Dear ladies and gentlemen. Welcome to the financial presentation call of Grand City Properties S.A. At our customer's 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 difficulty hearing the conference, please press star key, followed by zero on your telephone for operator assistance. I now hand the opportunity to Katrin Petersen, Head of Communication, who will start the meeting today. Please go ahead.
Hi. Thank you, and good morning, everyone. I'm Katrin Petersen, Head of Communication, and I would like to kindly welcome you on the name of Grand City Properties to our results call for the first quarter of 2019. With me are CEO Christian Windfuhr, CFO and Chairman of the Board of Directors, Refael Zamir, COO Sebastian Sammartin, and Senior Financial Analyst, Rachel Gal-Yam. Christian Windfuhr will lead you through the presentation directly after this short introduction. You will find the presentation on the company website under investor relations, publications, financial reports. The presentation of the results will be followed by a session with question and answers. The management is available for questions. We have already asked in advance to send us your questions by email. Please continue to send your questions so that we can include them accordingly. Please send your questions to the following email address, info@grandcity.eu.
Once again, info@grandcity.eu. With this, I will hand you over to Christian Windfuhr to begin with the presentation. Thank you for your attention.
Good morning, everybody. I'm very pleased that we have such a nice attendance to this call. The results were, as expected, very successful. A very successful start into the year, with good internal growth and a continuation of our portfolio quality improvements and diversification. We were able to further solidify the business, making further improvements in several areas, including enhanced asset quality, as evidenced by an increase in our book value. More detail about this later in the presentation. First, let's glance over page number three for our highlights. We were able to produce a solid growth in all our operating figures, rental income, adjusted EBITDA, and FFO I. We also further improved and solidified our FCNF and our already very solid debt structure. I now turn to Refael to guide you through the financial details.
Good morning. On slide four, we present profit and loss information, which demonstrates that we were able to capture the strong growth, the visionary potential of the portfolio, and create value. Net rental income for the first quarter 2019 grew by 5% to EUR 94 million, which largely the result of our like-for-like performance, which begins to capture the benefits of our acquisition. The total like-for-like amounted to 3.9% over the last 12 months, of which 3.6% comes from the same-place rent growth, reflecting the high demand of our properties. The profit for the first quarter 2019 results to EUR 125 million. Accordingly, the earnings per share on a basic measure is EUR 0.65 per share, which is slightly down compared to last year. The decrease in the profit is due to high other financial results, which increased due to over EUR 200 million bond debt repayments.
We like to point out that our recurring profit has increased, which you can see from growth of the adjusted EBITDA to EUR 72.6 million against EUR 67.8 million previous year. The adjusted EBITDA grew by 7% compared to 5% growth in the rental income, reflecting high operational profit as well as small effects of less than EUR 1 million arising from the first implementation of IFRS 16 treatment. As we will discuss in the next slide, the FFO I is unaffected by the new IFRS 16 treatment. Our adjusted EBITDA has continued growing period-over-period with a CAGR of 12%. Moving to slide five, you will see that our FFO I amounted to EUR 52.7 million in the first quarter of 2019, up 6% from the comparable period. The growth in the FFO I remains in line with the EBITDA growth as finance expenses and finance taxes remain stable over the period.
The FFO I is excluding the effect of the IFRS 16 treatment as finance lease is now included in the finance expenses. Accordingly, the FFO I per share has grown to EUR 0.32, up 7%, reflecting an FFO yield of 5.7%. Our FFO I per share after perpetual loan attribution reached to EUR 0.27, up from EUR 0.26 last year. The FFO II amounted to EUR 129 million in the first quarter of 2019, up 137% from EUR 64.4 million in our comparable period. The significant increase is due to the high growth in the result from disposal properties, which is the asset amount of the sale price to the total cost price. In the first quarter, we have disposed properties in the amount of over EUR 120 million, with 160% profit over investment and 10% premium to the book value.
On slide six, we present our EPRA NAV development, which has grown to EUR 3.9 billion from EUR 3.75 billion. Including perpetual note, EPRA NAV has grown from EUR 4.8 billion, which reflects EUR 28.7 per share, to EUR 4.9 billion, which reflects EUR 29.5 per share, with a CAGR of 21% since December 2016. On a per share basis, the EPRA NAV increased by 4% and the EPRA NAV including perpetual note increased by 3% against last year-end 2018. On a per share basis, the CAGR reached 17% since December 2016. From here, I pass back to Christian.
Thank you. Let's move to slide seven. As already mentioned, during Q1 2019, we have disposed of EUR 120 million of non-core and mature assets which had not much further upside potential. These assets were sold at 10% above book value, generating EUR 76 million or 160% profit over total cost. The disposal consisted mainly of mature properties in Berlin, which were sold at an attractive price 32x multiple or EUR 303,500 per sq m. The disposal of these properties clearly follows an opportunistic approach. These funds were channeled into further acquisitions in quality locations. We acquired over 500 units at a multiple of 20x. In addition, we have acquired 250 units in a pre-letting stage in London. On slide eight to 13, we summarize for you our portfolio distribution in more detail. The total value of our portfolio has grown to EUR 7.5 billion and comprises of 83,740 units.
The vacancy is up very slightly by just a tenth of a percentage point due to the acquisition of higher vacancy and disposal of properties with no vacancy. On a like-for-like basis, the occupancy has decreased by 0.3% in the last 12 months. In place rent is up to EUR 6.15 per sq m due to the like-for-like rental growth and due to acquisitions. Berlin remains our single largest city in the portfolio with 21%. Two-thirds of the Berlin portfolio is located in top-tier neighborhoods, including Charlottenburg, Wilmersdorf, Mitte, Kreuzberg, Schöneberg, Lichtenberg, Neukölln, Steglitz, and Potsdam. The remainder of the Berlin portfolio is in affordable locations, primarily Reinickendorf, Treptow, Köpenick, and Marzahn-Hellersdorf. We believe that our Berlin portfolio is the best in class amongst our peers due to our significantly higher concentration in top-tier locations in Berlin.
North Rhine-Westphalia remains with 27%, our largest portion of our portfolio 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 NRW portfolio. NRW remains the economic powerhouse of Germany with almost 20 million inhabitants in that region. Germany's fast-growing eastern cities based in Leipzig/Halle make up 15% of our portfolio. In this area, we experience strong growth as a result of the revival of the region through new companies setting up business there, making use of favorable conditions in terms of land prices and various encouragements by the local government. Lower rent and lower cost of living attract migration into this area.
According to Jones Lang LaSalle, during the second half of 2018, the offering prices for condominiums grew in Leipzig by 20%, the strongest in Germany after Berlin with 16%, Frankfurt with 11%, Munich with 10%. Hamburg and Bremen are our strongholds in North 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 positive development 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. Our London portfolio now comprises 11% of our portfolio. You can see on slide 16 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 nearly 2,000 units, of which 800 units are in the pre-marketed stage. The opportunities in London continue to be attractive for Grand City Properties' further external growth. The company has decided to increase the portion of their portfolio in London further, opening the possibility to further improve the asset quality in locations with strong market dynamics. On slide 14, we are presenting to you in some more detail our development sites through which we have the option to create additional value from pieces of land that were acquired as part of acquisitions and which now have developed into valuable assets due to changing market conditions in Berlin.
Here, we refer to two plots of land located close to the Prenzlauer Berg City Park. Both these plots could yield 6.5%, following an estimated EUR 90 million development cost, with EUR 6 million rent per annum, and the EUR 50 million development cost with EUR 10 million rent per annum respectively. Regarding the smaller plot, the discussions with the municipality are in a very advanced stage. We expect to reach the ability to start building in 12 to 18 months. On this plot, we can build around 600 apartments. Regarding the second plot, we are in a somewhat earlier stage. We will be able to proceed faster once the permits for the first plot will be received. Grand City Properties is examining the options to sell the land as is, build and hold, or build to sell.
We keep all of our options open and currently work on optimizing the building rights and getting all the permits in place. On the following slide, we would like to remind you of our financial key data. On slide 15, you will see our unchanged and very strong financial policy with our long-term goal to achieve an A-minus rating, keeping LTV below 45%, keeping our debt to debt plus equity ratio below 45% on a sustainable basis, maintaining conservative financial ratios with a strong ICR, keeping unencumbered assets above 50%, a long-term debt maturity profile, a good mix of long-term unsecured bonds and non-recourse bank loans, maintaining credit lines from several banks, and a dividend of 65% of FFO I per share. Let me now hand you back to Refael for the following slides.
On slide 16, you see our LTV, which stand at 45%. Significant headroom and low cost of debt, which improved to 1.5%, provide us with the stability to quickly act upon attractive opportunities. Our capital structure on slide 17 shows some slight adjustments in the financial source mix, where the convertible bond portion remained at 3%. The bank debt has been reduced to 8% from 11% at end of last year, and the trade bond portion increased to 29% from 27% at end of last year. The equity portion is 60%, up one point from end of last year. Our sourcing mix is well-distributed, validating our full access to all sources while keeping a strong equity base. Our debt maturity schedule has improved to an average duration of 8.7 years, up from 8.2 years at the end of last year, with no significant repayment in the mid-term future.
We achieved a longer debt maturity as well as an overall cost of debt of 1.5% by preparing expensive short-term bank debt and by issuing long-term trade bonds. Accordingly, the unencumbered ratio is up to EUR 5.8 billion or 76% ratio. As seen in the maturity schedule, we continue to manage our debt schedule, extending the debt maturity as well as paying up the upcoming maturity. GCP does not have material repayment of debt till 2025, excluding the convertible bond due in 2022. This will enable us to continue and focus on our business and to prepare well for future payments. Slide 18 reflects our strong coverage ratio with 6.2 for the ICR and 5.2 for the DSCR. Here we also show the development of the unencumbered ratio, which has increased significantly in the recent years.
Our strong effort to improve our financial structure while sticking to our conservative financial policy resulted in our current credit rating of BBB+ from S&P and Baa1 from Moody's. Our long-term goal to reach an A- or A3 rating remains unchanged. We will intend to keep maintaining our conservative financial policy as well as continue and improve the quality of the portfolio. Christian.
Allow me now to move to slide 19, where we detail for you our maintenance CapEx and modernization costs. Our strategy is focused on improving our assets' quality and attractiveness with repositioning CapEx. This increases the property quality and supports the value creation, including upgrading apartments for new renters as well as common areas such as staircases, playgrounds, elevators, et cetera. EUR 3.5 per square meter were invested during Q1 2019 in this area. We also invest 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 additional balconies, upgrading insulation, facade reconditioning, upscale apartment refurbishment, and others. We invested EUR 4 million or EUR 0.7 per average square meter during Q1 2019, resulting in 0.6% like-for-like in-place rent.
Another aspect of cut expense is pre-letting modifications for the London portfolio, which includes investments in finishing for newly built snagging and preparation of building prior to letting. During the first quarter 2019, EUR 3 million were spent on this item. Before I come to the end of my presentation, let us look please at slide 20, where we reiterate our performance and results with regards 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. Sustainalytics, an international rating agency for ESG standards, has rated Grand City Properties to a 95 percentile amongst 300 real estate players and noted the company as a 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's Best Practice Gold Award, underlying the company's commitment to the highest standards of transparency and reporting. Our best-in-class service center has not only been certified and recertified by the SH, but also recently achieved the ISO 9001 certification and among peers, stands alone with this achievement. Finally, to slide 22, where we present you our 2019 guidance. Judging by the start of the year 2019, we can herewith reconfirm our guidance for the year. We guide for an FFO I of EUR 211 million-EUR 213 million in 2019, resulting in an FFO I per share in the range of EUR 1.26-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 reversionary potential and from occupying apartments. Following our 65% dividend payout policy, we guide to a payout in the range of 82%-83% per share. Parallel, we expect to keep our conservative LTV well below 45%, providing a substantial cushion for any significant market change. With this, thank you very much for your attention and your time. We will now move to the questions that you have sent to us and thereafter, further questions that you may have. Katrin, please take over from here.
Thank you very much. As Christian Windfuhr said, we are now starting the Q&A session. We will answer the questions which we have received by email so far. We have grouped them together for simplicity reasons. The answer to your questions has been prepared by the team. I will now start with the first question, and the answer will be given by Christian Windfuhr. Could you please provide an update on your pipeline? Where are the properties located and what is the pricing you see in the market? How large is the London pipeline? Do you recognize price increase? What is GCP's current acquisition firepower?
Our current pipeline is approximately EUR 300 million. We remain focused on quality locations and seek to increase our position in large metropolis. In London, our pipeline is strong, with a pipeline of EUR 100 million-EUR 200 million. The demand for properties in these locations is very high and accordingly, are the transaction prices. We continue to stick to our investment approach and remain disciplined to acquire properties which provide accretive growth. We reiterate our target to reach 5% unlevered NOI yields over total cost in three to four years after acquisition. We continue to see very accretive growth opportunities arising from internal growth. Our reversionary potential is at 28%, which will support our internal growth in the next years. As to our acquisition firepower, we have a headroom to acquire over EUR 1 billion of assets and remain below the internally set 45% LTV level.
Can you elaborate on your Q1 2019 acquisitions?
Grand City Properties acquired in the first quarter of 2019, nearly EUR 200 million worth of properties, mainly in London. Acquisitions include over 500 units and were acquired at a multiple of 20 times, with a vacancy of around 10%. In addition, and included in the acquisition amount, Grand City Properties acquired 250 units in London, which are in the pre-letting and snagging stage. The acquisitions in London were located in Kensington, Westminster, and Brentford. In general, in London and in particular in these locations, we see very stable market and demand conditions with long-term sustainable fundamentals.
We noticed that the London portfolio continued to grow also in 2019. Could you please provide details on your Q1 acquisitions? Where were they located and at what price? Will the acquisition in London continue in 2019? The current London stake now representing 11% of total property investment. Is there a target or cap on U.K. investment as a percentage of total portfolio? How has the agency developed since December 2018? Have you increased the operational team in London to support the portfolio growth? Do you hedge your current assets?
2019, we continued to acquire properties in various locations in the city. Most of the acquisitions were located in Kensington, Westminster, and Brentford. As mentioned already, acquisitions included 250 units of pre-let properties, which are expected to be let in the upcoming quarters. The average cost per square meter is around EUR 7,000. These investments follow Grand City's investment criteria, pursuing attractive deals in strong locations at attractive pricing. We continue to target a rental yield of around 5% over total investment a year after acquisition, after reaching full occupancy. The current transaction yields of 3%-4% in London provide us with both upside potential and as a buffer to unexpected market churn. As of March 2019, our London portfolio includes nearly 2,000 units, of which around 800 are in the pre-let stage.
We target to hold and rent these properties as we see the rental market rising in the city. As mentioned, the German properties will be not less than 75% from our total portfolio. The U.K. properties will be within the remaining stake. Letting in the London portfolio is on track. In Q1 2019 alone, we have let approximately 150 units net and see a very good letting environment going forward. We are able to rent these units above our initial expectations and reached an average of over EUR 30 per sq m for our London portfolio. We continue to monitor closely the market and the trends, and any change of trend might be an opportunity. We expect to continue and cherry-pick opportunities in London. Our current pipeline in London is EUR 100 million-EUR 200 million. With the growth of the portfolio, we are starting to see benefits from economy of scale.
We have increased the local team and will continue to support the team with the growth of the portfolio. Referring currency hedging, yes, we use forward contracts to hedge the pound fair value of the net investment.
Can you please update us with your portfolio strategy to enter other markets? Is there any update on potential acquisitions in the U.S. residential market?
In the past few months, we have been offered several portfolios in the U.S. residential market. This market does include high upside potential and can create accretive growth. We see very positive results in our London portfolio, both in accretive acquisitions and on the operational rental side. We decided to strengthen and focus on London as our additional major new city. As mentioned previously, we would consider a small-scale investment in other European cities with good fundamentals if the acquisition will be accretive to our portfolio in terms of quality, locations, and yields. In any case, we intend to maintain our prime focus on Germany, which will stay over 75% of the total portfolio.
What is your take on the expropriation of residential units in Berlin? What is the potential impact on GCP? Do you see similar suggestions for other locations in Germany?
We continue to closely monitor the various discussions in Berlin, in particular regarding expropriation. We see recently the debate on expropriation becoming less relevant as it makes little to no economic or social sense. The mayor of Berlin, Mr. Müller, and Mrs. Merkel, as well as other leading politicians, say they reject the expropriation idea. In general, we see this discussion, among other suggestions, as a direct result from the very low supply of housing in Berlin and as a result of the extensive demographic, economic, and cultural growth of the city. The significant supply-demand gap results in the high rent increases in the city. The various suggested regulatory initiatives will not lead to new buildings being erected. With prevailing strong demand, rents will continue increasing.
We believe the imbalance between the supply and the demand can be only slowed through granting more and faster building permits and accelerating new buildings. However, currently, the expected levels of new buildings is lagging much behind the needs of the city. Our Berlin portfolio is rented below market rent levels, and therefore we see significant headroom for further rent increases. The potential effects and rent regulations at worst will extend the duration that it will take to fully capture this potential. Outside of Berlin, our main locations are North Rhine-Westphalia, Dresden, Leipzig, Hamburg, London, and more. All have strong but different economic drivers. We currently do not see similar behavior in other cities.
Could you please provide more details on the revaluation gains in the first quarter of 2019. In particular, what was the yield compression? What was the like-to-like valuation during the period? How much of the portfolio was valuated? Where have you seen the highest revaluation? How much revaluation gain has been recorded in the London portfolio? What revaluation levels can we expect in the next quarter? Okay.
Grand City Properties started 2019 with strong operational results, with high like-for-like results, and with increasing profitability. The performance resulting EUR 120 million value creation in the first quarter of 2019. Accordingly, the revaluation gains are primarily the result of operational performance. The yield compression in Q1 '19 was minor at around five basis points. A like-for-like revaluation gains were 2% in the first quarter alone, while around a third of the properties were revaluated in the period. We saw the highest valuation gain in Heidelberg, Berlin, and Dresden, Leipzig area. The London portfolio was hardly valuated at this stage. The strong market dynamics and the stable growth in the residential market support the valuation assessment of the external valuator. The valuations are supported by the economic and demographic fundamentals, which are expected to continue and to provide tailwinds in the foreseen future.
We expect positive revaluation gain also in the next quarter.
Can we get an update on the German residential market? Did you experience any change in the market, and how would the slower economy impact GCP?
Going into 2019, we see no significant change in the trend of the German residential real estate market. Demand in good cities remains very high, while supply is very low. We see, in particular, strong dynamics in Berlin, Leipzig, and Dresden. The demand is driven by strong urbanization across Germany, which is expected to continue in the upcoming future. On the supply side, the residential unit shortage remains very high, estimated by market reports at 2 million, mainly in the most demanded markets in Germany. One of the main constraints for further development is the high cost of construction and cost replacement cost, which is around EUR 3,000 to EUR 4,000 per sq m, including land. We see the high replacement cost as very protective to our valuations of EUR 1,234 per sq m for our German portfolio, and as a proxy to where the market is headed.
The German residential real estate market is currently one of the most stable real estate markets in Europe. Moreover, the regulatory environment in German residential real estate market provides additional stability and downside protection. The German economy continues to be very strong, with increasing purchasing power and increasing employment. In the theoretical event of a significant market downturn in Europe, we would expect a shift of market investments to more stable markets such as German residential real estate market. Moreover, as an offsetting effect, in case of such downturn, the low interest environment will prevail, which in turn supports specifically the real estate market.
There is a lot of discussion on further tightening the rent regulation. With the increasing pressure from demonstrations and expropriation discussions, rent development should remain a hot political topic among all parties. How do you assess the impact will be on your performance and your upside potential?
Grand City Properties is operating in the affordable housing segment. Our products and rents are tailored towards catering for the largest segment of the population. We thus don't have apartments in the upside segment, which are pushing the market rents higher. The majority of our apartments are rented below market rents, and we have a valuable upside to reach these in the next years. The regulations for increasing rents will not eliminate the potential, but might delay us capturing the upside in the short periods. The outcome of the current discussion is hard to assess, but the upside of our rents to market rents will remain to provide a headroom for us, even if the duration of realization the upside will be longer. We thus reiterate our guidance to reach over 3.5% increase in rental income on a like-for-like basis in 2019.
Recently, also a new regulation regarding the allocation of modernization costs came into effect, reducing the level to 8% and indeed capping it. Many of our peers use large-scale modernization programs as a measure to increase further rents. The potential for us to increase rents lies in capturing the gap of our portfolio to market rents and reducing vacancies, which are cheaper and easier measures than large-scale modernizations. We do, though, execute modernization programs on a selective basis where we can create a quick cash profit.
Will GCP consider to buy back shares or increasing your dividend payout ratio?
Buying back shares has a similar effect on GCP equity as to increasing the dividend payout. GCP share performance is improving, and we expect it to continue to improve. Currently, we don't see a reason now for plans to buy back shares. We are comfortable with our current dividend payout ratio of 65% of FFO I per share. It will balance between all stakeholders and provide shareholders with a yield of 3.7% of the 2019 guidelines. We seek to keep headroom to pursue opportunities while maintaining a conservative financial policy.
Have you experienced any cost of inflation?
We do experience cost inflation in the material and cost of labor, as well as in employee salaries for a few periods now. This is a result of Germany's current high demand for construction and low unemployment figures. We are able to offset those to a certain extent with other efficiency measures and exploiting other economies of scale.
Does the value of building rights largely affect the value of the land? Is acquisition of land and then building program something that GCP is willing to develop more in the future?
Yes, it primarily reflects the value of the land. In general, we do not acquire land for the intention of development. In the past, some land reserves were included in larger portfolios, and we are in the process of extracting these building rights. Moreover, in several locations, we have extracted building rights next to our assets, which at the time of acquisition were not considered.
What is your strategy to reduce your vacancies, which seems to be above market levels as your portfolio is located in strong locations?
We follow our strategy of acquiring properties with vacancies in locations with strong fundamentals. Vacancies in locations with strong demand and low supply provide long-term rental income upside. We have vacancies in strong locations such as Berlin, North Rhine-Westphalia, Dresden, and Leipzig, as well as in London. New acquisitions enable us to keep a certain level of vacancies in our portfolio, although we constantly decrease vacancies. Our recent acquisition in Q1 2019 has a vacancy rate of around 10%. Our like-for-like occupancy increase was 0.3% in the last 12 months. In addition, we have disposed of properties with very low vacancy. Although it is possible to decrease vacancies faster, it means compromising on the rent levels and tenant structure. We prefer to be more selective in our yield management, which takes more time, but locks in rents at higher initial values is a better long-term strategy.
The strategy pays off and is reflected in an above-average like-for-like in-place rent increase of 3.6%, which GCP achieved in the last 12 months. We would like to point out here again that the vacancy in our London portfolio resides from the deal situation. We bought these properties mainly from developers, which are newly built, newly converted, and the buildings are in the final snagging stage. The last finishing touches need to be made before they are ready for renting. We have already been very successful in decreasing our vacancies in London as soon as these properties were placed on the market, as the rental market in London is very strong due to very high demand and low supply of rental housing in this historically high ownership market.
We reduced the vacancy of our London portfolio to 11% from 35% in June 2018. We believe we can continue to reduce the vacancy in a short time. We also have an additional 800 units, which are in the pre-opening stage and not placed on the market yet. As soon as they are ready for rental, we believe to achieve great results. Going forward, for 2019, we expect a like-for-like vacancy reduction in the range of 0.5%. We expect a total like-for-like over 3.5% in 2019, including the effect of rent increases.
Can you please elaborate on your CapEx spending? Will it stay on this level? Will you invest more into modernization? What is the impact of the reduced cost allocation of modernization on your rent increase?
You can see on slide 19 of our presentation that our CapEx measures follow three different investment strategies. One is the ongoing repositioning CapEx, which is targeted at increasing the quality of our properties and increase the appeal of our properties and the surrounding area. These measures attract new tenants and retain current tenants, which leads to higher rental income from new lettings and rent increases. We invest EUR 3.5 per square meter on average in the first three months of 2019 and expect to invest in the range of EUR 13-EUR 15 per square meter on an annual basis. Additionally, we invest small amounts in modernization measures. We want to remind you here again that we don't do large-scale modernization all over the portfolio.
Many of our peers follow the strategy for a measure to increase rents. Due to the gap of our portfolio's rent to market rent, we have a more efficient way to increase rents by capturing this gap. You can see on slide 23 that our upside on rental income is 28%. We execute modernization measures on a selective basis where we see accretive results. You can see on slide 19 of the presentation a few examples of our measures. In Q1 2019, we invested EUR 4 million in modernization at EUR 0.7 per sq m, which resulted in 0.6% like-for-like rent growth. Going forward, we do not expect any heavy modernization projects and expect to continue these spending levels, but we are executing these very opportunistic whenever we see an opportunity to create additional accretive cash profits to further support the rental income increases.
Regarding the regulation, we mentioned before that although this will create a dampening effect, it won't be material if we invest on a selective basis and pick the low-hanging fruits where rent levels are high and the modernization works have most effect on the rent increase capabilities. Our third investment strategy are pre-letting modifications for our London properties. As explained before, we acquired these properties mainly from developers who intended to sell these buildings on a unit-by-unit basis. Due to the opportunities which opened up, we were able to buy these newly built or newly converted buildings. A few last finishing preparations are needed to have these units ready for letting. In Q1 2019, we invested EUR 3 million in this category.
Will you be providing a scrip dividend option for the upcoming dividend payment?
Yes, we will. As was done last year, a scrip dividend will be an option for shareholders as part of the AGM taking place end of June this year.
Like-for-like for the period increased to 3.9% from 3.4% in 2018. What is the effect of indexation and what is the effect of reletting? What locations contributed to the highest like-for-like? Did the London portfolio contribute to this number? How will the recently confirmed Berliner Mietspiegel impact your ability to achieve your target of over 3.5% like-for-like rent growth in the financial year 2019? What were you including in your guidance previously?
Like-for-like of 3.9% is comprised of 3.6% in place growth like-for-like and 0.3% occupancy like-for-like. Of the 3.6% in place rent growth like-for-like, 1.5% comes from indexation, 1.5% from reletting, and 0.6% from modernization. The increase from 2018 like-for-like is mainly due to the increase in the indexation contribution and is a reflection of the high reversionary potential in the portfolio. We have seen good like-for-like performance across our portfolio, in particular in Berlin, Hamburg, Bremen, Mannheim, Frankfurt area. London like-for-like was very high in the period, but only a minor contribution is included in the last 12 months like-for-like figures, as the London portfolio in March 2018 was small. Going forward, we expect to see a larger contribution from the London portfolio. The recent Mietspiegel in Berlin is in line with our expectations, and we reiterate our guidance to achieve 3.5% in 2019.
In Berlin, as we are below market rents in most of the portfolio, and therefore we are affected partially from the Mietspiegel.
You disposed EUR 124 million in this quarter. How many units did you dispose of and what was the price per square meter and rent multiple? How large is your non-core portfolio and how much can we expect to be disposed in 2019? How many units in held-for-sale portfolio and what is the average pricing?
We sold in the first quarter of 2019 approximately 300 units in Berlin at the price of EUR 124 million. These disposals are mature properties with very low vacancy and where a large portion of the potential was already captured. The disposals were done on an opportunistic basis following very attractive offers we had received. The disposals were carried out at a high average multiple of 32 times and at a price of EUR 3,500 per sq m, which was an opportunity we had decided to pursue. The disposals were 10% above book value. Furthermore, the disposals generated a profit of 160% above book cost. We intend to use the capital recycling gains to continue and acquire properties in high-quality locations and generate further accretive growth.
We consider prepared properties which are non-core, then they are either located in locations which are not in our main focus, as well as mature properties with lower upside potential remaining to be captured. Our assets held for sale balance of EUR 200 million is non-core, and we may continue to sell additional properties on an opportunistic basis as done in the past. In any case, our capital recycling will not exceed 10% of the total portfolio per annum. Our held-for-sale portfolio includes approximately 5,000 units valued at over EUR 500 per sq m, at a yield of 5%.
Thank you. I think these were the questions so far. We will now 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. We are looking forward to hearing your questions too.
Ladies and gentlemen, if you would like to ask a question, please dial zero one on your telephone keypad now to enter queue . Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please mute the handset before making your selection. One moment please for the first question.
The first question is from Alice Evans, First Berlin. Your line is now open. Please go ahead.
Yes. Good morning, gentlemen. I have a question regarding the development rights. If you could maybe talk a little bit about the timeline regarding the decision you need to make on the three options that you presented. I assume that there is some sort of deadline with regards to needing to secure the materials and contractor capacities, if you guys really do want to put the shovel in the dirt in one to one and a half years' time. That's it.
We expect within 12 months. Whether or not we will put the shovel ourselves still needs to be decided.
The next question is from Alban Lamer, BMO. The line is now open. Please go ahead.
Hi. Good morning. Can you hear me?
We hear you well.
Yeah. I also had a question on the development rights and especially the project in Lichtenberg. Just looking at the numbers here, and just want to clarify the additional rent of EUR 16 million for the 2 phases. I assume that's just on the extra additional cost. But if you take the current land value of EUR 100 million, the yield on cost is around 4.7%. If my math are correct. Can you please confirm whether my math are correct here? And the 4.7% would be on a gross rent basis. If you could basically give us some color on what the net yield on costs would be on the project. Thank you.
Yes. Thank you for the question. Yeah. The yield over cost, as mentioned, 6.5%, including the building rights as well. The EUR 100 million we mentioned, we get around 5% yield.
Okay. That's based on gross rent?
Yes. This is net rent, just making it net pro forma.
Okay. All right. Thanks.
The next question is from Manuel Martin ODDO BHF . The line is now open. Please go ahead.
Good morning, gentlemen. Two follow-up questions. Question number 1 is on your London portfolio. You mentioned a target of something like 12%. You almost reached the 12%. I think you have 10 or 11% now in London of your portfolio. Do you have any new target, or are you going to remain on roughly 12%? That's the first question. Second follow-up question on your valuation gains. Could you detail to us, please, how much came from price increases in the market and how much came from operational improvements? Thank you.
Hi, Manuel. Let me just start with your second question, please. Regarding the revaluation gains, almost everything came from operational results. A small size bit came also from lease compression. Regarding London, currently our target is 12%. Looking forward with our current pipelines, perhaps we might increase it towards 15%. Next question, please.
There are currently no further questions coming through.
Okay. With that, I would like to thank you very much for your attendance on our call. Wish you well, and hopefully we will meet in the not too distant future for personal further discussions on our company. Thank you very much and have a good day. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.