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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the conference call of ADO Properties. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Rabin Savion, CEO, who will start the meeting today? Please go ahead.
Thank you, Orelia. Good morning, everyone. I'm Rabin Savion, and I want to welcome you to our Q1 2019 update call. With me as usual is the rest of the senior management team, Eyal Horn and Florian Goldgruber. The biggest news in our sector in the last couple of weeks was probably the release of the 2019 Mietspiegel. As expected, this release has again shown a figure that has nothing to do with the market reality. The official figures show an increase of 5.2% compared to the last Mietspiegel 2 years ago or roughly 2.6% per annum. Looking at our portfolio for comparison purposes, we have seen an increase of the in-place rent by 5% per annum from 2016 to 2018. This might sound a lot but while looking at the average new letting rent to see where the market actually stands, you find a growth rate of 8.4% per annum over the last 2 years. Just to remind you, our portfolio is spread over every district of Berlin and has a good representation of the market. It is up to you now to draw your conclusion if that Mietspiegel mirrors the market, but I can only say that we don't see the supply and demand imbalance changing, which is still the key driver of the Berlin rental market. The OGM beginning of April has confirmed the new members in our Board and the AGM in June has the reappointment of the remaining members on the agenda. With that, we have now a stable Board and we have also seen the Board start discussions about a potential extension of management contracts. We will obviously update you on any decisions regarding this topic as soon as possible. Now let's move to Page 4 to give you the highlights of Q1. Our operation is on the right track. Our like-for-like rental growth of 5.3% is slightly ahead of guidance and the vacancy rate has improved by 10 basis points to 3.1%. All of that is supported by our successful modernization program. Eyal will walk you through this in more details. Like-for-like rental growth and acquisitions during Q2 of last year has taking our annualized income from rental activities to more than EUR 142 million. Our NOI and EBITDA margins are marginally ahead of our expectations for 2019. I mentioned to you the supply and demand imbalance and you can see this also in the price per square meter we achieved for our privatization units, which was this quarter close to EUR 4,100 per square meter. As we continuously said, we expect sales prices in Berlin to continue to grow. We can now move to Page 6 to look at our portfolio. Our average rents have further improved to EUR 6.77 per square meter, while the average new letting rent stands just under EUR 10 per square meter. This results in an average reversionary potential of 48%. Looking at our fluctuation rate, we again see a stable figure of more than 8% on average, which is an important driver to lock in the reversionary potential and as such, confirming the sustainability of our business model. Let me now hand you over to Eyal Horn, our COO, to give you better insights on our operations.
Thank you, Rabin. Our like-for-like rental growth remain strong and on track at 5.3%. During the first quarter of 2019, our construction management department has released close to 400 newly refurbished units. The vacancy rate has improved by 10 basis points from last quarter and we work hard to support this trend for the upcoming months. As in previous quarters, the main contributor remains the smart targeted CapEx investments into the fluctuated units, leading to a 2.9% rental growth. This is followed by the next contributor, which is the regular rent increase for our existing tenants, delivering additional 1.9% rental growth. Considering the new released rent table and even though the increase was lower than expected, we are still confident to be able and sustain a similar rental growth deriving from this particular driver. Like Rabin already mentioned, the rent table is not representing the real rental growth on the Berlin market and is rather a result of the pressure by politicians on this too.The remaining 0.5% rental growth is derived from the fluctuation without CapEx investment and minor vacancy change. Mentioning vacancy, lets please look at the vacancy graph on the right side. The overall vacancy, as well as its distribution, remained stable at 3.1%. This is granting us additional upside for further rental growth out of vacancy reduction through the course of the year. 2.1% of the vacancy is currently under construction and 0.8% is freshly modernized units under our letting efforts. The remaining 0.2% is units for the condo sales department further supporting our privatization program.Our average new letting rent is at EUR 9.99 per square meter, where our average in-place rent is currently at EUR 60.77 per square meter, granting us an exceptional reversionary potential of 48%. Let's please look at a table on the bottom left where we can see the breakdown of our maintenance and CapEx investments. In Q1, we invested a total of EUR 46.4 per square meter, demonstrating a consistent execution of our business plan and portfolio enhancement strategy. We are cutting no corners, but actively investing in our properties. This resulted in a total unit modernization CapEx of EUR 25.8 per square meter with an average unlevered return on investment of approximately 20%. The figures result from approximately 360 modernized units in Q1, mainly releasing us from the regulations of the rent cap law. Our repair and maintenance remains at the 2018 level with EUR 7.4 per square meter. Our capitalized maintenance is at EUR 10.3 per square meter, mainly reflecting our measurements on the building shell with a focus on elevators, facades and public safety issues in order to ensure the further development of the properties and their overall standards. As for the energetic modernization, this remains stable at EUR 2.9 per square meter. We are continuing to invest efforts to sustain this volume in order to further contribute rent increases. The overall investment volume has increased in the last years mainly due to our need to cope with increased regulations as well as manpower and building material cost inflation. Despite this increase, we still feel that this is the best way to crystallize value from our portfolio and to assure the enhancements of our building quality for years to come. With that, I will hand you back to Rabin.
Thank you, Eyal. Let's move to Page 8 for a brief update on privatization. During Q1, we sold 17 units, which is in line with our strategy. Our average sales price of EUR 4,096 per square meter reflects an uplift of approximately 36% compared to the value of our central location properties. If you compare this to the average sales price 12 months ago, you see an increase of more than EUR 600 per square meter. We see the demand in Berlin continuously increasing, while the building activity continues to be limited. Rents in Berlin are expected to rise further between 5% to 6% and privatization prices should increase accordingly. We will therefore continue with our strategy and not accelerate our sales program. On the other hand, we see offers for assets in which we see limited upside at very attractive prices. We have therefore decided to look at these offers more actively and potentially consider selling such assets. With that, let me now hand you over to Florian Goldgruber, our CFO, who will lead you through the financials.
Thank you, Rabin. As usual in Q1, there is no big change in the balance sheet given that we don't have a new valuation, which will only come in Q2. With that, the portfolio value stands now at nearly EUR 4.1 billion, and the interest-bearing debt stands at EUR 1.6 billion so more or less unchanged to the Q4. The EPRA NAV amounts now to EUR 55.37 per share end of March 2019. Looking at Page 11, the financing. As said, there has been no changes on the financing side in the first quarter, which means we still have similar rates with an average of 1.7%. We have no near term maturities. The next maturities are only in the end of the first quarter 2020, and we have sufficient headroom under all our covenants. Nevertheless, there is no huge fire power that we have currently in our state of financial strategy with the net LTV at the end of the quarter of 39.6%, which means that we will not pursue an aggressive acquisition strategy as we have also not acquired in the last couple of quarters.Moving to Page 12, and looking at the profit and loss. Like in Q4 last year, the key focus here is the NOI and the EBITDA margin and like we've seen in Q4, the trough of the margins compared to the previous quarters, like we already explained in Q4 driven by cost inflation, higher regulatory demand and also a build up of resources internally. This is something we were very positive that we could stabilize the margin in Q1 compared to the previous quarter, and even are slightly ahead of the Q4 figures. So this is giving us also confidence in our outlook for the full year 2019, where we don't see material changes for these figures. Moving to Page 13, the FFO. Also here, given that there are no material changes in the interest rate levels, you see a nice development of the FFO 1, which stands for the Q1 at EUR 16.7 million. And the AFFO at EUR 12.5 million, FFO 2 again clearly driven by the privatization activities at EUR 17.4 million. All of that in line with our expectations. With that, I'm coming to the guidance on Page 14, which is unchanged to the previous quarter, so we can confirm our approximately 5% like-for-like rental growth expectation, the FFO run rate of approximately EUR 65 million, similar also the long term cost of debt, which is currently at 1.7% where we don't expect significant changes. And also the target dividend payout ratio of up to 50%.With that, I'm handing back for the Q&A session.
[Operator Instructions] The first question is from Charles Boissier of UBS.
I just have a few questions. The first one, in the press release, you mentioned that you are ending the partnership with W&W Real Estate and just thinking about it, I mean, in the annual report you had spoken of -- it was just a few weeks ago of historical and very successful partnership since 2006. And I guess, over time you had convinced us that it's an outsourcing model that can work. So I just was wondering what is driving this direction now? And also if there is any cost attached?
Thanks, Charles. Thanks for the question. Yes, actually we are all extremely sad about it and maybe I will take that opportunity and thank Friedemann Weck, and W&W were our, I would say, long term and exclusive M&A partner since the beginning, since the inception of the company. But as you all know, we did not acquire anything for the last 3 quarters and the Board which has just been formed new is still reviewing the future strategy. So at this point of time, we mutually agreed that it does not make sense to renew an exclusive contract with W&W. After a decision on the future acquisition strategy, we will see in which format we can set up our acquisition capabilities and then we potentially either acquire that capabilities in-house again or work with different sources, but again yes, it's -- we're all very sad that this long term partnership has ended.
Okay. So I guess, in the meantime, while the Board is reviewing the strategy, we shouldn't expect there's really much in term of further acquisitions?
I would say that, that's correct. However, Charles, at the same time, and as we mentioned, we also examine the sale of assets which has limited upside as we seen real high offers coming at very attractive very prices, so that's something that definitely will be examined.
Right. And those very high offers, I mean, I guess you probably can't quantify them, but just trying to reconcile because on the one and for privatization, you're saying you don't want to do too much privatization, you're achieving 36% upside and you're saying because you're so bullish about the markets, you don't want to do too much privatization, you want to do less than 100 per year. And then for sale of assets I mean, it does make sense to, I guess sell mature assets if you have a very high offer, but should we read anything from that in terms of your view of the market or this is just very -- because you do mention, I think you did mention during the call, we will actively look for offers on some assets, so it just sounded like it's not a one-off extremely attractive opportunity, it sounds like potentially, you're very much welcoming and seeking those offers?
I think probably first on the market, I think we have not changed our view on the market, we see Berlin developing over the medium to long term very positively. And I think what the change that we try to describe here is not, let's say, a significant change in the strategy. The main difference is really that in the past, we more or less didn't look at any offers we received at all, as long as the assets were Berlin-focused. Basically, as you know, sometimes we had in the past, but there was pre IPO assets that didn't fit into the strategy which were sold. While I think the change is really that for individual assets you see that people with a different business plan, put a price tag at which we see very limited upside, and this is something that is not a change in the market, it's not a massive, significant change in our strategy, it's not that we said we want to be open to review these opportunities when they occur, because it's exactly an explanation that the market is still hot that you see still people coming into the market with very aggressive...
Offers.
-- offers.
Okay, okay. Good. And then a final 2 from my side, I don't want to take too much time. On the debt duration, I mean when I look back a few years ago it seems like that debt duration deteriorated kind of continuously in frontiers from close to 6 years to just 4 years, 4.4 years, now what's the plan there? And then lastly, I think you mentioned the 20% unlevered return on CapEx, just be interested in the maths.
I think probably -- first on debt duration, yes, you are right. Clearly, the -- we, at the point of IPO, had a longer maturity profile, but also at a higher leverage. So at the moment, as you also see in the profile, the average duration is not very long. But we also don't have any short term maturities coming up while this is actually arriving at a relatively low LTV. Nevertheless, I think that's something we are actively monitoring and where we look for market opportunities clearly to also to extend the maturity profile where we are not expecting significant change on the interest rate levels on the near future, but that's something we have I would say continuously on our mind, because you're absolutely right, we want ideally to extend the average maturity. On the map for, let's say, the unlevered -- on the return, the key is rather simple with the way how we look at the return on our CapEx is that we set the additional achieved rent in relation or to the CapEx investment that is associated with this additional rent achievement. So that means sometimes you have CapEx components, which you need to do any way, for example if I have an asbestos removal, this is a component [indiscernible] we put a 0% return on because if we don't do that then you don't have -- you can't let this unit at all. So this figure is kind of not taking into consideration for example, but the CapEx investment to really get the standard up to today's standard in contrast to the additional rent we achieved this is how we look at the yields on this investment.
The next question is from Sander Bunck, Barclays.
A couple of questions for me as well. First one is on the new Board, and I am aware that the Board has just been announced pretty recently. But I was just wondering can you -- have you had or can you say anything on have you had already any conversations with them? What their key strategic targets are? And how they're looking at this business going forward? And the main reason for asking is that because probably for an outsider, it's quite difficult to see what kind of strategy they could be evaluating given that the strategy over last couple of years has been quite successful. So what is it that they potentially could be seeking to do that is different from the strategy chosen in the last couple of years?
Yes. Thanks, Sander. First of all, we're very happy that we have a stable Board and that's a very positive note for the company. And we have been engaged in discussion with them also regarding our contracts as well, so that already is in process and we hopefully will get an update to you very soon. Regarding the strategy. Currently, we don't see any material changes. However, the new Board is examining all options currently as well as acquisitions. So it's acquisitions, it's capital recycle, it's of course continuation of what we have done until now which is modernization of the units and furnished apartment. So all that is continuing, but we will soon hear much more clear strategy from the Board and I hope that, that will be very soon.
Okay. And is one of those options for example as well, just given the underlying strength of the market and where you see privatizations compared to book values, is one of the options being examined as well, for example, a liquidation of the business and just capturing the difference between market value and current book values?
I think a full liquidation is at the moment nothing that is on the table or discussed because, as I said, this would be a significant change of the strategy. Nevertheless, as we also mentioned already is kind of that we are looking more active on individual sale options. So we generally as in the typical standard review, there's nothing ruled out. So on a theoretical basis you would actually -- somebody could also think about liquidation of the company as an strategic option, but this is nothing which we would currently expect and as I said, it's also not that it's -- it is the kind of the focus of the discussion at the moment we're talking about everything if it's furnished apartments, if it's the monetization strategy, if it's organic growth by actually building up further the capabilities of our craftsmen organization. So it's all options on the table where we --that the Board is looking at to actually fine-tune the strategy in the forward, we are currently not expecting anything that would be really drastic.
Okay, cool. And by the way, do you have an idea about when we can expect an announcement on that update? Is there a deadline or...
There is currently no clear time table, because the Board has just been actually formed and actually yesterday's Board meeting was the first Board meeting, where kind of the new Board members were really present and started the first discussion in the full Board. As you can imagine, that is nothing where you expect an outcome tomorrow, but it's also clear that this is the priority for the business.
Okay, great. And then the second question I had, very different is, on your organic rental growth. If I look over the total rental growth over the last couple of years and the different contributors to that rental growth, the rent increases has been steadily declining and you've been able to offset some of -- most of that by further unit CapEx so overall, you've been able to maintain that guidance of around 5%. With the new Mietspiegel coming in at 5.2%, how do you see that composition going forward? Do you expect rent increase -- the organic rent increases to drop further and unit CapEx to increase in order to get to that 5%? Or how should I be thinking about the composition of that number going forward?
Hi, Sander. Well, actually I think that if one would look even more in the past, one would actually see a kind of like a pattern. This is something which we are actually experiencing almost every Mietspiegel as usually when the Mietspiegel is coming out, it's coming in the middle of the year, so usually at that same year, there is not much of an impact one could have from that current Mietspiegel. Nevertheless, the year after, which is the following year, this is the year usually where we extract the most out of that Mietspiegel in terms of rental growth for that certain contributor. And of course the last year so to say before the new Mietspiegel actually arriving in, there is already not too much to extract and therefore it's going a little bit down. So there is this -- it's kind of like a cycle where at the beginning, you get a little bit more and then of course to the ends of the period where you actually extract all possibilities of rent increases, that figure can go a little bit down. At the end of the day it also of course have to do with the current situation of the last rent increases, as you know, there are many kind of restrictions in within that rent increases tenants if you have increase their rents by 15%, you cannot increase them again for the next 3 years and so forth. It also depends on the current inventory that one has and on the last rent increases and that of course impact that specific driver. Nevertheless, I think that what we can say in terms of future rental growth coming from that certain driver is that we feel that even though that the Mietspiegel came at a very moderate level, we still feel that we will be able to extract more or less similar levels as we've done in the past and on average, I think one can say that this driver can deliver somewhere around the 2% on an annual basis. The remaining of course would come as mostly at ADO from fluctuated units and invested CapEx in them.
All right. That's understood. Just a small push back on that, because you mentioned obviously that looking back a bit further in the past that the Mietspiegel, the majority of the impact was in the year thereafter, which mathematically I can clearly understand. However, if I just look at 2017, it was 2.6 when the previous Mietspiegel was published and the year thereafter the contribution was lower and obviously this year, so far most of the Mietspiegel push through has been already been done. So I guess in the second half, you maybe see a bit of this uplift. But then again, how should I be -- basically how is the Mietspiegel going forward driving your organic rent increases? Or are you saying realistically, it doesn't really matter that much for you?
No. I think the key point is probably that it has an indirect impact from also what else is offered in the market. So clearly when I look at the actual rental growth and that is something when you look at our -- in our presentation, the dark blue bar, it's also important to keep in mind that it's not only Mietspiegel increases, it's also a lot of CPI indexations, also cost trend increases and basically all standard [indiscernible] and we are continuously shifting more and more away from Mietspiegel to CPI indexation, by that actually disconnecting ourselves from the impact of the Mietspiegel, but nevertheless, on the overall growth as the Mietspiegel has an impact on the market and clearly how also the whole market is reacting.
The next question is from Bernd Janssen, VictoriaPartners.
I guess the question to Florian, regarding cash taxes, capital gains tax. I understand that, obviously you would like to have the maximum flexibility in terms of strategy, if the Board was approving the continued acquisition strategy, if not, or probably anyway you would increase your activities in terms of capital recycling. That said very easily but I would assume that your textbook values are pretty low and therefore, any capital recycling would involve quite high capital gains taxes. Could you comment on that? To what extent is the 6P reserves an option? And as a kind of follow-up question, if you were considering a capital cycling, do you have any updated views on the attractiveness of the key areas and burden so divided into central S-Bahn Ring and City Ring?
I think probably to answer the last first, because that's the easiest one, it would be opportunities everywhere in Berlin. That has not changed, it's really subject to the exact market location, the exact offer or the property we see. So we are, at the moment, not focus on central versus the S-Bahn Ring or any other region, that maybe one. On the capital recycling, you're absolutely right, because in the most extreme cases, we have assets on the book whether tax book values might be below EUR 1,000 per square meter. So selling them would crystallize significant cash taxes and deferred tax liabilities. But clearly you still have options on each individual deal to try to optimize that, try to -- we always look at fair deals as a tool especially to prevent real estate transfer tax, but it's not only that, it's also tool to actually mitigate deferred tax liabilities, and converting them into cash taxes. The other thing is also, as you mentioned, which we haven't used in the past, the active use of 6P reserves, which as long as you go with asset yields you could actually push back any kind of tax liability into the future. That's a thing that is clearly relevant. But you're absolutely right, in a scenario where you go into more active capital recycling, you will see some of these deferred tax liabilities turn into actual cash taxes. This is a side effect because sometimes it's more efficient to pay the tax then to try complex structuring.
Follow-up on your comment on share deals. Would you even consider under the likely new tax rules to keep, if that was the outcome, a 10% stake in an entity for a longer period of time?
That's nothing. We really analyze at the moment because we were not an active kind of seller up to now especially not in a scale where share deals makes sense. If you would sell a larger block where this is getting to a material figure, that's definitely something we would look at and see what is the economic most beneficial scenario. But we also all know we are still talking here about a draft law so we are very careful to -- well, how this really develops over this year before it actually gets turned into the actual law.
There are currently no further questions. [Operator Instructions] And the next question is from Tom Carstairs, Commerzbank.
Yes. Two questions please. I just wondered on these assets that you're considering for disposal, is there anything about the characteristics of them that you could help us to potentially understand what you might be considering disposing of? I mean, are they rent-restricted, for example? The second question relates to the guidance, FFO guidance, I know you stuck to the EUR 65 million, but for me I read it as a slight tweak downwards in terms of moving from what was at least EUR 65 million to approximately EUR 65 million, and I just wondered if you could give a bit of color on that please.
On the FFO guidance, I think the FFO guidance was unchanged, but at this exact point -- actually at the moment, we are slightly ahead of the guidance if you just take the Q1 and multiply through, but not in any material way and I think that was the reason for not updating the guidance, because we think it's A, as I said, kind of the deviation is not material and also too early to actually take such a step. But I think we're kind of not, let's say concerned about the guidance. And if I look at it from the Q1, there is more kind of upside risk than downside risk at the moment, but subject to the further developments over 2019.
Regarding the sales of the assets, I mean, we are looking currently at assets that have limited upside to them that we have done the majority of the work. But currently there is no particular characteristic of an asset that we're looking at it across the board and analyzing it. And looking at the offers that are coming and then seeing what potentially could be sold.
The next question is from Jaap Kuin of ING.
This is Jaap Kuin, ING. So my first question is on basically your margins and the M&A theme. So historically, we understood that part of your strategy to recapture some of the margins lost is to basically increase the size of your portfolio and the shutting down of W&W as part of your team suggested that this is not -- no longer part of the strategy, so this is kind of overrides the previous indication that this could be part of the strategy to recapture margin, I think the question is how do you plan to recapture margins and is this the correct explanation for what's happening?
Yes. I think the margins, we've seen the trough between let's say the average of last year into Q4 where we've seen kind of a new normal where basically effects of acquisitions continuously trying to fill up the resources in the organization was actually came finally to an end. Because one effect that we've seen last year disappear is that in general when we -- especially these asset deals that we acquired, you are taking over assets and actually the full cost base is only -- was built up 2, 3 months later, which resulted especially on these assets on extraordinary high margin really when we stopped acquisition this effect was falling away. On the same time, as said last year, you had the regulatory pressure increase which was also massive cost driver because you need more resources and on top of that, we've seen there clearly cost inflation. So it's not one explanation, acquisition is one of them but not the only in or maybe also the most important one. When you look at the development of W&W, I think this is nothing where we did actually something and active restructuring. The contract with W&W was coming to an end, end of June, or is coming to an end, end of June. And this was more a logic result of situation where you now had these 3 months of no acquisitions that especially in a situation where the strategic review is not completely concluded. That, it's basically, not sensible now to create such a cost load of retaining the full team at a point in time where you might not fully utilize it in the future. And this is, what I think, this will not have a massive effect on the margin as of today. But we'll look at Q1 really as kind of a more stabilized position going forward and we're not expecting a significant pressure on the margin at the moment, but we also don't see the possibility that we are, over the short run, getting back to the kind of 85% NOI, 75% EBITDA margin we've seen historically, where we were operating in different environment.
Then another question on return on CapEx, maybe just building on the previous question on this. Could you kind of highlight the delta in your returns due to the -- especially the cost inflation on the labor and building material side?
I think when you look at the figures that Eyal presented in the past, we had their figures that were even going up to like 25% and this is really key when you see it perhaps obviously, there's also some fluctuation in this return on investment subject to the individual assets that are modernized in each quarter. So we're also sometimes below 20% for individual assets. But all in all, you clearly see that the market is appreciating these investments and that you achieve a significant rent uplift because you're creating a product and that's the key driver also for this return that is fit for the market and the demand that is currently in the market.
All right. And then a final question on the Mietspiegel impact. Obviously, part of your portfolio is not impacted by the Mietspiegel either because they're already above the Mietspiegel or your contract is based on CPI, which is a fairly decent junk in your case. So could you kind of give a ballpark figure for actually amount of units impacted by the 2019 Mietspiegel this year and next year?
Well, currently we are in the phase of actually analyzing all the figures as the Mietspiegel was just presented 2 weeks ago and therefore, we're still not able to exactly say and implicate what would be the impact on our current units. As you all know, the Mietspiegel is a very complex tool and you have over 90 different kind of segments, which you actually need to look at in order to really foresee at the end of the day on what and which apartments will it then also impact and affect. And therefore, we're currently still in the phase of analyzing it and I'm sure that by the next quarters, we'll be able to give a little bit of more of an insight of exactly what kind of impact we expect to our portfolio. As mentioned earlier, we believe that we'll be able to maintain this increase as we've done in the past of somewhere around 2% annually, but currently we still cannot say on this current Mietspiegel which just actually came out what will be the exact impact.
The next question is from Veronique Meertens, ABN AMRO.
My first question, I just wanted to be sure. The number EUR 25.84 modernization CapEx, that's the number we can expect for the entire year for 2019?
Yes. Well, currently, more or less this is the figure that we are actually seeing. It's of course being derived out of a few things that were already mentioned through this call. First of all, of course, it is also volume-driven due to the fact that we are actually dealing with the increased regulations and in order for us to continue and crystallize value out of those modernization and we would like to release the majority of the fluctuated units from the rent cap regulation. More and more units of course are getting heavily, so to say, treated from the fluctuation. If we would add to that, of course what was mentioned also before, cost inflation. This is something of course the Berlin branch is actually booming and today finding a good construction company is actually not that easy and therefore prices are being almost dictated by those companies and therefore, we also of course seen price increase, we see a cost inflation in the cost of labor and all of these ingredients of course are coming together in addition to the newly apartment of ours, which is the furnished apartment, which is of course getting also a higher level treatment while we're modernizing these units. All of these things together are bringing this figure to where it stands today of around about EUR 25 per square meter.
Okay. And then maybe on the revaluations. I was wondering if you could maybe give a bit of your view of your expectations or opinion, do you -- because you said that you expect steel prices to go up in Berlin, do you expect maybe the same sort of revaluations as last year?
When I look at the Q2, I will say clearly, we are first looking at the cash flow growth and with the like-for-like running slightly ahead of 5%, you are already would get kind of 2.5% revaluation gain for half the year just out of the cash flow growth and the development with the market rents that is kind of in line with that as a kind of first step. On top of that, we would still expect some yield expression, it's very hard to predict where the final outcome there is. But we definitely don't see a scenario that yield compression has dropped already to zero. But we clearly see that the effect of the yield compression compared to the previous years is fading away and getting less relevant, if that's an ending tool for still adding up to 4%, 5% we need to see what the final outcome of the valuation.
And lastly, with everything that's going on with the protest and then naturalizing of the companies, I was wondering what's your latest view were or maybe insights was on that especially given that the Mietspiegel is probably a bit lower than people were expecting?
I think when you look at this, the whole political side of the business in Berlin, this is clearly a lot happening in the press, it's actually not so much which is really going on in the active political daily business, so we're not seeing any kind of laws and new regulations. Nevertheless, the real impact we see is that we are operating in a more and more hostile environment and that our operation people on the ground are facing this on a daily basis. I think that is one reason why you also see clearly a higher costs, it is coming in operation and it comes in maintenance where you need to make sure that everything is really bulletproof what you're doing. We're not really expecting anything material, it is actually not in the near future from the actual topic we're discussing and we're not expecting to be expropriated in the next 2 or 3 quarters.
The next question is from Marios Pastou, Crédit Suisse.
It's Marios from Crédit Suisse. Just 2 quick questions for me. Firstly, you mentioned you've invested additional spend in new build activities. So I just wondered, is this going to be, going forward, like a figure that's going to start inflating or it's kind of revised strategy coming from the Board something which you'll see new build activities taking a bit more of a back seat? And then secondly, with regards to more limited acquisitions, do you see this higher level of unit refurbishments sustainable over the say the next couple of years? I suppose, how much of the portfolio is yet to be modernized?
Hi, Marios. Well, regarding this new build activity that we're actually doing, this is something we've basically started almost 3 years ago. As we have mentioned in the past, we have mapped our complete portfolio and trying to look and see where we can additionally add living space to the portfolio and by that of course the enhanced rental growth and all other KPIs. What we're currently actually doing is that we're building on our own grounds. As we have already existing buildings with some vacant grounds, we are trying to of course utilize that space and built on these grounds. This is a project we're actually currently building, this is the first project that we're doing currently at the ADO, it's on existing ground that we have where we're going to build a complete new build with approximately 32 new unit. And going along, this is something which we'll continue to examine and every time that we see the chance of actually utilizing a ground in fields which are already in our possession with the ability to enlarge living space, this is something we would look at. This is the first building, first pilot project, it took a lot of time in Berlin. It's not easy even though the supply and demand imbalance is so great while coming into the municipalities, you're finding a lot of difficulties, getting the right permission in order to start with construction, but that's -- for this specific project, already behind us and we actually started actively constructing that new build.
Yes, I think this is exactly what Eyal said. The planning period for the projects are very lengthy and so you can't expect material changes even if you would decide to shift strategy today. The actual outcome and the figures of that is something we would probably like see only in 2 years. And actually we are continuing to do these activities and add more, so they will -- this will be now a constant figure that you will see in the next couple of quarters, always updated how much they're spending. And also clearly with an update at the point when we are actually also. Finally then, we also created new residential space added to the portfolio.
Although the city is actually aware of the shortage of apartments in Berlin, they're still very much taking their time and us as a professional company who pursue achieving these permits, it took us almost 3 years to actually get it. So that shows you exactly where the supply and demand imbalance is going and that will continue and limited supply is actually the key to the whole Berlin residential market and that will continue. Therefore, we will expect further increase in rents in Berlin going forward.
Talking to your other question around the, I'd say the remaining capacity to refurbish units. Clearly over time, if we're not acquiring, this should come down slightly nevertheless. There is always the option to modernize after a certain period of time because the standards are changing and improving. So the acquisitions have some impact, but it's not -- it doesn't mean that you now have remaining capacity for modernization for the next 5 years and then that's falling off a cliff. It might be, come down from the levels which we see today, but there will be always a certain portion of unit modernization, which allows us to actually try rental growth by repositioning product into actually much more up to date product.
And in addition to that, maybe just as a last sentence as Florian just mentioned, today actually, we are remodernizing units which we have modernize perhaps at the inception of the company back in 2006, 2007, 2008. So even those units which were actually modernized 10 years ago and have experienced one or two or sometimes even more fluctuated tenants, it's come to actually a period where you can actually go for another modernization. So as mentioned by Florian of course if no new supply will keep being put in into the portfolio for the next years, we will see and expect this figure to come down but we're still far away from that and we still have a lot to actually work with in terms of unit modernization especially in fluctuated units.
There are no further questions. I'll hand it back to you, gentlemen.
Thank you very much, Orelia. We all thank you for joining us on the Q1 update call. Thank you very much.
Thank you.
Thank you and goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.