Phoenix Spree Deutschland (PSDL) has been around for eight years, but floated on London's main market in June this year. The business model is simple: create a portfolio of residential assets in Germany, mostly in vibrant and fast expanding Berlin, and watch values grow as demand continues to outstrip supply by a significant margin.
- Strong demand for rental property in Berlin
- Solid balance sheet
- Significant reversionary value
- Shares trade at a discount to forecast NAV
- Rental increases limited by regulation
- Exposure to euro weakness
The key value metric lies in Phoenix Spree's portfolio's "reversionary" potential. In other words, rents charged on the portfolio of rented assets are far below the market rate. This is because rents are strictly regulated in Germany, and cannot be increased to reflect the growing imbalance between supply and demand. Between 3,000 and 5,000 apartments become available in Berlin each year, but the population inflow is currently running at nearer 40,000.
The restrictions on rents have restrained the supply of new purpose-built apartments. According to property consultancy Jones Lang LaSalle, 8,000 apartments were built in Berlin last year compared with a requirement for 16,000. And unless the authorities introduce some form of incentive to increase the attraction of new-build, construction is likely to remain subdued.
However, Phoenix is managing to push up rents by modernising apartments, which means they can be put into higher rental brackets. Vacant apartments are also being renovated and re-let at higher rents. And the portfolio also benefits from regulated annual rental uplifts. There is plenty to go for as market rents are around 33 per cent above "in-place" rents on the portfolio.
| PHOENIX SPREE DEUTSCHLAND (PSDL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 144p | MARKET VALUE: | £101m | |
| TOUCH: | 143.75-144p | 12-MONTH HIGH: | 151p | LOW:144p |
| FORWARD DIVIDEND YIELD: | 2.5% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORWARD NAV: | 17% | |||
| INVESTMENT PROPERTIES: | €245m | NET DEBT: | 68% | |
| Year to 31 Dec | Net asset value (¢) | Pre-tax profit (€m)* | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2014 | 206 | -0.2 | -0.4 | nil |
| 2015* | 222 | 1.9 | 2.8 | 5.1 |
| 2016* | 244 | 1.9 | 2.7 | 5.1 |
| % change | +10 | - | -4 | - |
Normal market size: 3,000 Matched bargain trading Beta: na £1=€1.412 *Liberum forecasts, adjusted PTP and EPS figures | ||||
There is another valuation upside generated by a change in consumer habits. Traditionally, around 85 per cent of people in Berlin live in rented properties, but this is starting to change as more people start to look at the idea of buying rather than renting. Phoenix has capitalised on this trend. Typically, refurbished properties in an apartment block are valued at about €1,500 per sq metre, but when properties are sold they can command values of double that. For potential buyers, the attractions are significant given the affordability. Indeed, while residential prices have recently strengthened, between 1994 and 2008 they fell 22 per cent.
Financing portfolio growth has been helped by the cheap cost of debt, which averages just 2.24 per cent - the most recent financing has been secured at less than 2 per cent. The current loan-to-value on the portfolio is around 40 per cent, and the group is targeting around 50 per cent, with a maximum of 60 per cent. Meanwhile, there is €40m of cash available for further investments.
According to broker Liberum, listed German residential property companies currently command an average premium to net asset value (NAV) of 18 per cent, reflecting the popularity of the sector. On that basis, Phoenix's shares look enticing, trading marginally below historic NAV.
