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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
They also started to see a recovery in rents across Germany – this is when the market seems to have turned. Up until that point TPF had struggled to make an operating profit but now gains on property pushed it into the black and it considered paying dividends. Effectively these would have been paid out of capital gains; generally the interest bill, management fees and other administration expenses exceed the rental income.
In 2011, with things looking up, TPF raised money at a discount to NAV (again, not something I’m usually in favour of) to buy more property. The rationale for this optimism was that, despite the uplifts that were coming through in valuations, it was still able to buy property well below its replacement cost.
Here is the crux of the issue: the Bundesbank reckons German residential property is overvalued but TPF says that it Berlin apartments were valued at €1,400 per square metre at the end of December 2012 and this is at least €600 less than it would cost to rebuild them.
Also blocks of flats (like TPF’s) seem to attract a much lower valuation than individual ones, which sell on average at €2,400 per sqm – for comparison the average flat in Greater (not central) London costs €8,700 per sqm. In fact, TPF is targeting selected disposals of apartments and intends to use the proceeds to help finance refurbishments and extensions of their other properties.
There are rules restricting rent rises for sitting tenants but TPF is benefiting from its recent acquisition. Vacant flats are being refurbished and re-let at €8.50 per sqm per month vs €5.50 for other flats in those buildings.
The issue for the Bundesbank is that Germans are a nation of property renters not owners so rent increases (as property owners look to maintain yields on appreciating property) are a bad thing.
The short-term worry for TPF is that the government imposes stricter rent controls and prices take a tumble. Over the long term though, I think prices will adjust to reflect rebuild costs.
James Carthew is director at Sapient Research
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by Danielle Levy on Dec 12, 2013 at 09:03