Buying a Property in Germany

Why Germany?

It’s no secret that the German economy was in the doldrums for some time after reunification and, as a result, its property market suffered. For the British buyer, however, this means that a plentiful supply of housing is available at affordable prices. Add into the mix the fact that Germany is a nation of renters (only 43 per cent of Germans own their own home), and the investment potential of this European nation suddenly looks very promising.

In fact, you only have to look at how much global investment companies are spending in Germany to realise its full potential – for example, in 2004 the Forbes Investment Group bought 80,000 properties for an impressive £2.3 billion.

The result of such spending means that house prices in Germany are on the rise once again, after dropping 6.8 per cent between 1994 and 2004, albeit not at an unprecedented rate. For a long-term investment, however, this bodes well, as a steady economic recovery tends to be a solid one.

Popular buying locations

If you are planning on renting your property out, the best bet is to consider a city home as many Germans move to the urban centres in pursuit of work. Berlin offers great value for money and, as home ownership figures in the capital are as low as 11 per cent, finding a tenant shouldn’t be too difficult. Facilities and amenities in the city are also good thanks to the 2006 football World Cup, which resulted in plenty of inward investment into the hosting capital.

Homes in Munich are the most expensive in the country, with prices averaging around £6,500 per square metre. Meanwhile, Frankfurt, the financial centre of Germany, offers a large choice, although at slightly high prices. Finally, the cities of Cologne, Stuttgart and Dusseldorf are all worth watching – especially as the number of new builds in these areas has been decreasing year-on-year for the past seven years, and is now at an all time historical low. As always, rural properties offer much better value for money, with houses starting from around £53,000.

Legal issues

There are no restrictions for British nationals buying in Germany, however if you wish to stay for longer than three months you will need to apply for a residence permit. This can be obtained from the local Foreign Nationals authority at the local town hall or area administration centre, and once obtained is valid for five years.

The buying process

The purchase process in Germany is not unsimilar to that in the UK, apart from the presence of a notary. Once you have found a property that you like you put in an offer. When a final sale price has been agreed between buyer and seller contracts will be drawn up by your respective solicitors and, if you are not 100 per cent fluent in German, translated. All contract terms are variable, so it is essential that you employ an independent solicitor – especially as there is no cooling off period once the initial contract is in place.

The contract will include all property details such as the agreed price, completion date, payment conditions and stipulations regarding either party withdrawing from the purchase. At this point you must instruct a notary, who will act as a neutral intermediary between buyer and seller and check the title deeds.

In order to complete on the sale, both parties need to be present to sign the final contract before the notary. You will need to produce a valid passport at this time, and it is advisable to have a translator present to ensure that you are aware of the entire transaction. Once the contract has been signed the deal is complete, and the notary will list the change of ownership with the land registry.

Finance

Interest rates in Germany are currently low, around 4.5 per cent, which offsets the amount of equity needed to acquire a mortgage. As a rule of thumb you will need a 30 per cent deposit in order to obtain a German mortgage, but some banks will require as much as 40 per cent. As a result, many German nationals have combined their debt in the form of a building society loan and a bank mortgage. Fixed rate loans are the most common, with mortgages available up to 30 years – provided that you will have repaid the loan before you reach retirement age.

Despite such low interest rates and high deposits, Germany currently has the highest average mortgage repayments in the European Union. Therefore, if you are considering buying in Germany, it may be more economical to raise finance in the UK – perhaps by remortgaging an existing property since UK lenders will not provide a mortgage against a German property. However you decide to finance your purchase, ensure that you have it all in place before you submit an offer.

Fees and taxes

When buying a German home you will need to budget around six to seven per cent of the purchase price in order to cover associated fees and taxes. This is broken down into transfer tax (Grundwerbesteuer) of 3.5 per cent, notary fees of 1.5 per cent and land tax of one per cent. In addition, if you aren’t a German resident, you may be liable for a 0.5 per cent wealth tax.

During your time as a homeowner in Germany you will also be required to pay annual property taxes, the rate of which will depend on where you buy, as it is set by the local community. As a rule of thumb however, the amount payable is usually the basic rate (around 0.35 per cent of the property’s rentable value) multiplied by the individual community’s stipulated percentage.

Capital gains tax will be payable at current interest rates when you come to sell, unless you have owned the property for over ten years. There are however plans to introduce a capital gains tax of between 20 and 30 per cent on all properties starting from 2008.

Whether you are buying or selling you will be required to pay half of the estate agents bill, which comes to about six per cent.

Visas, residency and work permits

As an EU member you are entitled to work in Germany without a work permit. As an employee you will be required to work a 36 to 40 hour week, but there is a minimum of 25 days annual holiday entitlement – and it’s not uncommon for this figure to come in at around 30 days. In addition, workers receive nine bank holidays per year.

Salaries in East Germany tend to be 25 per cent lower than in the west, but as a whole wages in Germany tend to be higher than elsewhere in Europe. Benefits are also good, with many firms paying an additional 13th month’s salary at Christmas.

Both employers and employees pay around 20 per cent of their gross monthly salary into the country’s social security scheme, which covers healthcare, unemployment benefits, accident and sick pay and pensions.

New-build versus resale

Many easterners have moved to the West since reunification, therefore leaving a surplus of property in the East to the tune of one million homes. Around a third of these are now due for demolition, while the remainder will be renovated in order to attract tenants. Despite this surplus, the Federal Bureau for Building and Regional Planning has estimated that the country requires 300,000 new homes to be built per year from now on.

As a result, buying off plan could be a lucrative investment. Since many German families rent for a long period of time, there is much demand for quality accommodation – and new-build homes appeal to this market. Newly renovated properties fit the same bill, and so a building that’s in need of refurbishment could also pay dividends. In fact, many investors are now buying whole apartment blocks comprising around eight units, with a view to renovate and then let out in order to achieve a high yield.

At the end of the day, however, as long as your property is in good condition, and in a good location, the age of the property is somewhat irrelevant.

Investment potential

Berlin is considered the city with the lowest property prices in Europe – in fact, they are currently around a tenth of those in London. Therefore experts believe that prices in Germany can only go one way, and that’s up. Investing in Germany however is seen as a long-term investment in regard to capital growth, as this is pegged to the somewhat fragile economy.

If you are hoping to make solid rental returns, however, then it’s a different story. Thanks to the German penchant for renting, yields in the larger cities can reach eight to ten per cent. This is a good return on a relatively low investment, and it’s unlikely that you will ever have a vacant property for long – provided that you are offering good quality, affordable accommodation.

Be aware however that, due to the lack of locals entering the property market, it could take some time to sell your German home – a problem that could cause financial difficulty if you needed to release equity in a hurry.

Health and education

Education in Germany is free, and is compulsory for children from the ages of six to 18. The academic standard is very high, and as a result many expatriate parents send their children to local schools. Having said that, there is a large choice of international schools available, with the major cities of Frankfurt, Munich, Hamburg, Berlin and Dusseldorf all boasting one. There is also a prep school in Bonn which is run by the British Embassy – fees for all of these, however, vary so it’s important to do your research.

Medical treatment is of a high standard, with Germany having the highest ratio of hospital beds to population in the EU. Treatment costs for workers are covered by social security insurance, but you will have to pay for any dental work and prescription medicines. If you are not covered by the German social security scheme it is essential that you take out private health insurance – although your European Health Insurance Card may entitle you to a refund.

Transport

Getting to Germany is easy with a range of low-cost carriers such as easyJet, KLM and Ryanair all flying there on a frequent basis. Internal flights are also available, but the most popular form of transport once in the country is road, with all of the major cities linked by the Autobahn. While there is no official speed limit for these motorways, a maximum speed of 130 kilometres per hour is generally acceptable. In the cities themselves, traffic congestion can be a problem, and speed limits are 50 kilometres per hour. On all other roads, including dual carriageways, 100 kilometres per hour is the maximum speed.

You are entitled to drive in Germany on your British licence for an unlimited time, but there are some minor differences in road laws. For example, drivers must carry warning triangles at all times, and the maximum level of alcohol allowed in the system is 50 milograms per 100 millilitres of blood.

The public transport system is better in the West, but most cities offer a comprehensive service. The train service is reasonably priced and reliable, but connections in rural areas can leave something to be desired.

And finally…

Buying a property in Germany suits two types of purchaser – those who are moving to the country and those after a long-term investment. Should the government decide to push this nation of renters into a home ownership culture, then owners of German property would be in an excellent situation to capitalise on the supply/demand ratio.

There is a risk however that the recently recovered economy could collapse once again, leaving you somewhat high and dry. Tenants also have strong government support, for example it is illegal to evict a single mother even if she refuses to pay the rent, so you could be left with an additional mortgage to pay should anything go awry.

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