Berlin-focused property fund could have further to run

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Berlin-focused property fund could have further to run
Master Investor Magazine

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Phoenix Spree Deutschland (LON:PSDL), the Berlin-focused residential property fund, has just released its end of December valuation. The independently calculated figure of €645.7m implies a healthy gain of 14% on a like-for-like basis during 2018, with the uplift driven by increased market rents and active management of the portfolio.

In its early years PSDL provided a more diversified exposure to German property, but the investment manager believes that Berlin offers the greatest potential and has been re-balancing the portfolio accordingly. At the end of December only a small proportion of the assets were still located outside of the City and these have all since been sold.

During 2018 a total of 222 units − 210 residential and 12 commercial − were acquired for an aggregate purchase price of €36.3m. The property advisor sees 400 to 500 potential purchases each year, but is highly selective, as evidenced by the fact that the price paid per square metre for last year’s additions was 32% lower than the average valuation of the portfolio as a whole.

The balance sheet remains strong

Acquisitions have been financed using a combination of debt and equity, with a target net loan-to-value ratio of approximately 50%. The balance sheet remains strong and the aim is to optimise the debt structure so as to create additional capacity for further purchases during 2019.

Phoenix Spree actively manages its portfolio and last year it invested the highest ever amount to improve the quality of its accommodation and surroundings. This has created significant future embedded value within the portfolio, especially when you factor in Berlin’s upbeat economic and demographic backdrop.

The benefit for investors is obvious with rental growth of 7.4% across the portfolio last year and new leases signed at an average premium of 39.7% to passing rents. Full results for the year ended 31 December are expected to be published towards the end of April.

The story has further to run

Berlin has experienced significant uplifts in residential property values in recent years, but the broker Numis believes that the story has further to run. They say that the strong market fundamentals are being driven by an under-supply of rental property, falling unemployment and population growth.

Phoenix Spree has often traded at a premium to its historic NAV as investors anticipated further upwards property revaluations. The end-of-year guidance of €4.52 to €4.56 (£3.96 at current exchange rates) implies a discount of around 10% that Numis considers to be an attractive opportunity. This is further supported by the fact that Taliesin Property, another Berlin-focused residential property fund, was taken private by Blackstone in 2018 at a 16% premium to NAV.

PSDL is a highly specialist, geared fund that has produced excellent performance with a 3-year share price return of 127%. Long-term, risk tolerant investors who are comfortable with the focused nature of the exposure may want to add it to their portfolio, although the modest yield of 1.8% means that it will only really be of interest to those looking for capital growth.

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