Good news this morning for one of my trading list stocks, Phoenix Spree. As predicted the German courts have found in favour of the property funds and struck down the Berlin law. Unsurprisingly the Phoenix share price is up this morning. I stick with my bullish view on this excellent fund BUT I would add a note of caution.
Talking to leftist and social democratic friends in Europe, it’s clear that there is momentum in favour of rent controls and I think there will be fierce resistance to this ruling. In a funny old way, I think its a tad unfortunate that the courts have been used to strike this down – we should be very careful about using institutions like this to determine what are in essence political questions. Whereas in the US liberals are keen to defend Roe vs Wade on abortion, and thus defend the courts, in Germany the Left will be keen to overrule the courts and insist on the policy, possibly by rejigging the law. In reality, the law is a bad law in a political sense. It makes no sense and is pointless left-wing populism. But it needs to be defeated politically with the centre and centre right winning back control in Berlin, or pragmatists on the centre-left in the SPD pushing back against it. My sense is that we have very much not heard the end of this – despite rent controls being bad policy – and many more battles will be fought over this. Anyway, regardless, it’s good news for now for Phoenix Spree Deutschland Limited (LSE: PSDL.LN).
Here’s the note from Liberum…
“Germany’s Federal Constitutional Court has ruled that Berlin’s rent freeze is unconstitutional. The rent freeze (Mietendeckel) came into law last year and has been the subject of a number of challenges. Doubts have consistently been expressed over the State of Berlin’s ability to pass local rent legislation, given the differences from existing federal law. In Bavaria, a similar six-year rent freeze was blocked by the Bavarian Constitutional Court in July 2020.
Phoenix Spree has maintained throughout the process that there was a high likelihood that the rent freeze would be successfully challenged. The company has sought to maximise flexibility due to the uncertainty caused by the new legislation. New re-letting contracts include clauses to enable the company to charge rent permissible under the previous system in the event that the Mietendeckel is voided. We note Vonovia has stated that it will not seek to claw back any of the foregone rents in the period since the Mietendeckel has been in place.
PSDL’s shares have risen by c.9% since the announcement this morning and we expect further upside in the near term. The removal of the rent freeze should lead to a strong upturn in investor sentiment towards the sector. The Mietendeckel would have had a material impact on earnings as it was expected to reduce like-for-like income by 16%. The latest portfolio valuation assumes the Mietendeckel is in place for the full five years.