Property investments in Germany
2007-2008

 

Its time for an update! Yes, the market has changed in Germany . And yes, we did not modify what was written in the article “On buying Real Estate in Germany”, up to today – and probably won’t need to change it in the near future either. Why? Whats written there is true and remains true, as it contains a lot of the basics to know when investing in Germany. However, it may be of some interest to have a look at the current market scene. We are far from giving a complete picture here, but the most important developments are not all too hard to summarize. The most important change this year 2007: Gradually the market turns from a Buyer’s to a Seller’s market; in some cities more, in some less. And here are the key factors that characterize what happened in the last 18 months.

Foreign investors pushing market prices up

In no other city the price push was as remarkable as in Berlin, Deutschlands Capital. Since about 2004 investors had begun to buy in large scale, speculating on the low prices. Private investors followed in 2005-2006, and the total sales turnover of property in Berlin in 2006 amounted to 15.8 Billion Euro as compared to approximately 10 Billion Euro in 2005 (Source: Gutachterausschuss für Grundstückswerte in Berlin). Prices have gone up in Berlins top locations but are still fairly low in the less asked-for areas. Prenzlauer Berg is still generally the top-end of the market, but Berlin-Mitte with its many faces and different areas shows a wide spectrum of prices, ranging from about 1000 Euro per sqm up to even 6.000 Euro for an apartment near Potsdamer Platz. But the top end of the market has shown a decrease of 10% for apartment prices. What is remarkable: Rents have increased by as much as 26% for high end properties in best locations in Berlin. (Ref: Bellevue 9/07; www.bellevue.de). We have observed the market there in the last eight months and have a bit more to say later on.

Banks are more interested to give loans

It seems like a turn of the tides. Some three years ago we went begging from Bank to Bank to get a mortgage for a non-resident, non-german client, today we get offers from all kinds of banks and it seem easier than ever to get a loan approval. Competition is the watchword, and whereas the interest rates have increased by about one point from average 4 to average 5% since about 18 months, more loans are granted than there have been in a long time. Forgotten are the wounds of the bad loans of the 90ies in Germany, the sins of yesterday have been healed and new risks are taken. However, the rules for non-residents are still pretty strict and in the average a mortgage is between 60 and 70% of the purchase price. (Another word would be worth saying about the often misunderstood method of valuation of property by German banks, but that’s not the topic of this article.)

German economy doing better making
Germans feel more confident

Money flows to money. That’s an old but often misunderstood rule. When economy is doing better people let money flow into the market more easily than when they are afraid of the future. Part of that is the willingness to invest in real estate and to take the risk of a loan – which means lending money and spending it to go into the market. Germans in that aspect are much unlike the anglosaxon investor, who by nature seems to be willing to take higher risks. Germans are hesitating longer and rather wait than take the first move. That move was done by the foreign investors at a scale like never before in history. Germans get more confident and also buy property again. This again pushes prices up. And thanks to Frau Merkel, the first female ruler of the German nation since nearly 1000 years (the last I remember was Kaiserin Agnes in 1056-1062), confidence has grown that “Der Deutsche Michel” (National caricature of The German) will do it again. And as confidence creates more confidence (just like the reverse is true as well) the wave may still go on for yet some years. Germany is a leading nation in many aspects, much respected in the world, and at least since the Klinsmann-miracle (Football World Cup 2006) we all know that giving up is not a German trait.

People early in their careers earning
a good income are eager to buy

It’s a rather new experience in Germany to see a relatively young generation (30-40) earning much more than their fathers ever dreamed of. And true, its an experience to be observed mainly in some of the large cities like Munich, Frankfurt, Hamburg, Stuttgart, Dusseldorf. Its not even true of Berlin really. And its definitely not true of many of the smaller towns where jobs are not as attractive. Due to the international structure of the top cities mentioned above with their many international companies, salaries have reached peaks undreamed of. Whereas this cannot be generally said to be true for Germany, it nevertheless influences the property market, because this young generation today is one of the strongest buyer groups.

A faster market enforces faster decisions

He who hesitates loses on todays market. Good offers (and not always good bargains, but very good or excellent locations and high class properties) go very quick. Times are over when properties were offered “like sour beer” as we say in Germany. This again makes prices move upwards as the push on the market is higher. And sellers do not have to go down much in price if at all – its become a sellers market really in the good areas.

Higher standards and more
expensive costs of building

Modern standards for house building and renovations are not only high because of the new energy and environmental requirements. Building materials in general have increased in price and so has the price for the good workers. Quality is much sought-after and the high-end properties are not being sold with anything but excellent value of material and work performance. The lower end of the price market is not really affected by this factor, though, except that a general shortage is created because newly build houses have reduced in numbers over the last years.

Summary

In general, the quiet times of low prices are over in Germany. We see price increases at the top end of up to 54% in one year (Wiesbaden! Ref. Bellevue 9/07). The average increase however for sqm flat prices is at 2.95%, measured in the 100 largest German cities (Bellevue 9/07; the full report you can find in the magazine). We will have a look at the prices of 1997 in a later article, as compared to today, to have a picture of a longer trend. (As an aside remark: The thermal springs of Wiesbaden were already mentioned by Plinius the Elder in the first century; they must have been of such high value to the Romans inmidst of cold Germany that the town ever since is the real top end of the German property market and never lost that position and yes, the springs still spill their warm and healthy water from wells all over the town and not only seem to heat up the body but also the property market….)

Which towns have shown the
best increases and which will be?

The past is easily researched. A glimpse at the City reports shows they are all the towns you may seldom have heard of (like Munich – no sorry, that’s the one exception and amongst the larger cities the leader after Wiesbaden with 15%; but what about Ludwigshafen (20%), Moers (17%), Kiel (16%), Luebeck (16%) or Minden (15%)? We have to add that these figures are only the average increases of the top-end prices of the market, not the full market view. So where is our much promoted Frankfurt, where is Berlin and whereabouts do we find Hamburg or Duesseldorf? Berlin shows -10%, Frankfurt +4%, Hamburg +7%, Duesseldorf +3% (but its very neighbour Duisburg +9%!). Cologne shows +1% and much mentioned Potsdam, the perl of Brandenburg, shows a 0. (Ref: Bellevue Market Report of 9/07).

Such figures may sound interesting, but what do they say about the value increase of your own property, if you bought one? Well the truth is as simple as old: You will know when you sit at the notaries desk and sign the sales deed. The price you get when you sell will tell what value your investment had in the end.

Own market research observations

Lets add some of our own observations here, perhaps that lightens the day in case you are not lucky to have bought a Wiesbaden high-end. Frankfurt am Main, in the special segments we use to focus on (1-3 BR, Nordend, Bornheim, Sachsenhausen, Westend) shows an average increase of prices of about 4-5% in the last year. That’s from average 2.800 Euro per sqm to about 3.000 Euro per sqm. At the higher end the prices over the last two years have risen from about 3.500 Euro per sqm up to 4.500 per sqm, for a newly built or a totally refurbished apartment, either “Altbau” or totally new. In individual cases prices have reached a peak of 6.000 Euro. That’s Westend, the most exclusive part of Frankfurt. Its also remarkable that nearly all developers who buy old houses to renovate, reconvert and sell them have mentioned that the purchase prices for them per sqm went up by about 10-15% over the last year! Prices of 25-30x the annual rent have been quoted and paid.

In Berlin we have observed that in some locations prices did not move up at all, whereas in others they almost jumped. Charlottenburg, the area around Kurfuerstendamm, Savignyplatz, Kantstrasse and Bleibtreustrasse seem to have made the biggest jump of all. Prenzlauer Berg seems stagnant since January 07, Berlin-Mitte shows a wide spectrum and yet has some areas which are like the Sleeping Beauty, worthwhile to consider an investment (latest example: 150 sqm refurbished 3 BR “Altbau” for 179.000 Euro – only 4 km from Brandenburg Gate and 3 km from the famous warehouse KaDeWe at Kurfuerstendamm; see offers on our website). That’s where the real chances still are to be found in Berlin if you are after a good value increase in the next few years, and that’s gonna come. But for those investors who want to buy whole apartment blocks in Berlin, the best times are over. The times you could get a “Zinshaus” (multiple apartment block, “Altbau” or newly built after the war) for the 10-11x annual rent are history. Today the buyers pay 16-25x the rent, which is a yield of 4.0-6.5 percent.

And that’s really Good News: In Leipzig we see a lot of improvements in terms of economical developments. Huge companies like DHL and Amazon are newly developing there, and Leipzigs airport and the perfect location inmidst of the crossroads between East, West, South and North make it a turntable for International and National companies especially from the logistics sector. And yes, in Leipzig much more than in any other town of the former East we have seen come true what was predicted in one of our books in 1995: Wait for ten years and you can buy really cheap in Eastern Germany. The time has come, and just as an example: A whole block – “Altbau” – renovated in the mid nineties with a very good standard, now to buy for 650 Euro per sqm – with a yield of 8.5% sounds like a real bargain, doesn’t it? And so it is. If you are after higher yield than anywhere else in any of the better locations, Leipzig is a good recommendation.

And what about our Good Old Frankfurt? No, we did not forget it. For us it’s the most stable, solid and upscale investment place in Germany, unless you want to go really high-end, retire and enjoy the Spa of Wiesbaden or the Biergardens of Munich, the two unbeatables. But the business town number one in Germany is and well may be for many decades to come, where the money is turned, and that’s Frankfurt, the place of the European Central Bank and way over 200 banks that come along with it, 147 of them from other countries (Source: Bundesbank). No other town with only 675.000 population (fifth largest City in Germany) and a very limited space can manage so much business like Frankfurt does. In their wake follow a great number of International Law Firms, Accountants, Tax advisors and Investment counsellors. That means a rental market of high quality-demand, high income people. And there is no other town in Germany where the good locations for rentals are so rare – we mentioned them in earlier articles. So the demand for apartments is high, was high and always will be high, its almost like a word from the Bible. True, yield is not necessarily as high as in other places, and the demand to maintain a high quality in an apartment may mean additional investments which lowers your yield. True, the value increase in a single year may be higher in other cities, but over a long period of time you will never lose in Frankfurt.

So a good strategy might consist of a mix of these three best of the best: Berlin for value increase, Leipzig for cheap prices with high yield, Frankfurt for the stability and safe grounds with good tenants from all over the world.

 

We can illustrate that in a nice Investment Triangle for Germany:

 

 

 

 

 

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