Last July I wrote about a closed-ended German residential property fund that had just listed in London. Unlike most of its UK focused alternatives, Phoenix Spree Deutschland (PSDL) was not trading at a massive premium to NAV and was well placed to benefit from the fact that European interest rates were expected to stay lower for longer than most other markets.
In January the company announced that its property portfolio had been externally valued at €282.762m at the end of December. This represented an increase of 15.3% over the calendar year with the share price rising 18.7% in the last 12 months.
According to the latest available data on its website, the portfolio consists of 115 properties containing 2,175 residential units, as well as 190 commercial units, 3 commercial buildings, 491 garages/car parking spaces and 40 miscellaneous rental units. These collectively generate a net yield of 4.6%.
The Board has recently successfully raised an additional £36.6m of share capital (net of expenses) that will enable the company to grow the portfolio, “particularly in Berlin where a significant market opportunity exists”. A placing programme has also been put into operation that will enable it to raise further capital over the period to 8th February 2017 as and when it identifies suitable properties.
For the first three years after listing on the London Stock Exchange the company is targeting a total return of 8 to 10% per annum, of which 2.5% is intended to be distributed by way of dividends. These are expected to be declared semi-annually with the first payment of 1.3 pence per share having being announced last August. The final dividend for 2015 should become clear this week with the publication of the full year accounts.
The Berlin residential property market has not experienced anything like the boom in prices that we have seen in London and other European capital cities, but it is beginning to make up some of the lost ground assisted by the low level of interest rates set by the ECB.
PSDL has moved to around a 3% premium to NAV, but its closest peer, the Taliesin property fund (TPF) is trading at around a 16% premium. It is also interesting to note that Woodford Investment Management – Neil Woodford’s investment company – owns a substantial stake in the company that is worth around £30m.
There is every chance that PSDL will continue to deliver strong returns, but if you are thinking about investing you need to be aware of the currency risk. Its euro denominated property portfolio has benefited from the recent rise in the EUR/GBP exchange rate, but if this were to reverse it would have the opposite effect. You would also need to be comfortable with the target gearing level of about 50%.
Phoenix Spree Deutschland is a niche product with the potential to deliver decent returns and a growing level of income. If you are willing to accept the high level of risk it could make a good diversifying holding. The full year results should be released later this week.