Background to the German Property Market

Since re-unification, the east has in effect been subsidised by the richer west of the country. Back in the first half of the 1990s, initiatives in the form of tax incentives offered by the government were aimed at stimulating economic growth in the region and west Germans invested heavily in property in the east creating a “bubble” in the market there. However, without the massive investment required in roads, factories, environmental clean-ups etc, combined with the governments’ commitments on pensions, wider European labour market reforms and entry into the Euro, the economy in the east stagnated and the property bubble burst leaving many wealthy investors out of pocket and reluctant to risk further investment in property anywhere in Germany. The cost of re-unification has been estimated at over $1 trillion (levied by taxation) to the German economy as a whole, with the result that today, property in Germany trades at historically low levels.

Recent economic indicators suggest the situation is about to change. Unemployment is falling and greater fiscal discipline on the part of the federal govt is enabling them to reduce borrowings. A prolonged slump in the performance of the German economy has been matched with a long period of depressed prices in German real estate. This, together with a reluctance on the part of German lenders, banks etc, to offer competitive mortgage deals, in spite of historically low interest rates, explains the general stagnation in the property market and has alerted foreign investors, pushed out of their domestic market due to high prices, to the opportunities in Germany and the low prices on offer.

The German Property Market 2008

Foreign investment in the German property market has been steadily increasing over the past years. Deals ranging between 100.000 euro and 100 million have been completed by privat and institutional investors who believe the German property market to be trading at a significant discount to other comparable western European economies. Despite transaction charges which can amount to anything between 10 -12 % of the purchase price (this includes stamp duty, agency fees, notary and land registration costs), German property represents great value for money. The investment vehicle used for purchase can also have a significant impact upon taxable income and future disposal of your investment vis a vis CGT (capital gains tax); specialist advice on the German tax code should always be sought when considering these factors.

While real estate prices across Germany are low, in comparison with other EU states, it is important to note certain regions within Germany offer better capital growth, and more stable rental income returns than others. The German property market in 2008 represents a great opportunity for investors seeking relatively high income rental returns coupled with solid capital appreciation. With interest rates in the euro zone likely to remain low for the foreseeable future and the German economy at last beginning to emerge from a long period of painful re-adjustment; property investors can be confident of strong returns on their investment in the years to come. Particularly in the south west of Germany, in cities such as Frankfurt, Stuttgart and Munich where the main drivers of the German economy are located, the property market should be described as a very strong “buy”. In Berlin, Dresden and Leipzig the opportunties are good to buy with good yield or with good value increase potential.

Did the recent financial crisis affect the German property market?

Yes and no. Indeed the large foreign institutional investors have reduced their new investment volumes mainly due to lack of possible financing. Private investors inside Germany – people living in Germany – are buying property at a higher volume than in the recent years. Funds are apparently shifted from other forms of investment into Real Estate, because people see it as a safe and secure harbour for their savings. Financings are possible both for residents and non-residents at about 60-65% of the purchase price.