Dear ladies and gentlemen, welcome to the financial presentation call of Grand City Properties S.A. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Ms. Katrin Petersen, Head of Communication, who will start the meeting today. Please go ahead, madam.
Yes. Thank you. A very good morning to everyone. In the name of Grand City Properties, I kindly welcome you to the results call for the first half year of 2019. With me are CEO Christian Windfuhr, CFO and Chairman of the Board of Directors, Refael Zamir, and Senior Financial Analyst, Michael Bar-Yosef. Christian Windfuhr will lead you through the results presentation directly after this intro. You will find the presentation on the company website in the section, Investor Relations. The presentation of the results will be followed by a session with Q&A. The management is available for questions. We have already asked you in advance to send us your questions by email. Please continue to send us your questions so that we can include them accordingly. Please send your questions to the following address, info@grandcity.lu. Once again, the email address is info@grandcity.lu.
Now I hand you over to Christian Windfuhr to begin with the presentation. Thank you for your attention.
Good morning also from my side. Welcome to the first half 2019 results call for Grand City Properties. We are happy to report a good first half of 2019 with good internal growth, a continuation of our portfolio quality improvements, and diversification. During the second quarter of 2019, we have continued growing the business in all aspects, including enhanced asset quality, as evidenced by a further increase in book value. More detail about this later in the presentation. First, please join me on page number three for our highlights. We were able to produce a solid growth in all our operating figures, rental income, adjusted EBITDA, and FFO1. We also solidified our EPRA NAV and maintained our very solid debt structure. I'm now turning over to Refael to guide us through the financial results in detail.
Good morning. On slide four, we show to you our profit and loss information. We can say that we were able to capture the strong hidden value inside our portfolio and continue with our value creation. In the first half of 2019, we sold mature and non-core properties at the value of almost EUR 190 million. As you know, last year, we sold properties at around half a billion EUR. This has, of course, offset the growth of the rental income. But as you can see, we managed to increase the net rental income for the first half of 2019 by 4% to EUR 189 million. Which is largely the result of our like-for-like performance, post capturing the benefit of our acquisitions.
Using the proceeds from disposal of non-core or mature properties and buying attractive acquisition with high revisionary potential has enabled us to offset the disposal effect and increase the rental income nevertheless. The total like-for-like net rental growth amounted to 3.8% over the last 12 months, of which 3.5% comes from in-place rent growth, reflecting the strong market our properties are located in. The profit for the first half of 2019 reached to EUR 250 million, and accordingly, the earnings per share on a basic level is EUR 1.28 per share. The profit was lower than last year, mainly due to EUR 339 million less property revaluation and capital gains. But we like to point out that our recurring profit has increased, which you can see from the growth of the adjusted EBITDA to EUR 146 million against EUR 137 million last year.
The adjusted EBITDA grew by 7% compared to 4% growth in rental income, reflecting higher operational profit. Our adjusted EBITDA is continuously growing period over period with a CAGR of 11%. Moving to slide five, you will see that our FFO1 amounted to EUR 106 million in the first half of 2019, up 7% from the comparable period. The growth in FFO1 remained in line with EBITDA growth, with financing expenses stable over the period and current taxes slightly up. Our CAGR FFO1 grew by 12% since 2016. Accordingly, the FFO1 per share has grown to EUR 0.64, up 7%, reflecting a FFO yield of 6.3%. Our FFO1 per share after perpetual note attribution reached to EUR 0.54, up from EUR 0.52 last year. The FFO2 amounted to EUR 191 million in the first half of 2019, up from EUR 187 million in the comparable period.
On slide six, we present our EPRA NAV development, which has grown dividend-adjusted to EUR 3.85 billion from EUR 3.75 billion at the end of 2018. Including perpetual notes, EPRA NAV has grown from EUR 4.8 billion, reflecting EUR 28.7 per share, to EUR 4.9 billion, reflecting EUR 29.2 per share. Compared to end 2018, the EPRA NAV on a per share basis increased by 6% dividend adjusted. From here, I pass back to Christian.
Thank you. During the first half, as you can see on slide seven of 2019, we have disposed over 2,000 units of mature and non-core assets at almost EUR 190 million. These assets were sold at 7% above book value, generating EUR 85 million or 83% margin over total cost. The disposals were located mainly in Berlin, Halle, and Merseburg at an average multiple of 19 times. We typically sell mature or non-core properties in order to recycle the funds into properties in better locations with higher potential. Therefore, these funds were channeled into further acquisitions in quality locations. We acquired over 600 units at an average multiple of 20 times. We also acquired 400 units in the pre-letting stage in London. In total, we bought for EUR 300 million, of which the majority was in London. On slides eight to 13, we summarize for you our portfolio distribution in more detail.
The total value of our portfolio has grown to EUR 7.6 billion and comprises 81,040 units. The yield reduced further to 5.1%, and the value per square meter increased to EUR 1,359 per square meter. On slide nine, we see the breakdown of our portfolio by location based on values. The largest part of our portfolio remains North Rhine-Westphalia with almost a third, and the largest single city location is Berlin with 21%. 60% is spread across many different strong cities across Germany and London. We have always put a strong focus on diversification. In the current rent freeze discussion in Berlin, the advantage of being diversified is proven again. On slide 10, you can see more details about our Berlin portfolio and realize the strong quality of our assets as they are located in central districts. Around two-thirds is located in top-tier neighborhoods, the other third in good affordable neighborhoods.
Please note that in value, our Berlin portfolio makes up 21% of our portfolio, but in terms of rent, it is only around 13%. On the next slide 11, we add some information and put some color onto the rent freeze proposals by the Berlin local government. So far, there have only been key points released by the Senate parties proposing a five-year rent freeze and allowing modernization allocation of only up to EUR 0.50 per square meter without prior approval. This draft bill is expected to be published in a few weeks. Following political and expert discussions, it will be voted for in October 2019, with implementation in January 2020. The effect on the market of this ruling is discussed in a very controversial manner because it does not produce any new housing, which is needed mostly to correct the supply and demand imbalance.
It also does not seem to address adequately the needs of those people who need it mostly. On the contrary, this proposal will harm the only solution to the increasing rents in Berlin, which is the construction of new housing. Berlin is a very demanded city, and in the past decade, this demand has even increased. Other demographic factors have further increased the demand, such as the trend to more single-person households and the increasing birth rate. These trends are not new and have been going on for years, and Berlin's government has taken the wrong steps in the past. We reiterate our position here again. The government has to set incentives to promote construction. Bureaucratic hurdles have to be reduced. The approval process for building permits need to be speeded up, and land for new construction has to be provided, plus many more.
Besides these various commercial inadequacies of the ruling, there is also a strong view on the legality of its implementation because it is considered unconstitutional and illegal without at least an inflationary rent increase. The ruling also is not within the legal limits. Many experts have spoken out that Berlin is stepping over its boundaries. There is no room for further rental regulation on state level as this is being regulated on federal level. We therefore expect that firstly, the final paper will look somewhat different from the initial proposal, and secondly, that the ruling, if it comes through, will be challenged legally. In the extreme scenario, if the rent freeze will be fully materialized, which we doubt, the impact on our cash flows will be insignificant. The rental income ratio of our Berlin portfolio is 13% of our total rent.
Even with zero growth in Berlin's rent, the impact of our like-for-like growth will be less than 1% per annum. Currently, we cannot assess the full impact and will also not comment on it until the final draft bill will be enacted. News from this morning is that the federal government has prolonged the Mietpreisbremse until 2025 and also has extended the calculation period from four years to six years. This was somewhat expected and will slightly extend the timeframe in which we will be able to capture our full rent potential. It is not clear at this stage if the active involvement and ruling of the federal government in this respect will curtail Berlin Senate's ability to make rules of its own, such as the Mietendeckel.
Please continue to the next slide 12, where we present the breakdown of our North Rhine-Westphalia portfolio, which you are familiar with. North Rhine-Westphalia remains with 27% our largest portion of our portfolio and is spread over various cities in the area with the biggest portion in Cologne, the fourth largest city in Germany, where we have 21% of our North Rhine-Westphalia portfolio. North Rhine-Westphalia remains the economic powerhouse of Germany with almost 20 million inhabitants in that region. Germany's fast-growing eastern cities, Dresden, Leipzig, Halle, make up 14% of our portfolio, and in this area, we experience strong growth as a result of the revival of this region through new companies setting up business there, making use of favorable conditions in terms of land prices and various encouragements by local government. Lower rents and lower cost of living attract migration into this area.
Hamburg and Bremen are strongholds in the north of Germany and the largest cities in the north. Both cities benefit from their harbors and the related business, while Hamburg, the Pearl of the North, has a strong and positively developing business infrastructure and is among the top cities in terms of rental growth in Germany. In London, over 90% of our portfolio is situated conveniently in a short walking distance to an underground or overground station. We continue to see strong fundamentals in London, and this portfolio comprises 11% of our portfolio. You can see on slide 13 a map of London, where we point out the locations of our properties. You see that we focus on strong middle-class neighborhoods such as Islington, Haringey, Brent, Hackney, Fulham, Elephant and Castle, Barnet, and Greenwich. Our London portfolio now includes around 2,100 units, of which 900 units are in the pre-marketed stage.
On the following slide, we would like to summarize for you our financial key data. For that, let me hand you back to Refael.
On slide 14, you will see our unchanged and very strong financial policy with our long-term goal to achieve an A- rating. Keeping NPV below 45%, keeping our debt-to-equity ratio below 45% on a sustainable basis, maintaining conservative financial ratio with a strong ICR, keeping unencumbered asset above 50%, a long-term debt maturity profile, a good mix of long-term unsecured bonds and non-recourse bank loans, and a dividend distribution of 65% of FFO per share. On the next slide, 15, you see our NPV, which stands at 34%, significant headroom, and low cost of debt, which improved to 1.4% from 1.6% at year-end 2018, provide us with the flexibility to quickly act upon attractive opportunities. Our ability to reduce the cost of debt is due to our proactive management and optimization of our debt structure.
Our capital structure on slide 16 shows that financing source mix, where the convertible bond portion remained at 3%, the bank debt at 8% from 11% end of last year, and the trade bond portion increased to 31% from 27% end of last year. The equity portion is 58%. Our sourcing mix is well distributed, proving our strong access to all sources while keeping a strong equity base. Our debt maturity schedule stands at an average duration of 8.4 years, up from 8.2 years at the end of last year, with no significant repayment in the midterm future. We achieved long debt maturity as well as lower cost of debt of 1.4% by repaying expensive short-term bank debt. Helping in the maturity schedule, we continuously manage our debt schedule, extending the debt maturity as well as cleaning up the upcoming maturities.
GCP does not have material repayments of debt till 2025. This enables us to continue to focus on the business and to prepare well for the future payments. Slide 17 reflects our strong coverage ratio with 6.4 for ICR and 5.3 for DSCR. Here we also show the development of the unencumbered ratio, which is up to EUR 5.9 billion or 76% ratio. Our continuous effort to improve our financial structure while sticking to our conservative financial policy result in our current credit rating of BBB+ from S&P and Baa1 from Moody's. Our long-term goal to reach an A- or an A3 rating remain unchanged. We intend to keep maintaining our conservative financial policy as well as continue and improve the quality of the portfolio. I pass again to Christian.
Thank you. Allow me now to move to slide 18, where we detail for you our maintenance CapEx and modernization costs. Our strategy is focused on improving our asset quality and effectiveness with repositioning CapEx. This increases the property quality and supports the value creation, including upgrading apartments for new rentals as well as common areas such as staircases, playgrounds, elevators, et cetera. EUR 60 per square meter were invested during the first half of 2019 in this area. We also invested to a smaller scale into targeted modernization with the aim to generate additional rent increase drivers. These include improving standards of the apartments and increasing energy saving levels. Also included are adding balconies, upgrading insulation, façade reconditioning, upscale apartment refurbishment, and others. We invested EUR 1.4 per square meter on average during the first half of 2019, contributing 0.3% to the like-for-like in place rent growth.
Another aspect of CapEx spend is pre-letting modifications for the London portfolio, which includes investments in finishing of newly built, snagging, and preparation of building prior to letting. During the first half of 2019, EUR 5 million were spent on this item. On slide 19, we are presenting our compliance and results with regard to ESG standards. For the first time in 2018 and again in 2019, we have presented a dedicated corporate responsibility report demonstrating our commitment to sustainability and corporate governance. Sustainalytics, an international rating agency for ESG standards, has rated Grand City Properties on the 95th percentile among over 300 real estate peers and noting the company as leader in its peer group.
EPRA has awarded Grand City Properties for the second consecutive year, the EPRA Best Practice Gold Award for its financial report, as well as the EPRA Best Practice Gold Award, underlying the company's commitment to the highest standards of transparency and reporting. Our 24/7 service center, certified by the TÜV and also recently ISO 9001 certified, stands alone among peers with this achievement. Finally, to slide 21, where we confirm our 2019 guidance. Judging by the positive start of the year 2019, we can herewith reconfirm our guidance for the year. We guide for an FFO1 of EUR 211 million to EUR 213 million in 2019, resulting in an FFO1 per share in a range of EUR 1.26 to EUR 1.27. We expect the growth to be driven mainly by higher total net rent growth of at least 3.5%, resulting from closing the gap to the revisionary potential and from occupying apartments.
Following our 65% dividend payout policy, we guide to a payout in the range of EUR 0.82 to EUR 0.83 dividend per share. In parallel, we expect to keep our conservative LTV at well below 45%, providing a substantial cushion for any significant market change. With this, thank you for your attention and your time, and we will now move on to the questions that you have sent to us already, and thereafter, to further questions that you may have. Kerstin, will you please take over from me?
Thanks. As said, we are now starting the Q&A session. We will answer the questions that we have received by email so far. We have grouped them together for reasons of simplification. The answer to your questions have been prepared by the team. I will now start with the first question, and the answer will be given first by Christian, then Flo. What is the size of your current pipeline and where is it located? What is the pricing levels? In particular, how large is the London pipeline? How large is GCP's acquisition firepower? How much internal growth can we expect and in what timeframe?
The current pipeline fitting our criteria is around EUR 400 million. The pipeline includes high-quality locations in large metropolitans. Together with our non-core disposals, is in line with our strategy to increase the quality of the portfolio. We target a 5% unlevered NOI yield over total cost in three to four years after acquisition. Our advanced pipeline in London is approximately EUR 100 million. We continue to see a pipeline of good properties in good locations in London at attractive pricing. For the London acquisitions, we target a rental yield of around 5% over total investment a year after acquisition. Our portfolio's internal potential is an additional growth driver with a revisionary potential of 28%. The potential is the result of the under-rented portfolio and from the high upside to meet market levels. We believe the potential will be captured gradually in the upcoming seven to eight years.
As to our firepower, we have a headroom to acquire at least EUR 1 billion of properties and remain below our LTV policy of below 45%.
Can you please provide details on the acquisition in the first half year 2019?
First six months of 2019, GCP acquired in several separate transactions, approximately EUR 300 million worth of property, mostly in London. We acquired 600 units at an average multiple of 20 times, with a vacancy of approximately 10%. On top of the 600 units, GCP acquired additional 400 units in London in the pre-marketing stage, which shall be ready for rental in the upcoming period. The acquisitions in London were in multiple locations across the city, such as Kensington, Westminster, Lewisham, Camden, Ilford, St. Albans, Bexley, and Brentford. In general, London, and in particular in these locations, we see very stable demand and a robust market with long-term sustainable fundamentals. The average cost was EUR 8,000 per sq m. The London properties are attractive opportunities in good locations, which are generating attractive operational profits.
We reach approximately 5% yield over total investment after reaching full occupancy and continue to target this level also on new acquisitions. Our strategy is to hold these properties long-term and benefit from the strong operational profitability.
What is your view on the residential market?
Residential real estate in Germany cities is marketed by high demand and low supply. The regulatory environment and the increased construction costs and land prices have led to a very low amount of new additions to the market, not meeting the high demand from the influx of people due to urbanization and general trend of smaller household size. We currently don't see any change of this trend and believe it will prevail for the years to come. The strongest market dynamics we see in Berlin, Leipzig, and Dresden, and these cities see the highest inflow of people. Grand City Properties is well-positioned in these markets and thus benefits from consistently increasing rents.
As our property values, with average of EUR 1,359 per square meter, are significantly below replacement, which are around EUR 3,000 to EUR 4,000 per square meter, including land, we continue to have a significant upside potential to take in these years to come. On the other hand, the price discrepancy provides a downside protection. We believe that the slowing economy will not have a significant impact on our business as we target the affordable housing sector, which is more resilient and less volatile towards economic changes. A slowing economy is leading to ECB to extend its supportive measures, which drives real estate investment, further decreases the yields and the interest costs. German residential real estate continue to be an attractive asset class, offering high, stable, and long-term cash flows.
The like-for-like for the period was at 3.8%. How much is relating to indexation and to reletting? Which location showed the highest like-for-like results? What was the like-for-like in Berlin? Going forward, how will the rent freeze impact GCP's long-term like-for-like? Will there be any impact of the 2019 guidance? Thank you.
The net rent like-for-like, 3.8%, is including 3.5% in-place increase and 0.3% occupancy increase. The 3.5% in-place rent increase is comprised of 1% indexation effect, 2.2% reletting effect, and 0.3% for modernization.
We have seen strong like-for-like performance across all other portfolios, with all other co-location over 3.5%. In the first half of 2019, the like-for-like in Berlin was around 1%. Going forward, assuming the Berlin rent freeze comes into effect, the impact of our total like-for-like will not be material. Our Berlin portfolio accounts for less than 13% of the rent of the total portfolio, and assuming all equal, that is our maximum exposure. As mentioned, we were studying in detail the draft law 153 live in a few weeks, and then we could assess better. In any case, we confirm our 2019 like-for-like guidance of over 3.5%, and for the following years, we expect to maintain above market average performance. Our revisionary potential is high at 28%, and we expect to see its contribution to the like-for-like in the upcoming years.
How likely do you see the rent freeze proposal in Berlin to be passed? What would be the impact on GCP, and how is this affecting GCP's strategy? Do you expect other states in Germany to follow this example? As to expropriation in Berlin, can you give your expectation here? In addition, there were new measures announced over the weekend concerning the German cap on rent increases in German Mietpreisbremse. How do you assess the impact for Grand City?
It's hard to currently estimate when and what exactly will be passed. We expect that there shall be extensive discussion and revision to the current suggestions. The next stage will be a draft law, which is expected to be presented end of August. After that, we would evaluate the situation better. There is still a high amount of skepticism that the suggested law will hold under the constitutional law, and we also understand the federal government lawyers view it as unlawful. With legislation on modernization topics modified only in the beginning of the year in accordance with federal legislation, it is questionable that Berlin could deviate from that. Also, Mrs. Merkel and the Green Party pointed out that incentives for investing in greener buildings and newer apartments need to be set with tighter rent regulation contracts.
Our current base case is that the law will pass in Berlin, but then potentially to be revoked by the Federal Constitutional Court. We will be more knowledgeable in a few weeks once the law will be published. Of our Berlin portfolio, less than 13% of the rent and 20% of the value is in Berlin. We continue to strongly believe in the city and in its potential. In the worst case of full implementation of the freeze, it will reduce our like-for-like increases only on 13% of our total rental income, which is not material on our overall activity. This again shows our strength by being diversified and not dependent on one single city.
We cannot rule out that other states will follow Berlin's example, but as Berlin's housing market has been experiencing the widest supply-demand gap and the local government is very socialistic, we believe Berlin has a lower threshold to propose such drastic ideas. As mentioned, the Berlin rent freeze suggestion is controversial and, in our opinion, unconstitutional and not sustainable. The main topics of the discussion are focused on the exceptionally strong rent increases, which are much above the German average, and the sale of Berlin's housing stock to private companies in the past, mainly to Deutsche Wohnen. Regarding the expropriation, in June, the signatures calling for a referendum were submitted. Now the Berlin government needs to react, but we think that due to the low feasibility of this drastic and extremely costly measure, there has not been any development so far.
We see the expropriation scenario as very unlikely. The debate is changing, weakening the support of such a move. As we have previously mentioned, in our opinion, the expropriation makes economically no sense. Accordingly, was rejected already both by the mayor of Berlin and by Mrs. Merkel. We reiterate our opinion that the imbalance between the supply and demand can only be sourced through granting more and faster building permits and accelerating new buildings. All the artificial measures, such as rent freeze, are creating more shortage and are counterproductive to the purpose of more supply and lower rent levels in the mid to long term. The City of Berlin should focus on creating more supply, which will ease the housing pressure, will stabilize the rent levels, and enable actual growth for these cities.
Regarding the recent announcement about the Mietpreisbremse, we see it as an additional attempt to restrict rent increases. We are learning the new announcement also in relation to the rent freeze proposal. From initial review, it looks like the new proposal regulations will not have a major impact on the current levels. That said, we again see the importance of portfolio diversification. The remaining outside Berlin is located across other good German cities, which are driven by different economic and growth engines and from different demographic structures. The position in London is adding to the diversification of our portfolio. In addition, regulations for increasing rents will not eliminate the potential, but delay our ability to capture the rents in the midterm.
Can you provide an update on the London product as it's fully invested now? What is the average pricing per square meter of the most recent acquisitions? What's specifically lease-up period for an apartment? What's the average rent and what's the expected rental growth for this product? How many pre-marketed units in London have been completed in the last period, how long it takes to prepare them for marketing, and how much it costs? What would be the implication on GCP in case of a hard Brexit? What is your current currency exposure here? What caused the value per square meter decline in London second quarter versus first quarter, considering it is based on a similar number of units?
Including the recent acquisitions. As of June 2019, the London portfolio includes over 2,100 units, including units in the pre-let stage. The London portfolio is currently 11% of the total portfolio, while currently 15% is our upper limit. Accordingly, our advanced pipeline in London is around EUR 100 million. The recent acquisitions were at an average cost per square meter of around EUR 8,000. We continue to achieve a good track record in filling the properties. In the first six months of 2019, we have reduced the vacancy by approximately 20% for properties held in 2018, and expect this trend to continue in the next periods. The typical lease-up period for an apartment is usually two years. The average rent per square meter is EUR 31. Each project is an individual case, but on average, it takes us six to 12 months to place these units on the rental market.
In the last 12 months, approximately 400 units have been prepared for rental and are on the market. As the units only need finishing preparation, the investments are minor. We spent in H1 2019, EUR 5 million on the units, which are in the pre-snagging stage. Please note that these costs are primarily priced into the acquisition price and are included in our yield expectations. As to Brexit, it is very hard to estimate what will exactly happen. We do see that the London residential market is benefiting from a strong demand and other sustainable fundamentals. We don't expect that Brexit will have a major impact on the residential rental fundamentals. On the contrary, as uncertainty continues in London, investments are held back, which is curbing the supply. We continue to monitor the market very closely, and any significant market changes may be an opportunity for us.
We do not bet on the market change. We believe that our yields, which are much above the market averages, provide us with a significant buffer to a market change. We limit our currency exposure to a minimum as we use forward contracts to hedge the pound fair value of the net investment. Also, as to the value change in the London portfolio between the first and the second quarter, the economic value remains the same. The change is due to currency exchange between the periods. As just mentioned, the net investment is hedged, and we are not internally impacted.
Please provide an update on your expansion plans. In the last call, you mentioned the U.S. market.
As mentioned in the last call, our main focus is and remains Germany, which we target around 75%. We will continue to monitor the market also in other European cities, as long as they follow our acquisition criteria, mainly in terms of strong fundamentals and acquisition opportunities. As mentioned in our last call, we eventually did not conclude the few deals that were offered to us in the U.S.
Can we get more color on the valuations during the reporting period? Which locations showed the strongest gains? How much of your portfolio was revalued in the first half year, and what was the split between yield compression and the performance-related uplift? What was the like-for-like valuation? What can we expect in terms of valuations for the second half of 2019?
In H1 2019, we have record over EUR 200 million of valuation gains. The valuation are the result of the high like-for-like results recorded period-over-period, as well as due to the strong market dynamic in our locations.
Most of the revaluation gain came from operational improvements, while yield compressed slightly by 0.1% during the period, which accordingly accounted for less than 25% of the valuation gains. The yield compression reflects the high demand of properties in our core location and the low operational risk. The valuation increase on the total portfolio was 3%, while half of the portfolio was revaluated in the first six months of 2019. The highest valuation gains were seen across all German cities. Looking forward into the second half of 2019, we see positive revaluation gains.
How do you see the fair value in Berlin development going forward? How do you see Berlin transaction and market prices change due to the intended rent freeze? Assuming the Berlin rent freeze proposal to become effective law, how would you adjust your strategy there? Have you increased rents in Berlin so far in the second half year?
As mentioned before, we cannot provide a good estimate to the impact until we see the final draft law in a few weeks. In general, we believe the strong fundamentals won't change. The strong demand will remain, and supply will even decrease. So far, after the rent freeze announcement, we didn't see any decrease in the transaction prices in the market. We can expect the positive trend not to change significantly, even under the assumption that the rents in Berlin will be static in the next few years. We assume, due to the high uncertainty in the market, there will be, in the short term, fewer deals and transactions, and accordingly, little change to the prices. On the other hand, the regulative environment in Berlin is not investor-friendly, but on the other hand, the very high supply shortage will not change, but rather increase due to the rent freeze.
We believe there is hesitation in building new apartments, and with the positive immigration to the city continuing, this will widen the demand-supply gap and potentially drive prices up. We reiterate our belief that only new construction and an investor-friendly environment could provide a solution to the housing shortage in Berlin, and any artificial interference will just increase the problem. The valuators have a conservative assumption for market rental growth and look at longer periods than only five years. Furthermore, we could expect further yield compression given the very high demand in Berlin and due to the decrease in the base interest rates, which shall offset the effect on the rent freeze. In addition, our current Berlin portfolio is valued at EUR 2,749 per square meter, significantly below market levels. We believe that going forward, the valuations will get closer to the transaction levels.
As mentioned, we still see very high potential in Berlin, which will not disappear under specific regulations. Our portfolio is very diversified. Only 13% of the rent is generated by our Berlin portfolio. Our strategy will remain unchanged. We will continue to build up a diversified portfolio with no majority focus on any one location while creating accretive and sustainable value. So far, we have increased rents in Berlin in a limited extent, and we are waiting to see more clarity on this matter.
How will the rent freeze in Berlin impact the 2019 like-for-like guidance, and how will it impact GCP's ability to increase rents in the following years?
We continue to confirm our like-for-like guidance for 2019, which is over 3.5%. Berlin rents include only 13% of the total portfolio rents. Therefore, the impact of the like-for-like is limited. Moreover, we see strong like-for-like increases across our portfolio, which in total are expected to average of 3.5%. Looking into following years, we expect the like-for-like to continue to be strong. Assuming the Berlin rent freeze will become effective, which is a question mark, we have enough potential in the various other strong locations our properties are located and can fit our risk force to maintain a high like-for-like rent growth on a sustainable basis.
What is the impact of cost inflation on your business?
Due to the low unemployment rate and the strong real estate market, the cost of labor and employee salaries has gone up in the last years. Housing construction for the condominium market has also led to increased cost of materials. Due to our efficiency measures, especially from exploiting our economies of scale, we have been able to offset higher costs to some extent. In any case, we continue to show increasing operational profitability, with the EBITDA margin increasing to over 77% in H1 2019 compared to 75% in H1 2018.
What is the plan with your development rates? Are you buying land and planning to build on a large scale? How do you see the prices of land development?
We continue with our strategy to extract the value and the potential from our properties. Extracting building rights from our properties follows our strategic path and has proven to be an additional value creation driver. As of June 2019, we had EUR 278 million worth of land for development and building rights on existing buildings, which are mainly located in Berlin. Building rights have become more and more valuable as the supply is scarce. Accordingly, we see the value of land increasing, in particular in Berlin. According to market publications, the prices for construction sites in Berlin increased by 36% in 2018, reaching nearly EUR 1,000 per square meter on average. Land prices in central locations were at much higher levels, with Friedrichshain/Kreuzberg at the highest price per square meter of nearly EUR 4,500.
We are currently working on the building permits and have the option to either sell those building rights at a high gain or develop some properties ourselves.
As to the development rights in Berlin, has there been any progress with the project? Was there any change from last period?
We are continuing with the zoning permits and prepare to start construction on a plot in around one year. As to the second plot, we continue with the zoning. We continue to explore three options for the development, either sell the land as is, build to hold, or build to sell. We are working in parallel to continue and maintain these three options.
You remain to be very active on the capital markets. What do you intend to use the funds for?
Year to date, including issuance after the reporting date, GCP raised over EUR 700 million debt in capital markets. In addition, in the first half of 2019, we have repaid over EUR 200 million of bank debt. We see the current expectation of low interest rate environment as an opportunity to lock in low cost of debt. As a result, our cost of debt is down to 1.4% from 1.6% in December, while the average debt maturity is further extending to 8.4 years. We can utilize our reputation in the capital market, which is backed up by our strong credit rating of BBB+ from S&P and Baa1 from Moody's. The proceeds are channeled into retirement of shorter and/or of more expensive debt, as well as for external growth purposes.
The vacancy rates remain above market rate. Could you please explain the drivers?
The main reason is that we buy vacancies. Our strategy is to acquire properties with vacancy in fundamentally strong locations. Our vacancy reduction measures are in total offset to some extent by the acquisition of new vacancies, driving up our operational profits and our cash flows. Additional offset is due to disposal of properties with lower vacancies than our average vacancy, which has an increasing effect on the total vacancy as well. In certain locations, especially the ones with strongly increasing market rents, we focus on maximizing the initial rent per square meter and ensuring ongoing rent increases, which naturally is harder and delays filling out the vacancy. The selective yield management does take more time, but results in higher value creation in the long run. Our consistently high like-for-like performance is our testimony to the strategy.
Our highest vacancies are on strong locations such Berlin, North Rhine-Westphalia, Dresden, and Leipzig, as well as London. Our London properties vacancies result from a different situation as we bought these mainly from developers at a full vacant situation, so they are newly built or converted and are in the final letting stage. Just finishing works are missing to have these assets ready for rental. As mentioned, our letting efforts in London bear fruit. We have reduced our London vacancy to below 10% from 35% a year ago. We reiterate our guidance for 2019 on a like-for-like performance of over 3.5%, including the effect of rent and occupancy increase.
Please give us an update on your CapEx strategy, especially considering your modernization investments in light of the proposed new regulation in Berlin. What is the impact of the reduced cost allocation of modernization on your rent increase?
We never had large-scale modernization programs as many of our peers have. Our portfolio has a large gap to market rents, so our embedded potential does not need to be lifted with very expensive and significant investment measures. Our modernization measures focus on the low-hanging fruit in areas of projects which have the highest accretive results due to the large gap to market rents. The majority of our CapEx measures are targeted at reducing vacancies which we classify as repositioning topics. The vacancy in our portfolio is in fundamentally strong locations, is a large upside potential of rental income. Through targeted topics to lift the apartment's standard, improving the surroundings, easy accessibility measures, especially targeted at our aging population, we are able to support our value creation process most efficiently.
CapEx per square meter amounted to €6 per square meter. We expect to continue investing in a range of EUR 13-EUR 15 per square meter on an annual level.
The media has building up criticism in the past few months. The criticism was directed at large and publicly traded real estate companies such as GCP, but also Vonovia, Deutsche Wohnen, among others. Is this criticism justified?
There have been several different topics the media was discussing, which created a lot of negative publicity, which is unjustified in our opinion. Populist politicians and extreme journalists use this opportunity to create attention and ask for very radical changes. They present wrong information and create false impressions, which mislead the public, especially people who they claim to protect. The German legislation has set very clear rules for the residential rental market and is aimed at protecting the residential tenant while balancing incentives for developers and investors to support in investing into this large market. Extreme ideas such as rent freeze and expropriation pop up, which are not solving the actual problems of shortage of supply. Strong demographic factors and a strong economy, leading to low unemployment rates and increasing disposable income, have led to increasing demand for new residential housing.
Instead of attacking the lack of new construction, they unfortunately are deviating the attention away. They need to start supporting initiatives which are aimed at increasing housing supply by freeing up unbuilt land, for example, setting incentives for developers, and improving the asset quality through targeted modernization measures, especially in light of the environmental targets. The affordable housing sectors in which we operate is the largest sector and needs the correct market dynamics to keep the sector sustainable. These extreme discussions are actually harming all these sectors and will discourage further investments into creating new supply in the German residential real estate.
GCP has continued to dispose properties also in H1 2019. How many units were disposed of in the first half? The report says EUR 187 million, and at what rent multiple? Can we expect more disposals going forward? How large is the non-core portfolio market for sales? How many units remain held for sale as of June?
In H1 2019, we disposed of over EUR 185 million worth of properties, carried at an average multiple of 19 times. We disposed over 2,000 units, primarily in Berlin, Halle, and Merseburg. The disposals were a mix of mature properties sold on an opportunistic basis, where a large portion of the potential was already captured, and also non-core properties. The disposals were 7% over book value and generated a profit of 85% over total cost. The proceeds will be used to acquire properties in high-quality locations and generate further accretive growth. Our assets held for sale balance amounted to EUR 200 million, and it is our intention to sell these in the next 12 months. These are non-core properties which are either located in locations which are not in our main focus.
Our held for sale portfolio includes less than 5,000 units valued at over EUR 500 per square meter and at a yield of over 4%. We might also sell, on an opportunistic basis, mature properties with lower upside potential remaining and be captured if an effective opportunity arises, which will create additional capital gains and will enable us to recycle these gains into higher quality properties with high upside potential.
How should we see the improvement in vacancy? Will it be a slow and steady reduction, or do you foresee a strong improvement at some point due to finishing refurbishment at one of several properties?
Our approach to the vacancy rate is to improve it gradually quarter by quarter and estimate that vacancy like-for-like to be in the range of half %.
Would it be of any interest to buy back shares since they are trading somewhat below book value?
We'd like to sustain our stronger equity base long term in order to allow us to pursue attractive opportunities. We see the liquidity of our stock as key, and wish not to harm it by a buyback program.
Okay, thank you. I think those were the questions so far, we are now ready to start the open Q&A part. If you have several questions, then we kindly ask you to ask all your questions together right at the beginning, and we are now looking forward to hearing your questions please.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question answered before it's your turn to speak, you can dial 02 to cancel your question. If you are using speakerphone today, please listen to the handset before making a selection. One moment please for the first question. The first question we received is from Marcus Schmidt from Oddo BHF. Your line is now open, sir.
Yes. Good morning. Thanks for taking my question. Actually, when I did the math, correct, I saw that in the second quarter, you did not spend so much on repositioning CapEx. Could you explain the reason why you curtailed investment in the quarter?
Thank you for the question. CapEx actually remained very similar. We are at EUR 6 per square meter. Looking forward, as Christian mentioned, we believe to be in the range of EUR 13-EUR 15 per square meter on an annual basis. Next question, please.
The next question received is from Kai Klose from Berenberg. Your lines are open, sir.
Yes, good morning. I have got four questions in total. Firstly, could you indicate if you have increased the rents in Berlin according to the Mietspiegel or not? Some peers have postponed that. Next question would be on page 10, again, on the disposals. If I understood correctly, you sold assets in total at an average multiple of 19 times, including Berlin. Seem to be quite low for assets sold in Berlin. Could we have the split by these two regions, Berlin and Mecklenburg, please? The third question would be on page eight of the presentation. You mentioned there that building rights increased to EUR 278 million from EUR 237 million there by March. What is the reason for the uplift? The last question would be, generally speaking, on your vacancy rate development. Berlin is now at 5.9, 30 basis points higher compared to March, maybe because of disposals.
Could you indicate what you target here and in general, how you want to bring down vacancy rates maybe a bit more in the next 12 months later? Thank you.
Okay, Kai. Thank you for your questions. I hope I'll get everything. Regarding the disposals, we disposed it correct in a multiple of 19. In Berlin, we had a multiple of over 30, and the non-core portfolio, mainly in Halle and Leipzig, were around 10 multiple. In Berlin, the vacancy went up slightly between the quarters. It's mainly due to certain fluctuation and then due to disposal of properties were low vacancy. Regarding the uplift of development rights, we see also a small movement between the quarters. It's due to extraction of building rights that we have in our properties, which accordingly increased the value to EUR 237. EUR 278, I'm sorry. I think I'm missing a question.
Regarding the rent increase in Berlin, I'm sorry, we had targeted rent increases in the city, not a large volume, and we wait to see what the regulation and the legal frame will show us. Berlin vacancy is 5.9. Our target, of course, is to bring it down. We will do it according to our timeline in order to capture higher rents and to secure long-term value to the city. Thank you. Next question.
The next question received is from Manuel Martin from Oddo BHF. The line is now open, sir.
Thank you, gentlemen. Two questions from my side, please. First question, sir. You said that 60% of the portfolio was revalued in H1. Could you indicate to us how much of the portfolio was valued in Q2? That's the first question. Second question, it appears that it seems that the valuation gains slowed down in Q2. Maybe you can elaborate a bit on that. What were the reasons? Is this a trend to be expected for the remaining of the year? Thank you.
Thank you, Manuel. 20% of the portfolio was valued in the second quarter, which could explain a certain decrease in relation to Q2. Still, we see positive and strong valuations. We expect this trend to continue also in H2 2019. Thank you. Next question, please.
We received a follow-up question of Kai Klose. Your line is now open, sir.
Yes, I had a question on the Mietspiegel, the rent table in Berlin, which came out in May. My question was, have you baked that in into your rent expectations? If you have already sent out rent increases according to the Mietspiegel, or are you going to raise that as some of your peers, of the Berlin-focused peers are planning to do so? Thank you.
Okay, Kai. Sorry, that's another question I forgot. Yeah, we didn't increase significantly. Also, small term, we see the rent increase in the year in Berlin in 1% so far. Looking forward, we don't factor much in, and our guidance of over 3.5% in the year doesn't include a major significant or rent increase in Berlin. Thank you.
As there are no further questions, I hand back to the speakers.
Thank you very much. Thank you very much to all of you for joining our call. Thank you very much for the questions you sent in beforehand and the ones you gave us now on short notice. We look forward to seeing you in various occasions in the not-too-distant future and wish you a very certain day. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.