Phoenix Spree Deutschland's hidden value

Phoenix Spree Deutschland has come a long way since its shares floated on the London Stock Exchange in June 2015, and it is well placed to take advantage of a shortage of apartments in Berlin amid ever-growing demand. On completion of a recently announced €73m (£65m) disposal and €36.5m of notarised acquisitions, 99 per cent of the portfolio will be situated in the German capital. With an influx of new workers, it’s calculated that the city needs 20,000 new apartments every year, but annual building permits are running at just 12,000. The benefit this brings to the owners of such properties was evident in numbers reported by Phoenix Spree in the first six months of 2017: pre-tax profit rose by 303 per cent, while adjusted NAV jumped 22.3 per cent.

The chronic shortage of accommodation is mainly a consequence of German rent restrictions, which have deterred new construction. However, rents can be reviewed when new tenancies are agreed. In the first six months of 2017, 234 new leases were signed at a 43.6 per cent premium to passing rents. This highlights the significant value that is yet to be crystallised as rental agreements come up for renewal. On an annualised basis, the letting rate was running at nearly 15 per cent of the portfolio at the half-year stage.

A further valuation-resetting opportunity is being created as a result of a rising trend among private individuals to buy apartments instead of renting. The point here is that the value of an apartment block as a whole is lower than if all the apartments were valued individually. So the 16 apartments sold in the first half achieved a 59.8 per cent premium over June 2017 average portfolio valuations. The company also invests in modernising apartments, spending €3m in the first half, and after refurbishment those apartments can be re-let at higher rents, although refurbs are usually carried out only when apartments are vacated.

Properties in Nuremberg and Fürth have been sold for €35.2m; that’s an 11 per cent premium to December 2016 book value and well above the original purchase price in 2008 of €13.9m. Five other non-Berlin assets were put up for sale for €10.5m in the first half of 2017 and a further non-Berlin asset was offered for sale in August for €2.1m. And at the end of the year the group announced it would effectively become a Berlin pure play with the €73m sale of its last major assets outside the German capital. The sale price represents a 26 per cent premium to the last valuation and is well ahead of the €38.7m paid for the properties just over 10 years ago.

Four Berlin property packages were bought in the first half of 2017, comprising 146 residential and 11 commercial units for €27.7m at an average price per square metre of €2,050. This compared favourably with the average value per square metre of €2,308 within the existing portfolio. Two more property packages were acquired since June 2017, comprising 75 residential and three commercial units for €11.6m at an average €2,045 per square metre. Since the first half, the purchases of 10 Berlin properties have been notarised at a total cost of €36.5m.

Gross debt at the half-year-end totalled €197.2m, with cash balances of €32.9m. However, with an upward valuation of €70.1m helping to boost the portfolio valuation to €519.7m, the loan-to-value ratio came down from 39.4 per cent at the end of December 2016 to 31.6 per cent. The company has also taken advantage of the favourable borrowing climate, with a blended interest rate on borrowings of just1.9 per cent. And the average duration of the loan book is nine years, ensuring plenty of low-cost funding for years to come.