This three-bagger shows you can still make big money from property
The UK property market may be slowing but there are other opportunities in bricks and mortar. Have you ever considered Berlin? Even if you haven't, this option might intrigue you.
Investment trust Taliesin Property Fund(LSE: TPF) published its latest half-yearly report today on the back of a dazzling longer term set of performance figures, up 39% over one year and 300% over five. The AIM-listed fund, registered in Jersey, was launched in 2006 to invest in residential property in Berlin, where prices were languishing at relatively low levels compared to many European and even German cities. It has proven a good call.
The Berlin market is booming and today's unaudited half-yearly report for the six months to 30 June shows a further 17.6% rise in adjusted net asset value (NAV) per share to EUR44.14, up from EUR37.53 on 31 December. The fund's property portfolio is now valued at EUR359.7m, an increase of 14.1% after adjusting for property sales in the first half of 2017.
Fab, not prefab
Prices in Berlin continue to rise strongly, up 13.7% to EUR3,070 per square metre, against EUR2,700 in December. Most of the properties so far purchased for the company's portfolio were acquired for under EUR1,100 per square metre, giving a nice, clear (and growing) profit margin.
At the same time the portfolio's overall loan-to-value declined from 42.2% to today's 37.8%, reducing risk. Taliesin's management has wisely avoided 'value trap' investments in prefabricated post-war estates, despite their high yields, preferring more mature buildings in central locations. Its makes for an attractive portfolio of residential and commercial units bang in the centre where demand is likely to remain high while supply is limited.
The investment case for Berlin property is strong, with a rising population and low homeownership rates of around 15%, compared with about 50% across the country. Berlin is a fashionable hub for techies and hipsters, who have largely been attracted by those cheap rents, which are now rising as a result. Money is pouring into Berlin after years of underinvestment.
Prices in Berlin nonetheless remain below other German cities, giving scope for growth. Individual apartment prices are at a premium to the price of whole buildings and Taliesin is splitting freeholds and selling off individual apartments to take advantage. It is also generating a growing income with rents increasing as residential space continues to lag demand.
Fund director Mark Smith says London's lost safe-haven status post-Brexit will also drive his fund's return. "Berlin is now the pre-eminent city of Europe, yet property prices are less than half those prevailing in Moscow, Stockholm, Paris or Vienna."
As ever, success comes at a price. Taliesin now trades at a whopping 36% premium to NAV, quite the biggest I have seen for an investment trust and it could narrow. Eurozone interest rates will rise at some point, although Smith sees little evidence of a leverage binge in level-headed Germany. He warns: "Real yields on property remain attractive versus government bond yields, there exists the risk of a reversal at some point." However, if you want to diversify out of the uncertain UK, Berlin could help you beat Brexit.
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Harvey Jones does not have a stake in any company mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.