Preview on Property Market Germany 2009

Property Market Preview Germany 2009

In this article we will give you a summary on the current scene in Germany, as far as property is concerned. We recommend to read the full article, use the link below.

To understand the „Immobilienmarkt“ or property market in Germany one has to evaluate first of all segments, second locations and third size or volume. From these categories you can practically derive any data you need. The segments to look at are residential, commercial, logistic, shopping and 1a city locations, hotels and all other property.

The locations to look at are major economic power spots, medium sized cities and the capital with its special role in Germany; the rest can be falling under minor towns and countryside. You might also subdivide into “old west” and “old east” but that’s of minor priority here.

The volume segments you need to take into review are above 10 Million, above 3 Million and under 1 Million Euro.

To evaluate the usefulness of informations read in newspapers, blogs, magazines and the faces of friends you have to decide for whom the information is relevant. Thus we recommend to subdivide as user groups four categories: Institutional Investors, Private Equity funds and similar, Wealthy private Investors and Private Investors in general.

Major trends are set by International Institutional Investors and large Investment Groups. Major influences on trends are current economy and consequences of the financial crisis, government and central bank decisions and news agencies.

Residential Real Estate

Germany was not sufficiently providing the markets in the last six to eight years with newly built houses and apartments. Two major reasons are: all tax benefits have either been nullified or greatly reduced, both for the private home owner as well as for the investor who purchases or builds property for renting. The other reason is that the risks banks were willing to take in financing of building projects were at a very low rate since the introduction of Basel II financing rules. It is a German specialty that its made extremely difficult for people to finance owner-used property, this leads to a general home owners rate of less than 40%. Well-earning entrepreneurs who wanted to save taxes by investing into rental property experienced two major stops: a) not getting financed and b) not having much of a tax advantage for any such investment. Just to see what Germany did in the last 12 years: the depreciation for newly built was lowered from a 7.5% per anno to 2% at present; the sales profit had been tax-free up to 1998 if property was kept for two years; now its ten years holding period (unless owner-used). The so-called “Eigenheimzulage” for lower income brackets – a support given by the government to enable people to buy or build homes for themselves – was cancelled in 2006. In 2008 a small bonus was introduced by adding owner-used property to a government-aided means of private pension savings.

The shortage of units per year is at a rate of about 200.000 to 300.000 per year, if you count also the old, practically unusable property – lots of it in the former East Germany.

Rents in Germany have not remarkably risen, in average, over the last 3-4 years. There are exceptions to this, like Frankfurt am Main and Munich, Stuttgart, Hamburg and Köln, where rents have gone up quite a bit due to extreme shortages in available units. In average though rents are at a stable level, but mostly secure and pretty well predictable. Current economy will not push them down very much due to the shortage in the big five cities. German rental law does not allow them to be pushed up too much at a time (20% cap within three years with the same tenant; only on new rentals you can increase but you are limited by the “Mietspiegel” – a market instrument of the larger city governments to keep rents within a certain range.

Commercial Real Estate

Office space rentals have remained constantly on an uptrend up to mid 2008. Then they crashed. No investor would at this stage advance into purchase of office space unless offered at a good yield with strong, long-term contracted and reliable tenants. The risk to lose money is too high and the disappointments of private investors trusting their money to institutional funds, banks and private equity firms have been too many to add to them without losing at large scale. Private investors might be on search for well-rented, good and safe yield commercial investments if the tenants, the contracts and the records prove to be strong arguments. Such properties are available but rare due to lack of willingness to sell if it does not have to be. Total sales transaction volume of commercial office space has dropped by about 65% in 2008 according to figures quoted.

Shopping and 1a Locations

After the bancrupcy of Hertie, a large warehouse chain with many 1a location properties, the British Investor is under sales pressure. Experts guess that he may get factor 10-11x when initially about15-16x was guessed to have paid by him in 2005. In Germany no sales prices are published but what is no guess is that this insolvency of Hertie affects the rental income of more than 60 large warehouse buildings.

Apparently smaller unit 1a locations are still much sought-after, even in smaller towns. Rents have been reported to have risen last year by 3-3.5%. Christmas sales have been booming in Germany in 2008 so there is interest in renting locations, mostly at a size between 100-250 sqm. Thus it may be worthwhile to research for middle-sized locations with a population between 50.000 and 100.000.

Logistics

Germans transport routes are considered to be amongst the best in the world. Streets, railway, water roads and air transport are well kept and organized and in good shape. Logistic halls, storage space, office and hotel developments have provided a large network for traffic in the very heart of the European Community. At present we estimate that a saturation of the market for this type of property has occurred with some exceptions: the new runway at Frankfurt International Airport will lead to more logistic and sales space needed; the Leipzig International Airport expands and needs more logistic space, and most definitely German roads will need more facilities to help ease the consequendes of the ever-growing truck traffic on the Autobahn.

Hotels

Most definitely it is to be expected that many Hotels will suffer from recession, need of renovations and renewals as well as a trend to built cheap accomodation facilities somewhat distant to the expensive center parts of the major cities. Being close to the Trade Fair Grounds is an advantage: In Frankfurt plenty of run-down buildings around and near main station and Messe area have either been taken down and newly built or renovated and converted into lodging space over the last five years. More of that is to be expected, financed by wealthy private investors or by large Hotel chains owners.So find the niche – it may be worth it, if you want to invest in this segment.

Historical monuments

Listed buildings may be interesting if you manage to find one that needs lots of renovations, that can be converted into apartment space and sold or that can be used for Hotels, seminars or events, like an old castle or manor of which Germany still has many, or some beautiful building inside a town. Tax advantages granted for such are still high in Germany – the last tax resort in the real estate segment in our country.

Furnished accomodation

Another special type of property is furnished accomodation. Makes sense in Frankfurt, Munich and partly also in Berlin – the latter mainly because of tourism and mostly for short-term rentals like some weeks or couple of months. Yield for furnished apartments is higher in average and you are more flexible with short-term tenancies to rise or lower rents according to the market.

Other property

To mention here are single family homes, townhouses and duplex homes. The trend is similar as in apartments: quite a high demand in areas where most jobs exist, and too little newly built. Either no land development, or difficult to finance in advance – and the already mentioned lack of financial advantages provided by the Government to home owners.

Modern technologies

One trend is very important and must be mentioned here. A great amount of stress was put on current themes like low-energy consumption, insulation, alternative technologies like solar systems, water wells, and the use of environmentally friendly building materials and methods. From production of the raw material to the final use of the building, all its steps have undergone research and the government supported projects to reduce CO2 emissions and develop new environmental-friendly methods and materials.

Any investment into such new technologies may well pay off. If you consider that the by-cost of the rent – so-called utilities or Wohnnebenkosten – have gone up to a level of 3.50 to 4.00 Euro per month and square meter, from about half of that less than ten years ago, then you can easily imagine that any apartment or building which at length costs the tenant half of that or less will be attractive for both, owner and tenant. The owner can charge a somewhat higher rent, the tenant will be happy to be independent of oil crisis, gas cuts or such contemporary ills. Alternative methods to procude electricity are a large field of new industries which will definitely need facilites to procude and sell their technologies. A very notable example one can find in Frankfurt, where the city-owned Beteiligungsgesellschaft ABG Frankfurt Holding is building about 800 so-called passive units which are largely independent from primary energy resources. And that without any real price difference to classical units.

A preview of several market segments, as relating to locations and investment volumes. Article has IV parts in total and is of interest to investors, home buyers, developers, owners, vendors, agents, banks and financing agencies.

Locations

The major economic and political centers in Germany are Munich (#1), Hamburg, Frankfurt, Stuttgart, Köln (Cologne) and Berlin. Focus for any investment on these cities if you want to be in a major spot. Minor cities however can be a lot more interesting if you know them well and know what type of property is most wanted in such cities. The little town of Münster in Westfalen for example (near Dortmund if you need a landmark from the soccer-map) was rating as a top city in a broad city investment report in 2008. Why? Its one of Germanys most advanced and sought-after university towns, its infrastructure is excellent and it has a shortage of space. Other towns to be mentioned would be Darmstadt (excellent Technical University, as well as the City of the ESA – European Space Agency, with all its daughter agencies), Jena, one of the most famous glass producing cities in Europe and one with a highly qualified University, Leipzig and Dresden – more interesting towns could be added here without hesitation. The clever investor who wants to invest around 500.000 to 1 Million Euro might be well advised to look for such locations with a population between 50-100.000, as they are not normally attractive to the large-scale investment funds or companies. A safe and secure 8% yield in an attractive small town might well be better than an unsecure 6% in a larger one. Vacancies are highly unlikely in towns where there is still well booming productive business or a good university. But it needs research, research, research in any case.

International Airports

The two major International Airports in Germany are #1 Frankfurt / Rhein-Main, #2 Munich. In a few years from now – perhaps five to ten – BBI in Berlin will be a competitor to these two. Its now under construction and is located at the airfield of Schoenefeld, the old East Berlin Airport. If you look around in that area you will be surprised at the opportunities it offers. Surely it takes some guts to put money into this location now, but if you envision what it would mean if planes fly from Berlin large scale non stop to Signapore, HongKong, New York, LA and Tokyo, then you can imagine what the land and property prices around the BBI airport will do at some point. We have found land prices to be as low as 30-40 EUR still only 30 minutes away from this future airport.

Berlin

We do not want to go into detail here about Berlin itself, its worth its own article which will follow soon. But so far Berlin has proven pretty stable in the crisis and the only real effect the crisis will probably have on the market is that the prices of blocks will come down again, back to a level of factor 10-12, based on the low rent levels in the average of Berlin. It just does not make sense to buy at factor 16-18 or higher when you can get an excellent property for that factor in Frankfurt or Hamburg. The average rent per month and square meter in Berlin is still at about 5 Euro. And they will not move up except in the top areas like in parts of Mitte and Charlottenburg-Wilmersdorf.

Little towns and countryside

Not of much interest for international investors. If you have some money over you can go to property auctions and find remarkable bargains. But never use funds you may need in the future.

Volumes of investment

We let aside large volumes above ten or 15 Million Euros. Investors between 3 to 10 Million Euros should focus on government and other large companies buildings (sale and lease back), packages for sale out of private portfolios or from property companies, emergency sales, single apartment blocks with good location and solid, strong yield around 6-7%. If you buy, convert and sell then focus on Altbau (the old style buildings) and top quality refurbishments, and that really means top quality and not superficial. Involve modern technologies to save energy and promote it. People are willing to pay a good price for top quality if the location is also justifying that.

Between 1 and 3 million get a smaller package of blocks, nothing that needs a lot of work and refurbishment as this may turn out a risk too high to take. Want fast and good return so focus on what has been running well in the last years and where most refurbishement work was done. Or buy one, renovate at top quality and resell. But watch for best location and make sure apartments are actually vacant so you can start. It may otherwise cost a lot of money to negotiate with tenants to move out. If they are living there since a long time and don’t want to move, it’s a problem. And this is nothing new – it’s a problem ever since blocks are converted. In general focus on residential property. Commercial only if it really is a well running and well established tenants in good locations.

Up to 1 Million: Focus on residential property, either one block or single units. Prefer top rental locations and nice modern or stylish Altbau. In middle-sized towns try for 1a locations and choose only cities with a good infrastructure and well-connected to the main metropoles.

Developers

If you are a developer, another type of property may be of interest. There has been a huge demand for large size apartments inside major cities like Berlin, Munich, Frankfurt, Hamburg and Stuttgart. This trend has been caused by two major influences: a social change of wanting to move back into the city, paired with a demand for spacious living, by a wealthy, well earning young generation. The second influence was that of international buyers wanting to have an apartment of high class, very representative and spacious; mostly oberved in Berlin, Munich and Frankfurt. Large apartments are 140 and more square meters – about 1400 square feet on up.

Financing

Only investors with a good equity will have a chance to find a bank for financing. It has always been a good rule of thumb for investors who purchased in Germany to start with 30-40% of the purchase cost as deposit. Subsequently such investors need not worry about temporary slacks in rent if there are any, as the financing is worked out in a very healthy way. Nowadays with banks being even stricter such equity ranges up to 50% of the purchase price (plus purchase costs between 10 and 13% to be paid extra by the investor). That means for any investment to calculate your available assests for the financing and take that as 50-60% of the total purchase volume. Based on that financing in most cases should be no problem.

Summary

German property at large has not been affected as much by the International crisis as in other countries. One reason is that German real estate was never on a speculatively high trend (the first half of the 90ies excepted, which was a market after the reuninion that was abnormal). So the relative stability on its upwards motions now reflects on the other side by a relative stability on its downwards motions. Germany is one of the most unattractive property markets if you are aiming at fast, quick profit. But on the other hand you will not lose good money in that market either if you do a things right to begin with.

(End of article.)

Copyright © 2009 by AllGrund Ltd. All rights worldwide reserved. Partial Quotations allowed if referred to author Peter Talkenberger and company AllGrund Ltd.

Find sales offers here.

About Author.