Ladies and gentlemen, welcome to the PSP Swiss Property Q3 2021 conference call. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Balzarini, CEO of PSP Swiss Property. Please go ahead, sir.
Good morning to everybody, and welcome to this conference call on our Q3 results. As always, I really do a very short introduction on a high level, and then I would like to give back to you for a Q&A. As mentioned last time, we are all back in the office since June. We are at the moment confronted with a quite stable rental market in the CBD of Zurich and Geneva. Geneva even better than originally expected. I would say solid rent fundamentals both in CBD Zurich and Geneva. A bit weaker CBD market in Basel, which was already highlighted in the half year, and I would say stable markets in Bern and in Lausanne.
On the other side, we are confronted with a very strong transactional market, particularly in CBD areas, but also on periphery assets, well-let assets we have sold on our end at very strong premiums. The transactional evidence for potential further yield compression is on the table. We have, based on our results and on our view on Q4, slightly improved our guidance on the EBITDA and slightly reduced our vacancy guidance for the year-end. All in all, I would say after a difficult period of 18 months of COVID, a solid result of PSP and good visibility for a good full-year results of the company. With that, I would like to immediately hand back to you that we can start the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Pascal Furger from Vontobel. Please go ahead.
Good morning. A couple of questions on the vacancy rate side. Can you give us, please, some details of which rental contracts you extended in order to revise your full-year guidance downward? Are there any other potential surprises possible on the vacancy rate side in the fourth quarter? Maybe looking also towards next year, can you already comment how much of the contracts that are set to expire that you are already in discussions, and where you feel positive that you can relet the space? The question number two is related to Parco Lago. Just wondering, what you expect in terms of earnings contributions for next year.
The last question, if you just briefly could comment on your revaluation gains in the third quarter. That's it from my side. Thank you.
Thank you, Pascal. On the vacancy guidance, this improvement, our guidance also I would say a slight improvement, is driven by a letting success in Lausanne, Place Saint-François, which we were working on for a while. It's based on a letting success in Rheinfelden, a letting success in Zurich West, Hardturmstrasse, and then especially one in Rue des Bains in Geneva. I think these were. As you know, when we do our forecasts, and I mentioned that last time, we base on probabilities, potential letting successes. If then we close one, which we had perhaps a little lower probability, this clearly at the end improves our overview. Across the board, I have to say, slightly better letting successes in Lausanne, Geneva, and selectively also in Zurich West, which leads us to improve our guidance.
With regard to the contracts which mature next year, I think here we typically give an indication on our pre-letting successes with the full year results. What I can say is that we are having one large contract with a tenant on multiple buildings, and we are very well ahead in renewing that lease agreement, and it makes more than 25% of our expiries of next year. For the rest, I would kindly ask you to wait for the February release when we then provide with our pre-lettings for the full year. On Parco Lago, in general, we are, I would say, pretty happy on the progress of the development which will be finished by the end of this year. The whole green area, park area will be finished beginning next year.
There we have a bit of delays also due to COVID, so the whole surrounding. If you take the sold apartments and the reserved one, we are a little bit above 80%. I would say it's reasonable to assume that we will finish to sell all the apartments by end of next year, latest early 2023. Please keep in mind that we are not providing discounts on our disposals, so we have our pricing view, and we are not really in a hurry to then really dispose in a certain timeframe. My guess would be that we will get to the finish line by the end of next year. With regard to the revaluation gains on Q3, as a reminder, we value our properties based on stock exchange rules twice a year by the external valuer.
As we do quarter reporting, we have to review the valuations of our assets if there is a larger contract to be signed or expires, which leads to a plus/minus valuation impact of CHF 5 million on that asset. This happened during Q3 on the part of Platz 9, where we prolonged a lease agreement at conditions where we thought this will be triggering this hurdle. Effectively, we had a valuation gain of CHF 5.6 million on that asset. Additionally, we sold our Bahnhof in Locarno on 1st October, but with a notary settlement on 30th September, which triggered the adjustment of the market value of that asset in Q3 by CHF 1.3 million. This leads to this CHF 6.9 million revaluation gains for Q3. Is that fine for you?
Thank you.
Yep. Okay.
Thank you. Just a small follow-up question on Parco Lago. Is there any sort of cluster risk, such as a very large apartment or an expensive penthouse, which might take more time? Thank you.
We have still two apartments on the top floor. Apparently one strong interest came in yesterday. I wouldn't speak about the cluster risk on this side because our profit margins are very high. As mentioned, the product is good. We're not in a hurry. Yes, clearly there are some more expensive apartments to be sold, but not too extremely ones.
Great. Thank you.
Thank you.
The next question comes from the line of Edoardo Gili from Green Street. Please go ahead.
Oh, hi, Giacomo. Thank you for taking the question. The first question I have is on the expiry of leases for next year and actually 2023 as well. On page 16, I can see that there's 18% and 18% again. You just mentioned that for next year, it's related to one big contract that has to be renewed. Can you give us a little bit more color on, you know, is it office or is it retail? And also in terms of the location, is it more CBD or is it more in the periphery as well?
Thank you, Edoardo. Well, the one next year, the big one, I would call it CBD Zurich. If you look at the CBRE CBD class definition, it's really short outside.
Mm.
It was an original big development site, and it's a tech company. The other ones are really then rent-linked income wise, you know, below 0.5%. Large part of them, of the big ones, we have a good view that they will be prolonged because they're central. I'm really not too worried about 2022. If I look, I go through the list, and if I can say so, I still expect rental growth, overall top line growth for next year. I'm pretty positive on our expiries for 2022.
Understood. In terms of leasing spreads, are we seeing that, like, positively? If you have any estimates in mind or any indication of what they could be?
We have seen some slight positive like for like, excluding COVID for this year. We will see now what we can put in as indication, indexation levels. I would say considering the overall market with, you know, some positives on the CBD, Zurich, Geneva, perhaps a bit more challenging in Basel and stable on the other two markets, I would say it's a flat positive releasing spread across the portfolio.
Understood. Thank you.
Thank you.
I have another question on page nine of the presentation where we talk about consolidated expenses. Can you give us a little bit more color on why the increase has been so high on multiple line items, for example, on maintenance and renovation, but also on general and administrative? What is the cause of that increase? Is it wage inflation only, or is it something else?
No, it's definitely something else. On the property operating expenses, the increase is due to the property tax we have to pay as we acquired a new building in Geneva, the Hôtel de Banque. You pay in Geneva a rent tax on the property based on the rental income. This goes through the operating expense line. Excluding that factor, this line would even decrease as we have reduced over the years the vacancy rate and the ancillary expenses we were able to transfer them to the tenants. Net of the Hôtel de Banque acquisition, we would have had even improvement of the operating expense line.
If you look at the general admin expense, I think we spoke already in half year. We had last year a positive effect from a settlement of a law case with Steiner, which provide us with a theoretical income of CHF 500,000 or cost reduction, which was a non-repeat this year. If we move forward for the full year, I don't see on a like for like basis a different number than last year. So no cost inflation, wage inflation. Personnel expenses will be slightly higher, but as it seems, we have record results and this triggers slightly higher personnel expenses.
Understood. Thank you. My third question is on rent reliefs, which are affecting your like for like trends. I was wondering, so what do you envision for the short-term future? Also think about accounting, are those rent reliefs fully included in receivables or some of them are going to be in bad debt, or are you writing some of them off as well?
The rent reliefs we have shown of CHF 3.6 million went through the P&L, so there are losses taken. We have some receivables, which, if we take out the impact and the reliefs are basically, postponement of payments, which we are pretty convinced that we can collect from today's point of view. From today's point of view, on the COVID side, we should be through. We wouldn't expect any, I would say, any significant, not even major impact from COVID coming through Q4. We should be through COVID hit as per Q3.
Understood. That's very helpful. I have another question on the like the office fundamentals for West Zurich specifically and where the ATMOS building, for example, is. I'm just wondering, you mentioned that on the inner periphery, the fundamentals are softer than in the CBD. How would you characterize West Zurich as a whole?
Well, we have seen through the development of the ATMOS building and the letting of the ATMOS building, that if you provide a grade A building in Zurich West, you can really increase the local rents, which are of course lower than what you see in CBD. I would say healthy, good rents. This has a kind of a spillover effect to the immediate neighboring buildings. I would say solid rents, increased rents to what we have seen four, five, six years ago. Clearly, with a modernized building and modernized floor plates, but in a different ballpark than what you see in the CBD Zurich. If in CBD Zurich, we see top rents being at CHF 800+, I would say top rents in Zurich West are at around CHF 400+.
We are confirmed that in Zurich West, at least where we have our properties, Hardturmstrasse, Förrlibuckstrasse with a solid market and a good community.
Supply risk. Is it? I would assume it's higher than in the CBD. Would you say that's true?
Sorry, I didn't get the first part of the sentence.
Supply, supplier risk or development activity in the Zurich West area. Would you say it's been pretty active in recent months or recent years?
It was active in recent years, but there's limited new projects coming. There is some projects, but I wouldn't say that there's big availability coming on in the future.
Understood. That's very helpful. I have just one last question on the just the state of retail, especially in Zurich CBD, so Bahnhofstrasse. How would you characterize the situation now versus pre-pandemic in terms of retailers, sales productivity, and also profitability, and perhaps also footfall, if you have any indication or data on that?
Well, as you know, our rental contracts on the retail are pretty much rental contracts as we have for office tenants with fixed rents. What we have as data point is that during COVID, we have renewed three large retail contracts on the CBD area, and in all three, we were able to increase the rents. I think what we observe, and this is a particularity, especially if you take Zurich, we are confronted with one high street, which has, I would say, this respective footfall and attracts the brands. If you have a reasonable floor plate with a reasonable accessibility to the street and the windows first line, we observe a certain resistance and even quite strong interest.
Mm-hmm.
Going forward, one has to keep in mind that we have a new Globus concept, which we think will be an enrichment for the whole Bahnhofstrasse in proximity. Generally, we see a positive environment. Is it pre-pandemic? I have to say, I see from a pure rents limited differences. I would expect that from a pure footfall, we still don't have yet the international traffic which we were used to. So far, no harm to the rents.
Understood. That's very helpful. Thank you, Giacomo.
Thank you, Edoardo.
The next question comes from the line of Andreas von Arx from Baader Helvea. Please go ahead.
Yeah, good morning, everyone. First question will be on the positive like-for-like rental growth you had in the third quarter. Is that just a kind of a one-off or, you know, a post-COVID effect, or would you read, let's say, or a trend in depth? That's first question. Second question, if you could give an update on realistic perspective with regards to lettings on Baufeld C and B2Binz. I mean, these projects are not too far out, and there's still significant vacancies. I mean, you mentioned especially, you know, challenging environment in Basel. I mean, if you could provide an update here. Then, third question on the disposals. I notice, I mean, you have sold one in Locarno and then another one in Olten is on the disposal list.
Is that just, you know, individual opportunities, or can we expect here further disposals in, let's say, known top five Swiss cities? Like, I don't know, Aarau, Biel, Fribourg, or Interlaken. I mean, is that are you now using the opportunity or was that just, you know, one time event with those disposals? Last one. I just try it. I mean, would you dare to comment on what's happening, let's say, in Germany with alstria office? I mean, it's quite similar period than you are. So if I look at, you know, the offering price and your discount that you're trading. I mean, have you been approached by any party with, you know, like alstria did? Thank you very much.
Thank you, Andreas. On the like for like side, if we look at the regions, the positive contributions come from Geneva, astonishingly, Basel, and Lausanne. Lausanne is the one rental contract, the Saint-François. Basel is the reposition of the Steinentorbergstrasse, which was the positive contribution, netted then by a little bit negative impact from the Grosspeter Tower. Geneva was the earlier mentioned renewals we had mentioned beforehand. Is this the trend? I think we have, as I mentioned, also on the next year's expiries, positive, negatives. From you know, from a distance, I would say I would expect slightly more positives than negatives, but we are around the numbers we have disclosed now. It's my expectations. On the letting update, Baufeld C and B2Binz.
On Baufeld C, we have still only the Swisscom letting and the restaurant. In Basel, we have to admit limited interest at the moment. On the other hand, we will come with a reasonable sized, very modern, very sustainable building close to the main station. I think as we get closer to the finish line of this product, we will attract interest, and I think we will let this surface in reasonable times. I think it's size-wise, location wise, something which needs a bit of absorption time, but I think we will soon, once we have completed, be able to let this building.
On the B2Binz, we have I would say very strong interest in that building, and we are currently in talks with a variety of different companies, being it from the tech sector, being it from the light industrial area, being it from also I would say consumer goods retail part, which are interested in this floor plate. We just got the permission to build it a few weeks ago, so we are now in this starting discussions with them concept-wise. It is a good product, a new product in the proximity to Hohlstrasse site, and so very central. With an adjoining railway station, one stop to the main station. On the disposal, we have even mentioned today in the press release a subsequent event disposal for the Schaffhauserstrasse.
Schaffhauserstrasse is a building in, for us, a B + location. We were able to let it fully for the first time, I think, last year. This triggered for us, I think, the reasonable assumption, okay, now it's time where we can, in this market disposal, dispose this asset. It's part of, I would say, of further refining of our focus priority strategy, where the longer the more we want to go even more CBD. We are not under hurry to sell assets. I think the biggest cleanup has happened in the last few years. We have some assets in mind, and we will review based on letting progress. Based on our view on how this local market develops, if we will continue to you know to sell those going forward.
Just as a reminder, all these disposal gains, as significant as they are, they are not part of our dividend strategy, and we don't need those to fund our dividend. We pay our dividend out of the operating earnings, EPRA earnings per share. This is, I think, important for us to keep in mind whenever we sell such a, I would say, non-prime asset. On your last point, I would love to give you any answer, but I cannot. I think the only thing I can say is that historically, we have not seen big private equity companies being very active on an unfriendly basis in Switzerland. Is it due to local tax regime? Is it due to liquidity? Is it due to language hurdles? I think we have not seen in the last 15 years, you know, those movements.
What happens in future, I cannot answer.
Thank you very much.
Thank you.
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Well, in the end then, thank you very much for your interest. Whenever you have a follow-up question, you know, don't hesitate to contact us. We look forward to the discussions and wish you a great year and at this time already a good holiday season. Thank you. Bye-bye.
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