Phoenix Spree Deutschland garners Brexit dividend, boosts holdings

The London-listed residential property investor Phoenix Spree Deutschland has added a further four properties to its Berlin portfolio for about €19m, representing a price per sqm of €1,970.

The properties have more than 9,500 sqm of lettable space across 132 residential and 16 commercial units in the districts of Mitte and Wedding. Phoenix said properties offer reversionary rental opportunities through modernisation, refurbishment and re-letting at current market rates.

The latest investments come after the company published strong interim results showing Phoenix raising NAV by 6% and increasing the dividend by 23%, helped by strong German housing demand and a shortage of supply in the German capital.

On June 30th the company had a German portfolio valued at €329.8m, with Berlin properties making up more than 70% (€232.3m) of the total.

The company reported a pretax profit of €15.7 million for the half year to June 30, up by 71% from €9.1 million year-on-year. Net asset value per share rose 6.1% to €2.42. NAV per share total return for the period was 7.8%.

The IFS profit for the period was €15.7 million, rising from €9.1 million the year before. The profit figure includes a €21.7 million revaluation gain, without which it would have booked a loss of €6.0 million. Phoenix declared an interim dividend of 1.60 pence, up 23% from 1.30p in 2015.

The company's business plan is modelled on buying apartment houses, upgrading and renovating, and privatising individual apartments. In its latest programme it has just completed the first sale of an apartment in Berlin for €4,195 per sqm. This compares to a July 2015 acquisition price of €2,580 per sqm, or a 63% premium.

According to chairman Robert Hingley, commenting on the results, "The first half of 2016 has seen the company achieve record rental prices, while experiencing good demand for its condominium sales. Demand for residential property from all of tenants, owner-occupiers and investors remains healthy. Despite recent increases, property values, on average, remain below the cost of construction."

"Recent declines in long-term bond yields have increased the relative attraction of residential property as an investment, while reducing financing costs for property owners. The company therefore believes there remains significant scope for further growth in property values and that its portfolio, with its focus on central Berlin, is well placed to take advantage of these trends," added Hingley.

REFIRE: The Phoenix Spree Deutschland business plan is similar to other privatisation specialists on the German – and particularly Berlin – market. While benefiting from buoyant demand for residential housing which has pushed up house prices by an average of 40% in the last 6 years, the company tries to leverage the price differential between the prices of individual apartments and blocks.

Phoenix has averted the worst disasters that befell many of its peers in the UK when a raft of similar companies rushed to market in 2006 and 2007 to take advantage of low German property prices – well below the cost of construction, in many cases – as well as low home ownership rates and rental yields of between 7% and 10%. The credit crunch put paid to most of these highly-indebted companies, many of whose assets ended up in special servicing. Phoenix has restructured its debt, now paying a blended interest rate of 2.1% on its €134m of debt, with 90% of that maturing in 2022.

After a recent €38m capital raise, the company has been steadily adding to its housing stock and at the end of June 2016 had its LTV ratio down to just 30.8%. The current value of the portfolio (end-June) is €329.8m, or about €1,775 per sqm. Other recent sales in the first half of the year were at prices equivalent to €3,662 per sqm, highlighting the profit potential.

However, the Berlin authorities are trying to tighten their grip on the ability of property owners to gentrify and privatise their holdings at will, and through policies of Mietpreisbremse and Milieuschutzgebiet have been blocking landlords' attempts to convert rental units into condominiums in many Berlin neighbourhoods. Nonetheless, shareholders in the sterling-denominated Phoenix stock have benefited from the Brexit devaluation as well as the company's solid operational performance.