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Trust Insider: value in the last of the German property trusts
by James Carthew on Nov 05, 2013 at 00:01
Londoners are used to floods of foreign money driving residential property prices to ever more bonkers valuations but I was surprised to spot a recent story in the press that the Bundesbank thought residential property in Germany’s largest cities was similarly afflicted. It says in some cities property is overvalued by as much as 20%.
This spurred me to have a look at what is left of the closed-end fund German residential property sub-sector.
Vast amounts of money were invested in this area in the pre-credit crunch boom of 2005–07. The argument was simple and seductive: German residential property was lowly valued relative to much of the rest of Western Europe and rental yields were attractive, especially in the eastern cities such as Berlin, Dresden and Leipzig. As residential property prices soared elsewhere, German prices stagnated – in theory, the only way was up.
Most funds dedicated to the area stretched their loan-to-value (LTV) ratios as high as they thought they could get away with to maximise their upside (and, often, the manager’s fee). The problem was that the German property market fell as the credit crunch hit. Pretty soon loan covenants were being breached and another once vibrant investment company sub-sector began to disappear.
From the detritus one stock stands out however: Taliesin Property Fund (TPF). TPF is interesting not just because it survived the credit crunch, but also because it is one of the few funds that have been issuing new zero dividend preference shares. It is using them as a way of funding an expansion of its portfolio. Post the zero issue TPF’s LTV ratio is 60%.
Before listing, TPF built up a portfolio of 36 properties, mainly in Berlin, which generated a gross yield of 6.5% on a cost price of €53 million (£45.1 million). The target return was 7.5% but vacancies, in partly due to refurbishment works in one building, were dragging returns. Many of the other funds dedicated to the area had similar problems.
The management fee started out as 2% of net assets but this has recently been cut to 1.75% and there is a performance fee which is 20% of the excess return over three-month Euribor – not a particularly challenging hurdle so the expense ratio is quite high.
Basing the fee on net assets at least removed one incentive to maximise TPF’s gearing. By the end of 2008, TPF owned 53 properties at an aggregate cost of €83 million but the wheels were already starting to come off the credit juggernaut.
The year-end net asset value (NAV) fell, not on declines in property values but on the revaluation of its interest rate swaps. TPF was doing quite well in managing their vacancy rates however, in marked contrast to some of their competitors – evidence perhaps that it had established a better quality portfolio; it even managed to sell a property at a profit in 2009.
In 2010 it refinanced part of its debt at lower rates and bought back 14% of its share capital in one transaction, boosting the NAV by 7%.
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