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Questor: Rent controls in Berlin are no more and this cheap fund stands to benefit

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Berlin
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Following a challenging 2020, it appears to be onwards and upwards for Phoenix Spree Deutschland, a trust that owns residential property in Berlin.

A cloud had lingered over the fund after a rent freeze came into force in Berlin in February 2020, but it was later deemed unconstitutional by Germany’s Federal government and withdrawn in April 2021.

This has meant good news for Phoenix Spree Deutschland on several fronts.

Firstly, its rents have reverted to the levels at which they stood before the rent cap. Not only that, but tenants are legally required to back pay these higher rents over the period that the freeze was in place.

In a trading update covering the 2021 calendar year, the fund said it had collected more than 95pc of a possible €2.1m (£1.76m) of back-dated rent. Since the withdrawal of the rent cap, Phoenix Spree has also resumed its programme of refurbishing vacant apartments and re-letting them at market rents.

In December of last year, new leases were signed at an average premium of 28pc compared to existing agreements.

Beyond the removal of the rent cap, there are several other reasons to feel most cheerful about Phoenix Spree’s prospects over the coming years.

Partly in response to the freeze, the fund has embarked on a new strategy of selling some of the flats it owns that were previously let out – a process that requires legal permission to separate the blocks into legally distinct entities.

This strategy has so far proved lucrative for the trust and has the potential to deliver substantial gains in the future, which are not factored into the current asset value. During 2021, €15.2m of apartment sales were completed at a price that was on average 19pc higher than book value.

At the end of last year, three quarters of the portfolio had been split into apartments and applications had been submitted for a further 10pc, with more than half of these at the final stages of the process.

This is a rare privilege enjoyed by Phoenix Spree, as new federal government legislation is likely to make it difficult for landlords to legally split their properties into apartments to sell into the private market in the future.

In turn, these new rules will exacerbate the supply-demand imbalance that already exists in the Berlin residential property market, which is likely to feed through to higher valuations.

This is yet another supporting factor for the trust: Berlin remains an attractive place to live and work, yet apartments remain in short supply.

“Rents and prices will be going up, simply because there are more people living in Berlin than there is space for,” said Nick Greenwood, manager of the MIGO Opportunities trust.

“It is a place where people want to live and that will steadily drive up prices, not dramatically, but you would expect some net asset value (NAV) growth just coming from the market rising as a whole.”

For example, there was a 9.7pc increase in asking prices for apartments across Berlin over the nine months to September 2021 alone, according to the latest data compiled by CBRE and broker Liberum.

Looking ahead, the trust should benefit from this positive backdrop for rents and prices, combined with the management team’s ongoing efforts to add value, either by investing in their apartment blocks and reletting them at higher rents or splitting them up and selling them into the private market at a premium to book value.

Over time, this combination of factors should result in a significant uplift in the value of Phoenix Spree’s assets, estimated between 470p and 475p per share at the end of December.

Mr Greenwood suggests that a value of 550p per share could be feasible later down the line.

“There are lots of things going steadily as she goes.

“There are so many of them that it is sort of like watching paint dry. It will keep drifting higher,” he said.

This trust offers investors something different and looks attractive on an 18pc discount. It has consistently grown its net asset value and did so by 6pc last year, even though it faced a rent freeze for part of the period.

This is one to hold on to.

Questor says: hold

Ticker: PSDL

Share prices at close: 389p

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