Germany: Germany

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

Germany isn’t a market often mentioned in property magazines or on television programmes. Neither is it the kind of property market that makes people jump up and down with excitement. In contrast to the rest of Europe house prices have actually fallen over the last decade. Purchase fees and taxes are expensive and the Germans have one of the lowest recorded rates of home ownership. Only 43% of Germans own their own home, a level which falls to 11% in the capital, Berlin. This is compared to 70% in the UK and US.

Yet something is stirring in the property markets of Germany. Big institutional investors are spending enormous amounts of money on residential acquisitions. Writers for dry finance journals are looking interested. 3% of knowledgeable Irish investors are now choosing Germany as their target market.

Somewhat paradoxically, the appeal lies in the property market’s sheer lack of fizz. The low sales price makes this one of the most affordable markets in Europe, while the German preference for renting creates reliable rental income of up to 10%. Germany may not be the place to look for capital appreciation, but a good quality house here should make a reliable return year in, year out.

Is this a good place to buy?

Germany is both Europe’s largest economy and the largest residential market, yet according to the Organisation of Economic Co-operation and Development, property prices here fell 6.8% between 1994 and 2004. In the same period house prices quadrupled in Ireland and doubled in the UK.

Since 2004 the outlook has improved slightly. Values are now rising slightly, although the 0.7% increase registered in the first three quarters of 2005 is not exceptional.

Prices have been depressed by a number of factors. The sluggish economy and high levels of unemployment has made people reluctant to commit to mortgages, rental costs are reasonable and the law provides strong protection for tenants. As long as the tenant continues to pay the rent they are effectively safe from eviction. The economic woes are compounded by demographic figures. Germany has a shrinking population which is expected to decline by 10% between 2010 and 2050.

The problem of depopulation also has an impact on a regional level. Much of East Germany is depopulated as easterners have moved westwards in search of employment and higher wages. There is now oversupply of property in the East with up to one million surplus residential units. About a third of these will be demolished by 2009 and others upgraded to try and increase appeal.

Despite this, since 2004 Germany has attracted significant investment from the large institutional investors. In 2004 Goldman Sachs was part of a bulk bid for 66,000 residential units worth 2.1 billion euros. Forbes Investment Group bought 80,000 housing units for 3.5 billion euros.

Before investing this amount of equity the big investors do their homework. Their reasoning for investing in Germany, and the reason that private investors are following suit are as follows:

1. Comparatively, over the last twenty years housing affordability in Germany is believed to have improved more than in any other industrialised nation. According to one European Economist at Merill Lynch in London, this places German real estate ‘amongst the cheapest asset prices in the world’ (Foreign Buyout Firms Moving into German Housing, Matthew Brocket, Bloomberg 5.12.2005)

2. The German economy may be in the doldrums but Germans are showing a new willingness to accept free market reforms. Despite the difficulties, the German economy is still the powerhouse of Europe. Buy now and you buy at the very bottom of the market.

3. Interest rates are so low that there is little difference between buying and renting property. The government is encouraging Germans to buy houses as part of their retirement provision. Together these factors should translate into more home ownership.

4. In addition to buying vast amounts of property, the big investors work to improve purchase conditions by linking up with mortgage providers to arrange easy financing. They then sell apartments and houses back to tenants at a slight mark-up.

So far, the model seems to be working. Tenants are buying their apartments. Whilst the market remains flat in East Germany, sale prices are rising in the West as demand increases. Real estate prices in prosperous cities such as Frankfurt are higher, but the market here is under-supplied and rents are going up.

At present most buyers look to Germany for this stable rental income rather than for capital appreciation. Yet despite over-supply in the East, the Federal Bureau for Building and Regional Planning calculates that 300,000 new residential units will now be needed yearly.

Put all of this together and it is possible to see why intelligent investors are thinking seriously about placing money in Germany. The entry threshold is low; should home-ownership rise, capital appreciation is on the cards. Alternatively, if Germans continue to favour renting, yields in the cities can reach 8%-10%. Not such a bad deal after all.

Price history

Across Germany prices fell 6.8% between 1994 and 2004, although rising in the cities of Western Germany. House values are now inching upwards, increasing 0.7% in the first three quarters of 2005.

Buyers this market will appeal to

Germany appeals to buyers looking for reliable rental income, many of whom use property here to balance risk within a portfolio. As political developments suggest that the German economy could one day climb out of difficulty, professional investors are entering the market. These investors see German property as a bargain asset which just might perform in the long-term.

Which type of property should you go for?

As the investment market is concentrated on the cities, centrally located apartment buildings are favoured. Buying the best available quality is very important. In general, Germans move much less often than other European groups. Comfortable with renting, German families will look for years to find the right home and they will reject B grade apartments out of hand. Higher quality buildings also perform better in a market where over-supply continues to be a problem.

Another established trend is for people to buy whole apartment blocks for renovation. This is one of the grounds on which tenants may be given notice, six to eight storey apartment buildings can be picked up in Berlin for 2-300,000 euros, and a renovated block in a reasonable area will then rent for much improved prices.

Hotspots

The demographic trends for people to move into the cities, and of a move from East to West, mean that the best opportunities are still found in the cities of Western and Southern Germany such as Frankfurt, Dusseldorf, Cologne and Stuttgart.

In rural Germany apartments can cost from as little as 20,000 euros (£14,000/$25,000) with houses from 80,000 euros. In Frankfurt a one bedroom apartment costs from 120,000 euros, and a three bedroom house from 250,000 euros (£175,000/$300,000). Frankfurt is the financial centre of Germany, but other cities and satellite towns are better value. Prices in Berlin are also exceptionally low, but with only 11% of the population owning property, the capital is best seen as a market for long term investment.

Purchase process

After the sale price is agreed, contracts are drawn up and translated. Amongst other details, the contract must include property details, agreed prices and payment conditions and clauses specifying what will happen should either party fail to complete the contract.

The next step is to choose a notary who acts as impartial liaison between buyer and seller. The notary has responsibility for checking the status of the property in the land registry and for witness’s signatures. Both parties need to be present as the contract is read aloud. The notary is supposed to check that the buyer understands the commitment that they are entering into. You therefore either need to be very confident with the contract or to pay for a translator to be present.

After the contracts are signed the notary lists the change of ownership at the property registry and the transaction is complete.

Fees are comparatively high and are likely to total 6 – 7% of the purchase cost. Stamp duty is 3.5%, the notary may charge up to 1.5% and land tax may add 1% of purchase cost. Non-residents may face an additional wealth tax of 0.5%. Capital gains tax is also levied at high rates, although property held for more than ten years will be exempt.

Key risks and opportunities

The signs for recovery in Germany are cautious, but this is not an unstable or inherently risky market. There are caveats: the level of competition makes secondary grade property hard to rent. Given the unique focus on renting, property bought in Germany may take longer to sell than in other countries. This is not the best market for people who may need to access capital quickly. It is also important to assess the strength of the local rental market wherever you choose to buy. High fees and initial costs mean that costs are hard to recoup if the balance between supply and demand is unfavourable.

Mortgages

Mortgages are widely available with interest rates as low as 4.5%. A 70%/30% balance between debt and equity is conventional and fixed rate mortgages are common.

Opportunity rating

Germany probably represents the single best property investment opportunity of any developed economy. Prices remain very low, yields are high and it is often claimed that German property represents one of the most undervalued assets available. Government reforms and the country’s emergence from a long recession should see prices rise significantly.

Rating: $ $ $ $ $

Risk rating

The two primary risks in Germany are first, that economic recovery is very fresh and somewhat fragile, and second, the government has a lot to do in order to change the rental culture into an ownership one, which would be the underlying driver for price inflation. However, all indicators seem to point to these risks being overcome.

Rating: * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in Supplied by ...

“Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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