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Questor: our Berlin property trust has taken a severe hit. Is it time to hand back the keys?
Questor investment trust bargain: shares in Phoenix Spree Deutschland, which owns Berlin apartment blocks, have been punished by proposed new rent controls in the city
We tipped Phoenix Spree Deutschland, which invests in residential property in Berlin, in July 2017 at 290p and for a long time all went swimmingly: the share price was about 350p a month ago. Then it fell precipitously and we are right back where we started.
The fault cannot be laid at the trust’s door, however. Instead it is all to do with German politics, specifically a five-year rent freeze proposed by local politicians in Berlin.
There are several reasons to think this may not be the disaster it first appears.
First, the proposed rent controls may never be enacted, because the matter has always been handled previously at the national level.
“Rental legislation [in Germany] has always been determined under federal legislation,” Phoenix Spree said. “The board believes there are serious concerns regarding the constitutionality of the new rent proposals and there is no certainty that they will come into effect. We would expect an increasing number of legal challenges.”
Reports from Germany in recent days suggest that experts in its parliament share the trust’s doubts about the legality of local rent controls.
Second, the trust has other options up its sleeve if the controls do take effect. Currently it owns entire apartment blocks and rents out each flat. However, it is possible to change the legal registration of title so that it owns each flat individually. The apartments can then be sold one by one to owner-occupiers.
In fact Phoenix has already been doing this. Numis, the stockbroker, said in a recent note: “The fund has split over half the properties in the German land registry, which is the final step to allowing the sale of properties as individual [flats], and applications have been made for the majority of ‘non-split’ apartment blocks. In 2018, 23 sales of individual flats were agreed at a 24.2pc premium to book value.”
In all the trust owns 2,545 apartments in 96 blocks.
Analysts at Liberum, another broker, said that if Phoenix could sell individual flats at the average price it achieved last year, €4,566 (£4,099) per sq m, it would represent a 61pc premium to the present value, €2,838 per sq m, implied by the trust’s market value.
Another way in which the trust could escape the effects of the proposed rent freeze would be to switch to short-term furnished lets, which would be outside the scope of the new controls.
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Nick Greenwood, who holds Phoenix Spree in his Miton Global Opportunities investment trust, pointed out that rent controls in Stockholm had led to a severe shortage of rental properties, causing tenants to wait for between nine and 20 years for a property.
“We are hoping cool heads prevail in Berlin and they will not make a similar mistake, as a continuation of such policies would result in a housing crisis,” he said.
However, we can expect prolonged uncertainty while the legal and political processes in Germany take their course. A switch by the trust to a new business model, whether it involved sales or short-term lets, would also involve risk and would be likely to weigh on the share price.
None the less, the trust holds high-quality assets and is not entirely at the mercy of Berlin politics. We will hold on to the shares for now and monitor how the proposed new law progresses.
Questor says: hold
Ticker: PSDL
Share price at close: 284p
Update: Woodford Patient Capital Trust
Shares in this trust are also close to record lows following the suspension of Neil Woodford’s flagship “open-ended” fund. Last week the trust’s board announced some changes designed to reassure investors and, in time, reduce the discount.
It said it would begin to reduce borrowing (“gearing”) levels and then start to buy back shares if the discount persisted.
- Read Questor’s rules of investment before you follow our tips
It pointed out that accounting norms gave the trust some flexibility not to mark down the value of stocks if the open-ended fund had to accept fire-sale prices when it sold the same stocks. It reiterated that valuations were carried out independently.
Board oversight of proposed portfolio activity was also strengthened.
Questor says: hold
Ticker: WPCT
Share price at close: 58p
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