Recent reports of rising financing costs have not only troubled Grand City Properties, an Aroundtown subsidiary, but the entire sector. As a result, the difficult market environment for property sales forced the company to write down its portfolio. This led to a loss in the hundreds of millions last year. Despite increased rental income due to strong demand for housing, higher financing costs impacted the operating profit (FFO1). Additionally, no dividend was distributed again, and the company issued a cautious forecast for the current year. But how do experts assess the future plans of the residential real estate giant?
According to analyst Jonathan Kownator from the US investment bank Goldman Sachs, the financial figures largely correspond to his estimates. The targets projected by the corporation for the current year are also in line with expectations. However, analyst Paul May from the British investment bank Barclays criticized that Grand City Properties did not pay a dividend for the second consecutive time.
In 2023, the net rental income of the company listed in the SDAX increased by four percent to approximately 411 million euros, as announced on Wednesday in Luxembourg. This increase is mainly due to higher rents and a lower vacancy rate. However, particularly higher financing costs weighed on the operational result, which declined by four percent to 183.9 million euros compared to the previous year. For the current year, the subsidiary of Grand City Properties expects an operational profit of 175 million to 185 million euros. This would mean both a decrease and a slight increase.
In a conversation with the financial news agency dpa-AFX, the chairman of the supervisory board Christian Windfuhr cited two reasons for the cautious profit forecast: additional bank debt that needs to be repaid, as well as further costs due to interest payments for hybrid bonds (notes). As a result, profits from operating activities could be offset by these additional costs. For 2024, the company plans to increase its net rents by three percent on a comparable basis.
Due to the devaluation of the property portfolio, the company recorded a loss of around 638 million euros in 2023. In the comparable period of the previous year, Grand City Properties still made a profit of over 179 million euros. The property holdings were devalued by nine percent, with a devaluation of eleven percent occurring in Germany, as CEO Refael Zamir explained in a conference call with analysts. Overall, the value of the properties has fallen to the level of 2018. For the current year as well, the manager expects further devaluations of the portfolio, which should, however, be less severe than in 2023. "We hope that the devaluations will be about half as much as last year," added Chairman of the Board Windfuhr.
As with other companies in the industry, Grand City Properties keeps an eye on its debt levels and is therefore selling properties. Last year, the company sold apartments valued at 306 million euros, which is about three percent below the book value. The sales mainly involved older properties in London and North Rhine-Westphalia. "The transaction market is still weak," said Chairman of the Board Windfuhr. Prices for apartment sales are just slightly below book value. Buyers primarily include family offices, small private equity firms, and occasionally larger financial investors. However, the deals tend to be small. Last year, the company sold around 1,200 apartments and there are still properties valued at about 200 million euros for sale. However, as Windfuhr emphasized, there is no set target for the number of apartments to be sold. If the price is right, everything is ready for sale. Nevertheless, the company is not under pressure to sell anything.
In 2023, the cost of debt was low at 1.9 percent at the end of the year, with an average maturity of 5.3 years. The group also has sufficient cash and liquid assets to service the debt until the end of 2026. Although the market situation has improved somewhat recently, macroeconomic uncertainty remains, as the company emphasizes. In the current situation, it is better to be cautious with capital and liquidity in order to reduce indebtedness. Therefore, as already announced on Tuesday, no dividend will be distributed again for the year 2023. Chairman of the Supervisory Board Windfuhr stated that a dividend could be considered again from next year if the market situation improves. Until then, the company will continue to retain its cash reserves in order to be able to service its debt after 2026 as well. Management expects the interest rate environment to improve again from mid-2024.
Grand City Properties is mainly active in densely populated areas of Germany with its approximately 63,300 apartments, including Berlin, North Rhine-Westphalia, the Halle-Leipzig-Dresden region, and the Rhine-Main area. Furthermore, the company is also represented in metropolises such as London and Munich. The largest shareholder is the commercial real estate group Aroundtown, which holds 61 percent of the company. The company's share saw a loss of over four percent in early trading and ultimately fell by around 1.7 percent.
