government has introduced new laws which would allow States to block the partitioning of apartment blocks into condominiums. The Berlin Government has adopted these proposals.

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 Company reviews and monitors emerging policy and legislation to ensure that appropriate steps are taken to ensure compliance.

The Company monitors costs and cash balances closely at all times and plans budgets for capital expenditure that take into consideration the potential for cost inflation. The Company has suspended dividend payments to preserve cash.

The Company rigorously checks the credit worthiness of new tenants and has always set strict income to rent criteria for incoming tenants.

The Company engages with external advisors to advise on potential policy and regulatory implications of political events.

Blocking the ability of landlords to split assets at the land registry would likely be a net positive for the Company since the supply of condominiums would be materially reduced, increasing the value of the existing stock. With 76.6 per cent of the Company’s Portfolio already split in the land registry as condominiums, the Company is likely to benefit from this.

Increased

Financial and interest rate risk

Inadequate management of financing risks could lead to insufficient funds for sustaining business operations and timely repayment of existing debt facilities. These risks encompass reduced availability of financing, rising financing costs, higher than planned leverage and breaches of borrowing facility covenants.

A fall in revenue or asset values could also lead to the Company being unable to restart and maintain dividend payments to investors.

The Company seeks to manage its loan to value ratio through the property cycle to ensure that, in the event of a significant decline in property values, its financial position remains robust.

Interest rate risk is managed through the use of derivative instruments with matching maturity or fixed-rate debt. At least 80 per cent of drawn loan facilities are hedged.

The Company continues to model expected revenues, property values and covenant levels, and these are reported to the Board as part of its annual Viability Assessment.

The Company took on new covenants when signing its facility with Natixis in January 2022: 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 (the requirement to hold all related rental income in Natixis accounts until sufficient debt is repaid to return within the covenant level), with no event of default. The Company carried out extensive sensitivity analysis prior to signing this facility and, even in the most stressed rent scenarios, no covenants were breached.

The Company is in regular contact with its financing partners and regularly reviews its financing covenants. They are subject to biannual valuations which were last carried out at the end of 2022. At that time, the Company retained substantial headroom on all covenants.

Acquisition and disposal activity within the Portfolio is closely monitored in the light of underlying property market conditions to ensure that the Company’s loan to value ratio and debt refinancing schedules remain appropriate.

In the light of weak current market demand, the Company has suspended dividend payments to preserve cash.

Berlin residential rental values have historically been relatively resilient during times of economic stress, and this is not expected to change due to supply constraints.

Inability to sell properties including condominiums

During the 2022 financial year, there has been a significant deterioration in investor and consumer confidence in reaction to inflationary pressures and consequential interest rate rises.

A higher cost of financing has seen investor appetite for German residential assets weaken, and, during the second half of the financial year, pricing has weakened. In parallel with this, a number of larger market participants are now net sellers of assets as they seek to reduce leverage. As pricing expectations between buyers and sellers have differed, transaction volumes have dropped.

Higher mortgage rates combined with economic and geopolitical uncertainty has negatively impacted buyer sentiment for condominiums.

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

The Company continually monitors the portfolio of assets to ascertain the potential for disposals of buildings.

The Company regularly reviews whether any current or future changes in the property market outlook present risks which should be reflected in the execution of its asset management and capital position. 

The Company maintains a strong relationship with its independent valuers who provide regular assessments of the property market outlook.

The Property Advisor maintains a strong network of investors active in the market and actively monitors valuation and liquidity trends in the Berlin residential market.

In the light of weak current market demand, the Company has suspended dividend payments to preserve cash.

Property laws remain under constant review by both the Federal Government and the coalition government in Berlin.

Further tightening of the Mietpreisbremse laws, which limit the amount that landlords can increase rent in apartments in certain zoned areas, could negatively impact the Company’s reversionary reletting strategy.

During the 2022 financial year, there has been increasing use of online platforms by tenants in order to ascertain if rents prescribed by landlords are compliant with all tenancy laws and regulations.

A significant increase in the cost of living has reduced net disposable income and placed more pressure on vulnerable tenants, which could lead to defaults on rents. This, in turn, could place financial pressure on the Company.

The Company has historically been able to adapt its business model to accommodate new rent regulations.

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 maintains regular contact with a broad network of professional advisors and industry participants to ensure that it is kept up to date on property tenancy laws and regulations, both current and future.

The Property Advisor is in constant dialogue with the Company’s property manager (Core Immobilien) to ensure that tenants are notified on a timely basis of any changes to tenancy laws and rental levels.

The Company, through its Property Advisor and Property Manager, maintains close contact with tenants. To date, few concerns have been raised, either through online platforms or elsewhere in relation to non-compliance with tenancy laws and regulations.

The Company rigorously checks the credit worthiness of new tenants and has always set strict income to rent criterial for incoming tenants. The Company has in place a Vulnerable Tenant Policy which it will continue to monitor and apply to relevant tenants. The Property Advisor closely monitors vulnerable tenants and those unable to afford their rents.  A vulnerable tenants list is reviewed by the Company Board. In instances of hardship the Company seeks to support its tenants, both residential and commercial, by agreeing, on a case-by-case basis, the payment of monthly rents or deferring rental payments.

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 the risk of cyber-crimes and loss of data.

As cyber-crime remains prevalent, this is considered a significant risk by the Company. 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.

The Russian state has been linked to cyber-attacks on government and international infrastructure and the risk of an increase in these attacks is highly likely now that the Russian state is subject to international sanctions due to its invasion of Ukraine. 

There is a constant review of IT systems and infrastructure in place for the Company to ensure these are robust. Service providers are required to report to the Board on request, and at least annually, on their IT controls and procedures.

A detailed review has been undertaken of the cyber security of the Company and its outsourced processes. As part of this review, the Company has required all its key service providers to confirm to the Company their procedures and protocols around cyber security on an annual basis. Additionally, the Company has requested that all service providers carry out cyber penetration testing and report back to the Board with any significant observations. No material concerns have arisen from these reviews.

Service providers are also required to hold detailed risk and control registers regarding their IT systems. The Property Advisor and the Board review service organisations’ IT reports as part of Board meetings each year. No material concerns have arisen from these reviews.

The Board believes that, while the risk of cyber-attacks has increased due to the sanctions imposed on Russia, the risk to its service providers directly remains relatively low. The secondary risk from cyber-attacks on digital infrastructure, such as payment systems, remains high and the Board, and the Property Advisor, will continue to monitor the situation.

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.

Decreased financial liquidity has resulted in reduced acquisition opportunities available to the Company.

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.

The Company’s shares are currently valued at a significant discount to Net Asset Value. Given this, the Company has undertaken to not commit to further acquisitions until such time as this discount narrows.

Any future acquisitions will be subject to rigorous checks to ensure that they meet financial and environmental targets. Acquisitions are benchmarked against the alternative of share buy-backs.

Outsourcing risk

The Company’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 (International Financial Reporting Standards) 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 Company.

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 significant stake in the Company, aligning their interests with other key stakeholders.

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

ESG risk

A failure to anticipate and respond to environmental risks and take proactive measures could damage the Company’s reputation and disrupt its operations.

Unplanned capital expenditure from the cost of complying with energy performance and climate legislation with specific energy performance and/or building requirements could negatively impact on operational cashflow.

Future investor expectations for ESG compliance could result in diminished asset values and/or illiquidity in the resale market if assets are not deemed suitably ESG compliant.

The Company maintains its own dedicated ESG consultant to advise and assist in the implementation of ESG related activity.

The Company has instructed a leading law firm to provide a watching brief on current and future climate and energy performance related legislation as they affect German residential properties.

The Company has recently secured the services of a carbon mapping consultancy to advise on the carbon footprint of five buildings that are representative of the Portfolio. 

ESG considerations are reviewed by the Company Board on a quarterly basis.

The Company seeks to ensure accurate reporting of its ESG related activities and, in 2022, was awarded a gold medal for its sustainability reporting by the European Public Real Estate Association (EPRA).