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Taliesin's play on Berlin flats

The Taliesin Property Fund is a useful route into Europe's hottest property market
November 8, 2012

At first glance, Aim-traded Taliesin (TPF) might be just another boom-era property fund that piled into central Europe with masses of debt at peak valuations. But it's different because it picked a market underpinned by robust fundamentals - flats in Berlin. Five years later, with its net asset value significantly higher than in 2007, Taliesin looks in fine shape.

IC TIP: Buy at 1085p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Excellent market fundamentals
  • Fast-rising NAV
  • Still off the City's radar
  • Shares trade at 12 per cent below adjusted NAV
Bear points
  • Big debt load
  • No dividends

Housing in Berlin is arguably Europe's strongest property market (see Property Matters). With a post-reunification boom in the early 1990s followed by a crash that has taken well over a decade to work out, Berlin is on a completely different property cycle to the rest of Europe. Its oversupply is finally expunged so, against a healthy economic and demographic backdrop, rents are rising rapidly.

That has prompted lively investment activity, helped by German housing becoming a popular hedge against the possibility of a euro break up. Backed by 30,000 German rented homes, the first commercial mortgage-backed security since the financial crisis was launched in September; fund manager Aberdeen Asset Management recently announced an institutional fund aimed at the same sector; and €6.4bn (£5.1bn) of German property portfolios changed hands in the first half of 2012 - considerably more than in all of 2011.

TALIESIN PROPERTY FUND (TPF)

ORD PRICE:1,085pMARKET VALUE:£41.2m
TOUCH:1,055-1,085p12-MONTH HIGH:1,140pLOW: 1,005p
DIVIDEND YIELD:nilTRADING PROPERTIES:nil
DISCOUNT TO NAV:See text
INVESTMENT PROPERTIES:€113mNET DEBT:120%

Year to 31 DecNet asset value (¢)Pre-tax profit (€m)Earnings per share (¢)Dividend per share (¢)
20071,1826.10172nil
20081,007-6.70-160nil
2009963-1.89-47nil
20101,1594.95121nil
20111,3105.98150nil
% change+13+21+24

Normal market size: 200

Market makers: 3

Beta: nil £1=€1.247

The price of individual properties is also soaring, with average prices up 16.3 per cent over a year in Berlin, according to Jones Lang LaSalle. Seeing rents rise for the first time in living memory, many of the 78 per cent of Berliners who rent are taking advantage of low interest rates to buy.

Taliesin owns a portfolio of apartment blocks worth €113m, mainly in former East Berlin. It is not, perhaps, the ideal vehicle. Its diminutive size means it's difficult to deal in the shares and its operating costs are relatively high. It also carries a lot of debt, the interest on which soaks up cash profits not invested in refurbishments. There are consequently no dividends.

Yet these drawbacks also make it a good-value play on a sector that is otherwise exciting much interest. Its shares are off the City's radar (hence, no profits forecasts) but that could soon change. Taliesin issued €7.2m of new shares in the first half to help buy a €45m portfolio and the fund's director, Mark Smith, plans to raise the company's profile once this acquisition, which has been delayed by negotiations with banks, is complete. He reckons €300m is the optimal portfolio size.

Moreover, the effect of Taliesin's high debt to equity gives it a big boost in a rising market. Its net asset value (NAV) rose 13 per cent last year, even as its portfolio increased by about 9 per cent. And investing post-interest profits in a refurbishment programme seems sensible when it drives big rental uplifts. Rental income rose by 7.3 per cent in the first half.