This German property trust is handling its twin challenges adroitly and we will hold Phoenix Spree Deutschland is managing to deal with a rent freeze and the pandemic at the same time
READERS could be forgiven for feeling any “Reit fatigue” after all the coverage we have given to real estate investment trusts recently both in this column on trusts and in Friday’s updates on our Income Portfolio. But we must return to property now, although today’s fund is different not only in the type of asset it owns but in the circumstances in which it finds itself.
Phoenix Spree Deutschland owns flats in Berlin and faces the combination of the coronavirus epidemic and a new law that bans rent increases for its tenants.
The latter certainly hit the shares hard when it emerged last year. But the trust has taken some imaginative steps to overcome the setback and the shares trade more or less where we tipped them in July 2017.
One modification to the fund’s strategy that it
has been gradually putting into practice since the rent freeze came along is to sell some of the flats it owns and was previously happy to let out. To do this it first needs to separate the flats in a block into legally separate entities and this naturally takes time and effort. However, in a trading update published yesterday it said a further tranche had been sold at a premium to the valuation at which the properties were held on its books. Quite a big premium, in fact: in the first half of the year
the legal formalities for eight flats were completed and the average price achieved was 15.7pc more than book value. Even more strikingly, analysts at Liberum, the broker, calculated that, in view of the discount, currently 29.1pc, at which the shares have been trading relative to the fund’s net asset value, a sale of all its flats at the premium achieved on those eight properties would imply a 54pc gain.
In other words, if all its flats were turned into separate properties and sold at a 15.7pc premium to book value, and the discount disappeared, the share price would rise by 54pc.
We do not expect such an outcome in either respect but the calculation gives us plenty of comfort: the share price seems to more than fully reflect the challenges that the fund faces.
Neither is the sale of individual flats the only means by which it is attempting to counter the rent freeze.
Yesterday’s update stated: “The board and its legal advisers remain of the view that there is a high likelihood that the Mietendeckel [rent freeze] will be successfully challenged. In particular, the new legislation raises concerns about whether the state of Berlin is competent to pass local rent legislation, as the provisions substantially deviate from existing German federal law.
“Recent legal developments challenging the legality of the Mietendeckel have been positive. In May this year the opposition in the Berlin House of Representatives and a quorum of federal parliament MPs lodged cases at both Berlin’s Regional Constitutional Court and the Federal Constitutional Court. Additionally, in June, 12 constitutional complaints from private owners were filed with the Federal Supreme Court.”
It added that a similar move to introduce a six-year rent freeze in Bavaria had been blocked by the Bavarian Constitutional Court on July 16. “The ruling stated that a federal state may not issue its own regulations that contradict federal rental laws. This ruling is significant in the context of the Berlin Mietendeckel, as the basic legal arguments against the imposition of a rent cap are the same,” Phoenix Spree said yesterday.
As far as the pandemic is concerned the trust said its effects on rent collection levels had been limited: collection in the six months to June 30 was broadly in line with the same period last year.
It said residential rent collection had remained “particularly resilient”, with 99.6pc of rent collected during the first six months of 2020. Welfare payments are available to support tenants affected by Covid-19.
Commercial rents, which account for only 11.6pc of income, achieved a 96.2pc collection rate (99.7pc last year). This trust is navigating difficult times adroitly and we will hold.
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