Shares I Love: Phoenix Spree Deutschland – Phoenix Spree Deutschland benefits from a supply and demand imbalance in Berlin
Shares I Love: Phoenix Spree Deutschland
Investors’ Chronicle
Leonara Walters
4 August
Marcus Phayre-Mudge, manager of TR Property Investment Trust (TRY), explains why he invests in Phoenix Spree Deutschland (PSDL).
“Phoenix Spree Deutschland is a UK-listed specialist owner of prime apartments in Berlin and, like most listed real estate, has been a victim of investor panic about the rising cost of debt. Yet we continue to like this company due to its index-linked rents, strong tenant demand and because, unlike its German residential cousins, it has few refinancing requirements until 2026.
“Most private rents in Germany are pegged to a regularly reviewed ‘mietspiegel’ – rent index – based on similar local dwellings. The result is sustainable income for landlords and manageable outgoings for tenants. The mietspiegel is also a reason why Berlin is the most affordable capital in Europe. A Londoner would need to move to Uxbridge or Croydon to compete with prime central Berlin on a rent-per-square-foot basis.
“Crucially, Phoenix Spree has permission to sell 75 per cent of its apartments to private owners. Counter intuitively, a flat that can be sold empty to owner occupiers, freeing it from mietspiegel-linked rent, is 20 per cent more valuable, meaning that such sales can generate significant value for shareholders. The wrinkle is that landlords often need to wait until a critical mass of flats are empty before it makes sense to sell a block or building.
“When share prices are languishing way below net asset values, as they are at present, disposals become even more important as they demonstrate properties’ true, realisable values. Yet fund managers are often paid a percentage of assets under management so can be too slow to sell assets, because reducing the size of the portfolio also reduces their own fees.
“The extent to which a manager’s fee structure aligns with investor interest is always a key consideration when we look at companies. Phoenix Spree’s board has come up with a solution to this issue. In June, it announced it had agreed with the company’s external manager, QSix, to pay it a 1 per cent disposal fee as an incentive to sell assets. The board also capped QSix’s other ongoing fees at a much lower rate than the previous year, which should act as a further incentive to sell assets. Smaller companies such as Phoenix Spree, which had a portfolio worth €775.9mn (£664.34mn) at the end of 2022, benefit disproportionately from asset sales.
“Meanwhile, the company has continued to reap the rewards of a structural supply and demand imbalance in Berlin, leading to healthy rent and new lettings growth in the year to March 2023. Also, increased mortgage costs will mean that many prospective buyers will rent for longer. Even in tough economic times, people need accommodation.”
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