Germany: Jet to Let guide to Germany

Why invest in Germany?

Germany should be viewed as an opportunity for investment rather than a certainty. Even after having a near-stagnant economy and flat property market for the last decade, it’s very unlikely that Germany, as one of the largest economies on the planet, will fall off the map entirely. Instead, analysts predict that the election of a new grand coalition government, the sale of public housing and a boost from hosting the FIFA World Cup this year will see resurgence in the German economy soon. The jury is still out and, at this stage, a lot needs to change before things start to look more promising for jet-to-let investors.

The story so far…

Germany played a key role in 20th century history. The country was defeated in both World Wars, which led to its occupation and division into East and West. Since the end of the Second World War, Germany has undergone enormous social, political and economic change and established itself as the dominant economic powerhouse in Europe.

The most significant event of recent times has been the reunification of the country in 1989. The Berlin Wall came down ending 44 years of imposed separation but, ironically, this has been an obstacle for subsequent development of modern, united, Germany. The area that was formerly East Germany has struggled to catch up with the more developed West even after an extensive programme of modernisation accounting for the transfer from West to East of an estimated €1 trillion to date since reunification.

West Germany was one of the founding members of the European Union (EU) and modern Germany remains a committed member. The country joined NATO in 1955.

Where is it?

Germany has borders with its neighbours Denmark in the north, Poland and the Czech Republic in the east. Austria and Switzerland lie to the south, France and Luxembourg in the south-west and Belgium and the Netherlands in the north-west. Germany shares more borders with other countries than any other country in Europe.

Germany stretches from coastline along the North Sea in the north-west and the Baltic Sea in the north to high mountains of the Alps in the south. Germany has a total area of 357,021km squared and 2,389km of coastline.

What is the weather like?

The climate is moderate without extreme cold or hot periods. Most of Germany is situated in the cool west wind zone with damp westerly winds from the North Sea so the climate in north-west and coastal Germany is oceanic, characterised by relatively mild weather. The rest of the country has a continental climate, with variations in temperature throughout the seasons, leading to warmer summers and colder winters.

Language

Germany has a population of around 82 million, of which 92 per cent are German. The remainder of the population is 2.4 per cent Turkish and six per cent from other groups. The official language is German, which is spoken by over 95 per cent of the population and English is widely spoken as a second language.

Currency

The official currency is the euro (EUR) divided into 100 cents.

Politics

Germany is a federal parliamentary republic, with the Chancellor acting as the head of government. The Chancellor is traditionally a candidate of the party with the most seats in parliament, supported by a coalition of two or more parties with a majority.

The most recent elections took place in 2005 and a Grand Coalition government was formed with the main ruling party being the Social Democratic Party of Germany (SPD) in coalition with the Christian Democratic Union (CDU) and the Christian Social Union of Bavaria (CSU). Angela Merkel (CDU) was elected as the Chancellor of Germany.

As a federal republic, Germany is divided into 16 states which are further subdivided into 439 districts.

Economy

The German economy is the largest in Europe and one of the largest in the world. It operates under a social market economy, which brought about miraculous economic progress since the war ended in 1945. There are some concepts that are central to the social market, which strives to keep a balance between high growth, low inflation, low unemployment, good working conditions and effective social welfare.

As a result, modern Germany has an exceptionally high standard of living and a generous welfare system. The country’s economy is based on a strong industrial sector and Germany has long established itself as one of the world’s largest and most advanced manufacturers.

The services sector, including banking, insurance, transportation and tourism, has grown steadily over recent years and now contributes the largest share of its gross domestic product (GDP), which was 66.5 per cent in 2005.

The German economy has recently spent several years in near stagnation and has been one of the slowest growing economies in Europe over the past decade. This slow growth has been accompanied by high levels of unemployment and a marked lack of business confidence.

Nobody predicted that the long-awaited reunification of Germany would mark the start of a period of economic stagnation. The continuing integration of the Eastern economy remains an expensive long-term process and this economic setback, along with the failure to adjust to modern business requirements, has meant that Germany has become a less attractive place to invest in. This is particularly noticeable when compared with cheaper and more flexible labour markets over the borders in neighbouring Poland and the Czech Republic.

Economic growth

The economy grew at an average yearly rate of 1.2 per cent from 2000 to 2005. In 2005, it grew by just 1.1 per cent, while the GDP per capita in the same year was €25,300. The European Commission forecasts an increase in activity and forecasts economic growth of 1.5 per cent in 2006. This growth will be export driven as foreign trade has recently received a significant boost from a more favourable euro/dollar exchange rate.

Inflation

Inflation is traditionally low in Germany and in 2005 year-on-year inflation grew by 1.9 per cent. The forecast for 2006 is 1.6 per cent and this is based on a predicted decline in oil prices, but continuing political tensions in the Middle East currently give them little room to fall.

Interest rates

Germany is a part of the Eurozone so its monetary policy is regulated by the European Central Bank. Interest rates remained at a flat two per cent since June 2003 until the benchmark was increased to 2.25 per cent in December 2005 and to 2.50 per cent in March 2006.

Unemployment

Unemployment is both a cause and a symptom of the latest economic slowdown. The threat of relocating manufacturing companies to Eastern Europe has forced employees in Germany to work longer hours or to accept pay cuts. The wide-ranging social welfare system and a high tax burden has reduced the motivation to work, and high labour costs and inflexible employment laws, combined with weak demand, have reduced the number of job opportunities.

Recent data confirm that the percentage of long-term unemployed is about 52 per cent of the total, which is one of the highest rates in the EU. There are some positive signs of a recovery in the labour market as employment growth has started to stabilise. The jobs created by stronger exports and the wealth and confidence which has resulted has led to a gradual pick-up in domestic demand.

Foreign direct investment (FDI)

When looking at the figures, FDI in Germany seems sporadic and reflects uncertainty in the current economic climate. The major foreign investors are the USA, Japan and Switzerland and FDI inflows are widely distributed across various economic sectors, such as software, business services, automotive components and electronics. The German government continues directing investment to the east of the country where it’s most needed, and offers incentives and grants to promote this policy.

Germany is one of the largest investors abroad, but the amount of money invested has decreased significantly since 2003. It invested €16.8 billion in other countries in 2005.

Economic summary

German workers are on average paid more per hour than Americans, although they produce 13 per cent less (sources: Capital Economics; BLS). There lies one of the problems of the German economy, namely labour cost, flexibility, mobility and the reduction of skills in the long-term unemployed. Reform is key and one of the reasons for Angela Merkel being elected was to push this through, but the reality seems to have fallen short of this for now.

Attitudes towards investing and business sentiment are rising in Germany, but until the German people’s attitude shifts away from saving money and moves towards spending it on goods and services, then it’s up to the export market to continue driving the economy. With rising Eurozone rates and also a strengthening currency, the validity and duration of any German economic revival is still unclear.

What does this mean for the property investor?

German property has lost value in real terms and in opportunity terms for investors over the last ten years. Analysts don’t foresee the market situation reversing very quickly and a boom in property prices in the short term is unlikely. This is because of sluggish growth, high unemployment, rising interest rates and a culture that has a tendency towards renting rather than purchasing property. High transaction costs and a lack of competitive loans and mortgages add weight to the idea that a rapid improvement is some time away.

So, what is the catch?

Although Germany’s social market economic system has helped it to build one of the largest economies in the world, the country continues to suffer from several key social problems that could act as major obstacles to recovery.

Reunification

The reunification of Germany in 1990 was without doubt a positive event for the German people and the geo-political climate in Europe, but the logistical implications have presented the country with a number of problems. The economic divides that existed when the East of the country was much poorer than the West continue to persist in 2006. There are also prejudices held towards Easterners, and bitterness regarding the financial cost of reunification, which has not been helped by the weak economic performance of recent years.

Unemployment

High levels of unemployment remain one of the most crucial social issues to resolve in modern Germany. The unemployment figure for 2005 was 9.5 per cent, but, despite this, Germans are not in favour of labour reforms to rectify the situation, such as longer working hours, and they seem to prefer the ‘job for life’ culture. The new Chancellor is expected to propose several new policies that will affect the labour market in an attempt to address the issue, but it has been necessary to scale down many of her more radical plans to appease the current coalition government.

Low birth rate and ageing population

Germany has one of the lowest birth rates in Europe, and one of the highest life expectancies. Birth rates have plummeted to around 8.3 per 1,000 of population in 2005 from 11.4 in 1990, with average life expectancy for men being 76 and 81 for women. This represents a key shift in demographics that will cause further strains on Germany’s ability to provide social welfare in the future.

Corruption

According to Transparency International, the 2005 German Corruption Perception Index (CPI) is ranked 16th with a score of 8.2 ahead of the US, France, Belgium, Japan and Spain. This indicates that Germany is virtually a corruption-free country from a business perspective, which should be encouraging for potential investors.

The property market

The German property market has experienced negligible growth over the past 15 years due to the economic slowdown. However, attitudes towards home ownership among most German citizens, who have traditionally rented, may be changing as banks and large corporations begin to sell off significant numbers of apartments to overseas investors. This reduces costs as the investors go on to sell the properties to tenants, but opinion is divided as to whether this will act as a significant catalyst for growth in the property market.

The German property market continued to stagnate in 2005, with property prices remaining flat along with the level of housing loans. The prospects for 2006 don’t look too promising, although there is plenty of media coverage and marketing activity talking the market up!

Tourism

Germany is ranked ninth in the world by the number of tourist arrivals, with over 20 million visitors last year. These contributed to a 5.8 per cent rise in revenue from tourism of €14.1 billion.

Germany is expected to benefit immensely from hosting the FIFA World Cup in 2006 with an estimated attendance of over ten million fans from around the globe. This is fantastic news for the short term, but the real gain is the global exposure that Germany will receive for up to a month during the championship.

Property hotspots

If you want to invest in jet-to-let property in Germany, then it’s the bigger cities that should be investigated first. Rural properties in the German countryside are also an option for investors, but those seeking sun, sea and sand will find little of any of these things here. Investing in Germany is about long-term tenants and the traditional buy-to-let model.

Cities

Berlin, the capital city, has a population of around 3.4 million people. It remains debatable as to whether Berlin is a good investment in terms of opportunity cost, but with economic recovery possible, letting prospects can only improve. In all of the major cities and suburbs, apartments are popular as there is often a shortage of land for housing. For a capital city, Berlin is cheap as a two-bedroom apartment in the city can be purchased for €95,000 and rental income from this averages around €600 per month.

The city has a rich cultural life and is at the centre of reunified Germany, but the property market can be erratic due to comparatively low demand from other buyers. This aside, with low prices and the possibility that Germany will regain its economic prowess, this city might be just the sort of speculative investment that could pay off in the future.

Frankfurt is an attractive jet-to-let option. The standard of living is excellent, with Frankfurt ranked top in Germany and a very respectable eleventh in the world, with a strong financial services market attracting international executives, city financiers and merchant bankers. Frankfurt is the economic centre of Germany and is home to hundreds of banks and financial institutions, including the Bundesbank and, since 1998, the European Central Bank. It’s a modern international and cosmopolitan city, with just under 30 per cent of its residents coming from overseas.

Munich is one of the drivers of the German economy and is home to the corporate headquarters of many successful multi-national companies, such as insurance company Allianz, BMW, defence contractor EADS, Siemens and the German headquarters of Microsoft. The city also has the second largest airport in Germany after Frankfurt.

When considered alongside the rest of Germany, higher returns are more likely in these dynamic and vibrant cities. In a future economic resurgence, these locations will maintain their pivotal position and the business opportunities that arise will provide a boost that will increase property prices and rental income.

Compared to other European cities with similar standards of living, such as Geneva and Vienna, prices in potential German hotspots are very inexpensive. It would seem, at least to the more optimistic investor, that if there is a good time to invest in German property, it would be now. Other cities with the highest rental levels that feature highly for their standard of living are Stuttgart, Hamburg, Düsseldorf and Cologne.

Rural

At least 75 per cent of German houses have been built since the Second World War, although traditional village homes can still be found in rural areas. There are many properties in the former East Germany which need modernisation. The Rhine and Mosel valleys are popular destinations for those seeking a rural lifestyle alternative to the bustling cities. The Black Forest is also a favourite choice for those who find their element in a more nature-orientated holiday destination.

Transaction costs

There are no restrictions on foreign ownership of property in Germany. A lawyer who specialises in conveyancing can conduct the legal work on your behalf and you must pay the following transaction costs:

• Purchase Tax is 3.5 per cent of the price. This is payable four weeks after the notary deed has been signed by the buyer and seller.

• Notary fees are around 1.2–1.5 per cent of the purchase price, plus any translation fees.

• Estate agents’ fees vary across the country. They are usually around five to six per cent plus VAT and would normally be divided between the buyer and the seller.

• Registration fees are between 0.8 and 1.2 per cent.

• If financing is required, there may also be some fees payable to the bank and additional notary and registration fees for the mortgage.

On average, the total fees to take into account on top of the purchase price are approximately 10–12 per cent.

Annual costs

• Property Tax – This is annually levied on all residential property by local authorities. It tends to vary between different cities and regions, but, as a guide, it’s between €150 and €300 per apartment per year. It would be slightly higher for a house and the figure is also dependent on the size of the property.

• ‘Council Tax’ – Additional costs for refuse collection, water, common areas, maintenance and the like add up to about €0.5–2 per square metre per month.

Taxes

The German taxation system was overhauled in 2000 with the intention of boosting the country’s economic competitiveness. Even after these changes, Germany has one of the most complex taxation systems in Europe.

The major taxation rules for Germany are outlined below:

Income Tax
Individual Income Tax rates for 2006:

Tax Tax base (€)
0% Up to 7,664
15% 7,665–52,151
42% 52,152 and over

As of 1 January 2007, for high-income individuals with income exceeding €250,000, the highest tax bracket will increase from 42 per cent to 45 per cent.

Corporation Tax
The basic federal Corporation Tax rate in Germany currently stands at 25 per cent.

Capital Gains Tax
A capital gain in Germany is treated as income and is therefore taxable at the Income Tax rate for both an individual and a company. There is an exemption on the sale of a private property that has been owned for over ten years.

Summary

Strengths
• Political democracy.
• EU member.
• Mature and stable judiciary and legal framework.
• Modern infrastructure.
• Little/low corruption levels.
• Strong industrial producer.
• World beating manufacturing brands.
• Large long-term rental markets in urban centres and also the possibility of short lets in Berlin.
• High living standards.

Weaknesses
• The present government doesn’t have sufficient political power to implement radical reform necessary for economic growth.
• Weak economy.
• High savings ratio which inhibits a consumer-led recovery.
• Labour market rigidity.
• Rental culture.
• Mortgage market.
• Rising interest rates.
• High transaction costs for an investor.
• Relatively complex taxation system and high rates.

Opportunities
• ‘Bottom fishing’ – is this the bottom of the property market?
• Reform leading to strong economic growth.
• Liberalisation of the mortgage market?
• Berlin property prices on a square metre basis are rock bottom.

Threats
• Continued economic slowdown.
• ‘Bottom fishing’ too early and a continued real fall in prices thus making an opportunity loss.
• When will interest rates peak?
• Further relocation of manufacturing to Eastern Europe.

Facts at a glance

Geography

Population (2005 estimate): 82,431,390
Language: German
Ethnic groups: 92% German. Minority groups include Turkish, Greek, Italian, Polish and other
Local currency: Euro divided into 100 cents

Political system

Political structure: Federal republic with parliamentary system
Chancellor: Angela Merkel
Main parties: A coalition between Christian Democratic Union (CDU)/ Christian Social Union (CSU) and Social Democratic Party (SPD)

Economy

Unemployment rate in 2005: 9.5%
Unemployment rate, February 2006: 8.9%
Inflation rate in 2005: 1.9%
Inflation rate, February 2006: 2.1%
Interest rate, March 2006: 2.5%
GDP growth in 2005: 1.1%
GDP growth forecast for 2006: 1.5%
GDP per capita: (income €25,300 per person) in 2005

Taxation

Income Tax: 15–42%
Corporation Tax: 25%
Capital Gains Tax: Taxed as income

Corruption statistics

Corruption rate: 8.2
Corruption rank: 16th

Industry and technology

Major industries: Iron, Cement, Steel, Chemicals, Automotive

The German property market

The most popular destinations in which to invest: Berlin,Frankfurt, Munich, Stuttgart, Hamburg, Düsseldorf and Cologne

Property taxes (transactions)

Transfer Tax: 3.5%
Notary fees: 1.2–1.5%
Estate agents’ fees: 5–6% plus VAT
Registration fees: 0.8–1.2%
Total fees: Average 10–12%

Property taxes (annual)

Property Tax: Varies. Normally is around 1% of rateable value
‘Council Tax’: €0.5–2 per square metre per month

Mortgage

LTV: 70%
Term: 30 years
Currency: Euro
Current interest rate: Varies between 4.90 and 6.15%

Investor resources

Embassies

British Embassy in the Federal Republic of Germany
Wilhelmstrasse 70–71
10117 Berlin
Tel: +49 (0)30 204 570
Fax: +49 (0)30 204 57 594
Website: www.britischebotschaft.de/en

Embassy of the Federal Republic of Germany in the UK
23 Belgrave Square
London SW1X 8PZ
Tel: 020 7824 1300
Fax: 020 7824 1449
Website: www.german-embassy.org.uk

Useful websites

Deutsche Bundesbank (German Central Bank)
www.bundesbank.de

Expatriate Resource
www.howtogermany.com

Federal Statistics Office of Germany
www.destatis.de

Invest in Germany
www.invest-in-germany.de

A Manual for Germany
www.handbuch-deutschland.de

Tourism in Germany
www.germany-tourism.de

© Lawpack Publishing 2006

“The Jet–to–Let Bible”, Dominic Farrell
Reproduced with the permission of Lawpack Publishing.

Further information on this topic can be found in “The Jet-to-Let Bible”, by Dominic Farrell, ISBN 1 905261 11 X

For information and advice on investing overseas, contact Bewarethesharks.com on +44 (0) 151 482 5525 or visit www.bewarethesharks.com

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