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Phoenix Spree plugs into Berlin's property imbalance

The Berlin-focused real estate specialist is tapping into a shortage of accommodation in the German capital
May 2, 2019

Phoenix Spree Deutschland (PSDL) is capitalising on the short supply of new-build housing in Germany’s capital, which has been caused in part by rent controls in the city. The shortage of supply combined with robust demand and property renovation work by the property specialist on the apartments it acquires is driving strong rental revenue growth. With new tenancies being signed at a solid premium to passing rents, there should be a significant amount of value still to be realised within the group’s portfolio. While the net asset value (NAV) growth is expected to slow after an exceptional run, prospects still look bright and appear undervalued based on the shares' sizeable discount to forecast NAV. What’s more, low borrowing levels put the company in a strong position to grow the portfolio with acquisitions.

IC TIP: Buy at 363p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Accommodation shortage in Berlin

Large reversionary potential

New rental agreements signed at a premium to passing rents

Rising NAV

Bear points

Property prices moderating

LTV set to rise 

Phoenix Spree has transformed itself into a Berlin pure-play, selling its central and northern German portfolio in April last year for €73m (£63m), a 26 per cent premium to the Jones Lang LaSalle valuation pre-notarisation. The relatively high cost of acquiring land, construction expenses and gaining planning permits coupled with rent controls has deterred residential construction within Berlin. However, the capital’s population has grown and the government expects this to continue, with forecasts that it will increase from 3.7m in 2018 to 4m by 2025.

In the year to the end of December2018, Phoenix Spree’s adjusted NAV roseby 11.4 per cent to 458¢, slightly ahead of previous guidance for 452¢-456¢ in February. The group focuses on acquiring under-let apartment blocks, modernisingthose with sitting tenants or renovating vacant units, after which rent-control rules allow it to increase rents. Leases also tend to contain provision for indexation. 

Rents can also be reviewed when new tenancies are agreed. Last year, 284 new leases were signed at an average premium of 39.7 per cent to passing rents, emphasising the level of potential value to be crystallised as tenancies come up for renewal. All this helped take like-for-like rental growth to9 per cent last year, ahead of management’s annual target of around 6 per cent.

The group also sells some units, given that the apartment blocks as a whole are valued at less than the estimated value were apartments to be sold individually. Last year, proceeds from 23 condominium sales were €9.9m, up 4.4 per cent on 2017. This represented a 24.2 per cent premium to book value and a 27.8 per cent premium to the average valuation of Berlin rental properties. Modernisation work also helped boost the selling value of properties. Acquisitions that had completed by 31 December 2016 were revalued at the end of last year at an average 97.2 per cent premium to purchase prices. Admittedly, property valuation growth has moderated after several years of exceptionally high property price rises across the city. That meant revaluation gains of €66.1m last year were down from €157.4m in 2017.

The loan-to-value (LTV) ratio of the portfolio fell from 32 per cent to just 26.1 per cent, following the sale of non-core assets. Management plans to increase that ratio to the high-30s – with a medium-term target of 50 per cent – to take advantage of acquisition opportunities. Management is currently in talks with new and existing lenders about its financing arrangements. 

PHOENIX SPREE DEUTSCHLAND (PSDL)   
ORD PRICE:363pMARKET VALUE:£ 366m
TOUCH:361-364p12-MONTH HIGH:390pLOW: 329p
FORWARD DIVIDEND YIELD:3.2%TRADING PROP:€12.7m
DISCOUNT TO FORWARD NAV:18%  
INVESTMENT PROP:€633mNET DEBT:41%
Year to 31 DecNet asset value (¢)Earnings per share (¢)Dividend per share (¢) 
201627340.46.3 
20174111217.3 
2018458467.5 
2019*51250.711.5 
% change+12+10+53 
Normal market size:5,000   
     
Beta:0.471   
*Liberum forecasts, updated adjusted NAV, pending updates following FY results for EPS and DPS figures  £1=€1.16