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Questor: our German property trust comes in from the cold after Berlin rent freeze is overruled

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Apartment buildings in Berlin's Charlottenburg district - Fabrizio Bensch /REUTERS
Apartment buildings in Berlin's Charlottenburg district - Fabrizio Bensch /REUTERS

A cloud that had long lingered over Phoenix Spree Deutschland, the Berlin property trust first tipped by this column in 2017, was finally lifted last week.

Germany’s constitutional court ruled that Berlin’s rent freeze, which came into law in February last year and punished shares in the trust, was unconstitutional.

Its shares have rallied by 4pc on the news but the emphatic nature of the ruling, and its impact on Phoenix Spree’s residential property portfolio, mean there should be much more to come.

The trust had produced solid returns for this column until, two years after our tip, the proposal from local politicians in Berlin to introduce a rent freeze in the city sent its shares tumbling. The new law hit the rental income generated by Phoenix Spree and continued to weigh on its shares.

The freeze knocked around 4pc off Phoenix Spree’s rental income last year but was expected to reduce it by a fifth in 2021 as the full force of the law was felt. The cap, which initially affected only new rentals, was applied to all Berlin residential rents in November.

Following last week’s ruling, Phoenix Spree Deutschland’s rents can now revert to the levels at which they stood before the rent freeze. Not only that but the higher rents that would have been in place were it not for the cap are now “legally due”, according to the trust’s board. Phoenix Spree estimates that it is owed about €1.8m (£1.6m) from tenants.

All of this should bring a substantial upgrade to the value of the trust’s assets, most recently pegged at 476p per share at the end of last year. That valuation had assumed Berlin’s rent freeze being in force for five years and ascribed only a modest uplift from the potential sale of some properties.

Those sales, partly in response to the rent freeze, have proved profitable. Last year Phoenix Spree sold 41 flats and two attic spaces at an average price 19.2pc higher than their book value.

To sell the flats the trust first has to separate the blocks it owns into legally distinct entities. By the end of last year it had done so for properties representing 70pc of its assets, with a further 15pc in the pipeline. But the 476p per share valuation of the trust ascribes a higher sale value to only 7pc of its assets, those deemed to be “active sales”.

Nick Greenwood, who holds shares in Phoenix Spree Deutschland in his Miton Global Opportunities trust, said that once the scrapping of the rental freeze and lucrative flat sales were factored in, a value of 550p per share was feasible.

“It must be fairly significant,” he said, adding that while he had been expecting Berlin’s rental cap to be overturned, last week’s ruling went further in allowing little room for appeal.“It’s almost as though this rent freeze all disappears as a bad dream. It’s actually better than we were expecting,” he said.

The brighter outlook should be reflected in a narrowing of the shares’ substantial discount to the value of Phoenix Spree’s assets. That discount stands at 25pc to December’s valuation, although with the value of the assets likely to rise as a result of the rent freeze ruling, the true discount could be closer to 35pc.

For a trust that has consistently grown its net asset value, and did so by 14pc last year while it faced both the rent freeze and the pandemic, that strikes Questor as exceptionally good value – particularly as last week’s ruling means that investors can refocus on the attractions of Berlin’s residential property market.

“It’s a city that everyone wants to live in where property is cheap,” said Mr Greenwood.

Questor says: hold

Ticker: PSDL

Share prices at close: 359p

Update: RIT Capital Partners

RIT Capital, tipped by Questor last month, has reported a 10.6pc rise in the value of its assets over March, driven in large part by the blockbuster flotation of a South Korean ecommerce business called Coupang.

The new valuation removes the technical premium the shares were enjoying based on February’s outdated NAV. The shares now trade at a 5pc discount to March’s valuation, an “attractive entry point” according to analysts at Numis, the broker, if a narrowing from the 7pc we had calculated last month.

Questor says: hold

Ticker: RCP

Share price at close: £24.10

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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