A closed-ended fund that invests in a Berlin-focused portfolio of German residential properties has recently listed on the main market of the London Stock Exchange. Phoenix Spree Deutschland has been operating in Germany since 2006, but can now be traded in the UK using the ticker PSDL.
The fund currently owns 114 different properties. These are mostly multi-apartment residential buildings and they have been divided up into 2,325 separate rental units. Just over 60% of the value is located in Berlin with the remainder in secondary cities across the country such as Hanover and Bremen.
In the six years to 31 December 2014 the gross asset value of the portfolio increased by 62% from €151.8m to €245.3m on a like-for-like basis. The average rental income has also gone up, with a rise of 12.7% in the last three years.
Despite the recent strong performance, German residential property is an undervalued asset class and has lagged behind most of the other major European markets. Estimates suggest that the average price per square metre in Berlin is about 83% less than in London and it is also cheaper than other Continental capitals such as Rome and Paris.
The main reason for this is that Germany did not experience a house price boom in the 1990s and noughties, with the average price actually falling by 14% between 1990 and 2007. Research by the Economist suggests that local property prices are still 15% below their long-term averages with respect to earnings.
Levels of home ownership in Germany are well below what we see in other European countries, but they are starting to increase and this trend should continue due to the low level of interest rates set by the ECB. Resale values are often less than the cost of construction, which means that supply is limited and this is putting upward pressure on both prices and rents.
The fund has significant cash on its balance sheet and undrawn borrowing facilities. It plans to use these resources to finance further acquisitions and increase the net loan to value ratio from 39% towards the 50% target. The aim is to generate annual shareholder returns of 8% to 10% per annum of which 2.5% would be in the form of dividends.
PSDL is a niche product, but unlike most of the UK orientated property funds it is not trading at a ridiculous premium to NAV. It should also benefit from the fact that European interest rates will stay lower for longer than most other markets. This could make it a useful alternative and a good diversifying holding, although the euro-denominated exposure adds an extra risk.