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The broker Numis has recently highlighted a possible buying opportunity for the £363m specialist investment trust Phoenix Spree Deutschland (LON:PSDL). A significant sale by its largest shareholder, Woodford Investment Management, has put pressure on the share price and eliminated the premium to NAV that it has typically traded at.
Phoenix’s core strategy is to buy unmodernised, residential apartment blocks in Berlin that offer the potential for higher rents and capital gains after a comprehensive refurbishment. This lucrative opportunity arises because of the archaic regulations governing the city’s property market.
Local rules often limit the amount that a tenant has to pay to the level specified by a rent table, which means that many of the occupiers are paying significantly below market rates. If a tenant leaves a property and it is then comprehensively refurbished, the landlord can re-let it at its full market rent.
Significant value embedded in the portfolio
In the 6 months to the end of June Phoenix invested €3.4m in Berlin renovations and modernisations, which was a record level for the fund. The investment manager believes that there is significant value embedded in the portfolio, as evidenced by the fact that new leases in the city are signed at an average premium of 40.6% to the passing rents.
Initially Phoenix had a more geographically diversified portfolio, but it has now completed the transition to a pure-play residential Berlin fund following the sale of its Central and North German properties.
Despite recent strong gains, Berlin property values remain affordable on an international and national basis, while the capital values appear to be well supported by the excess demand. Rental growth is also expected to be healthy in consequence of the low vacancy rates, falling unemployment, and low rents relative to many of the other large German cities.
In 2017 the fund’s NAV grew by an incredible 51%, due in part to the rental uplifts following the refurbishments. Numis do not believe that this sort of growth will be repeated, although the NAV total return in the first 6 months of 2018 was a reasonable 4.1% with annualised like-for-like rental growth of 10%, and an 11.1% annualised increase in property values.
Total returns of 8% to 10% per annum
Phoenix Spree Deutschland targets total returns of 8% to 10% per annum net of fees, most of which is likely to be in the form of capital gains rather than income, although the plan is to increase the dividend from the current yield of 1.8%.
Numis says that the property advisor, PMM Partners, has a strong track record and they believe that the fund is well-placed to capture the portfolio’s reversionary potential and benefit from a positive economic backdrop in Berlin.
There is further support from Nick Greenwood, the manager of the Miton Global Opportunities Investment Trust (LON:MIGO). Greenwood is well-known for identifying these sorts of opportunities in overlooked areas and he has taken advantage of the recent price weakness to top up his long-term holding in the fund.
Phoenix has typically traded at a premium to its historic NAV with investors anticipating future capital growth, but sales by its largest shareholder, Woodford Investment Management, in mid-2018 have put downwards pressure on the share price and they are now available at a small discount. It could turn out to be an attractive entry point for long-term investors.