Good reasons that speak for
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Decided: the introduction of the euro
The real estate market in spring 1998
Europe and real estates
Commercial or residential?
Locations
Enclosing consideration

 

Decided: the introduction of the euro

Europe is heading an important change: the introduction of a common currency – the EURO – will be completed by 2002.

What does the euro mean to us?

Let us look at various possibilities:

  1. Fact: the caretakers of the market (federal bank) loose their nearly unlimited power to determine the course of the money; the European Central Bank will take its place.
  2. Possible consequence (1): what has been successful in Germany over 50 years cannot and will not be transferred to Europe (independent monetary policy; separation of the federal bank and national decision makers; control by government bodies)
  3. Possible consequence (2): the EURO will clearly be a softer currency than the D-mark
  4. Possible consequence (3): the trust into the European integration process decreases
  5. Possible consequence (4): the US dollar and other currencies (Swiss franks) will gain momentum
  6. The share markets get a reaction
  7. An escape to real asset values sets in
  8. The long-term interest rates increase
  9. D-mark investments which get converted to euro loose a lot of buying power

But we don’t want to tempt fate. For also the exact opposite might occur:

  1. The euro will be a stable, firm currency
  2. The situation on the employment market in Europe betters
  3. More jobs get created in Germany
  4. The euro gains international stability
  5. A larger and larger demand for residential and commercial space comes up in Germany and other European countries
  6. The US-dollar and other currencies loose against the euro
  7. Asset values in Germany increase in value due to the increasing demand
  8. Shares of large European companies increase in value
  9. The interest rates remain moderate.

Let us now look at both possible scenarios. In both cases one thing is certain: asset values appreciate. In the case of the euro getting weaker the result will be an escape to invest in asset values. In the second case of a stable or appreciating euro the situation on the single European market will better so much that the demand for rental space will increase and thus the result will be increasing rents.

FORECAST:

THE EFFECT BY THE EURO ON THE REAL ESTATE MARKET WILL BE VERY NOTABLE

So both scenarios speak for a long-term engagement with real estates. But let us get a little more precise. What is the current situation?

 

The real estate market in spring 1998

It is more than conspicuous that at the moment two factors meet for once in history:

  1. The interest rate for real estate loans are on a historical bottom
  2. The market prices of real estate properties have remained quite constant in the past two years

TWO IMPORTANT FACTORS SPEAK IN FAVOR OF REAL ESTATES NOW:

  1. LOW PRICES
  2. LOW INTEREST RATES

Of course there are differences. For instance the real estate prices in Duesseldorf have only increased by 5% in the past 12 months; in Dortmund more than 5% and in Frankfurt am Main (domicile of the new European Central Bank!) also by more than 5%; in Berlin, Leipzig, Dresden, Karlsruhe, Magdeburg, Wiesbaden, Wuerzburg, Mannheim, Munich and Hamburg though they have dropped by 5-10% (source: “FinanzTest” journal 3/98).

While the area of Rhine and Ruhr and Frankfurt am Main still belong to the top locations, other locations have clearly backed down; in the new federal states this is due to the decreasing tax advantages and financial support as well as a lack of demand for (partially expensive) refurbished apartments. On a drive through Dresden the author noted nicely painted, but certainly not high-class refurbished, apartment blocks had the fewest vacancies, while high-class villas in top locations where vacant one after the other – whether they were refurbished or not. But where the unemployment rate is more than 20% the demand for living space of higher quality can also hardly gain momentum….. of course the exception proves the rule.

So let us keep at the two most important facts: real estate prices are still at a moderate level and there are sufficient chances for people looking for bargains; and the financing conditions are unbeatably good. Just recently we have gotten to less than 6% of fixed interest over ten years (!); just a few months ago we were still at 6,5 up to 6,7%. So while the interest rate has decreased by half up to three quarter of a point the prices for real estates have not decreased at all.

STILL TOO FEW INVESTORS ARE TAKING ADVANTAGE OF THIS HISTORICALLY UNIQUE CHANCE!

One should actually expect that more investors are using this unique historical opportunity but still there are too few going against the general trend, meaning acting contra-cyclically. The masses are staying away from real estates (cyclical attitude); only insiders know what they’ve got to do. Property salesmen can stock up on residential buildings provided the banks cooperate: in several years the properties so purchased can be partitioned and resold as single freehold flats with a good yield. The private owner still has chances to a tax-free gain here, whereby there might be changes being done to the tax laws in future. But where one gets a gain when selling one can still pay taxes on that gain in good conscience; for after all one hasn’t been working but waiting for this gain!

 

Europe and real estates

There is no doubt to the fact that the Euro, i.e. the forthcoming unification of the currency within the EU holds interesting perspectives for the entire European real estate market. For instance the famous real estate journal Bellevue, in its latest issue, alluded to the fact that as a consequence of cancelling the D-mark for the Germans who want to purchase real property in foreign countries, it can definitely come to price jumps upwards. Especially when buying in popular vacation resorts or locations where one wants to settle at an older age perhaps it could become much more expensive to us Germans.

So for those who consider buying a property in a foreign country we advise them to do so as soon as possible – for a good reason. Additionally to this the company AllGrund is also a partner for properties in France lately.

EURO MEANS:

BUY REAL ESTATE PROPERTIES NOT JUST IN GERMANY!

The legal regulations and regulations of the land registry office when buying foreign properties are sometimes very extensive and can hardly be coped with if one doesn’t speak the applicable language. Thus it is strongly advised in any such case to avail oneself of a competent partner in the field.

 

Commercial or residential?

In view of the fact of our insecure developments on the employment market we currently advise investors who can spend up to 1,5 million DM to buy residential buildings, offhand. Commercial properties become interesting at a higher volume and can be considered in certain locations. Of course here you get a higher yield than in case of residential properties; but in exchange latter ones are generally more stable, less exposed to the mood of the markets and are also easy to resell if one made a proper choice in the first place. Bear in mind: a rental apartment can be changed into a freehold flat in almost any case and can be sold to a private user or be offered to the tenant. A commercial property hardly ever gets bought by the person renting it; for he would rather buy himself if he needed it. This by the way is also a weak point for many commercially leased, closed real estate funds…..

 

Locations

Again and again the question of the right location for a property purchase comes up. And again and again we point out that currently the locations of Rhine-Ruhr and Rhine-Main are the safest ones. Though there is a grave difference between those two locations: while at Rhine and Ruhr one can partially still purchase properties for very low prices, the market at Rhine and Main is quite firm. The prices are unbowed high and getting into the market here is often only possible starting from 300.000 DM and above; but at Rhine and Ruhr one can find many interesting properties for a price between 100.000 and 200.000 DM. The rent yield lies between 5% and stately 6,5%. If one compares this to the long-term interest rate of 5,9% one quickly recognizes that the tenant practically pays the interest. Rent increases let such properties go up into the positive profit centre.

Though these properties are not aimed at tax advantages they are solid properties, purchased inexpensively, which compensates for this.

The same by the way also holds true for residential buildings; the price difference of cities in Rhine-Main and Rhine-Ruhr is tremendous sometimes. The achieved rents at Rhine and Ruhr, realistically, are between 8 and 12 DM per m² and month. If, with this rent, someone purchases for the 15X of the annual rent, he gets an interest rate of 6,7% - so if he arranges the financing accordingly the house can almost finance itself, including the amortization. If one purchases the house for the 13X of the annual rent the yield is 7,7% and thus the property is in the “plus” including amortization.

APARTMENT BUILDINGS ARE THE BEST CAPITAL INVESTMENT

Since the resell as single flats later on can be done for the 16-18X of the annual rent one can easily calculate what a profit can be attained here.

Save taxes – but how?

Someone who wants to do something about taxes should be looking out for two chances this year:

  1. Listed buildings that need refurbishment (we have extensively talked about this in the past year)
  2. Properties with 40% special depreciation in the new federal states

The first mentioned has become very rare, especially in the field of residential buildings. Latter ones however are numerous – but mainly on a market on which the prices have been declining in the past years, as well as the demand for residential space. So if one wants to save taxes one, at the same time, needs to look carefully as to where one purchases, which building developer is responsible for it, how real and save the rent guarantees are and what future possibilities the respective location and the property really have.

The key questions are: will the property bring in the expected rents on a long term? And: if I want to resell the property after the time period of the special depreciation, how much will I then be able to get for it? It can be expected that partially high advanced payments will need to be made, simply because there are numerous such properties which will be coming “on the market” during the next ten years – when tax advantages have been used on a large scale and fixed financing agreements are becoming less. Here too, good consulting is the primary rule.

 

Enclosing consideration

The real estate property is an indispensable factor when planning to build up capital on a long term. This is regardless of the development of the shares or bond markets; to the contrary, building up one’s funds should also regard these instruments. Enough authors and journalists have been extensively writing about the development of the shares markets. As mentioned above, the introduction of the euro will also affect this area; but based on our estimation it will affect it much less than the very interesting real estate markets in Europe.

 

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Important note: Any evaluations, advices and indications on our information and internet pages are mostly subjective evaluations and solely have the purpose of giving real estate investors a general orientation. They make no claim to be complete, right or constantly valid. Most real estate information is founded on conditions or legal regulations (taxes, regulations about apartment ownership, tenant’s rights and more) which might have been current or of interest for real estate buyers at the time the text was written. These conditions and legal foundations – especially also fiscal aspects – possibly have changed by now. Thus we recommend, before one does any property purchase, to get the current data on the real estate markets, tax- and other legal regulations and innovations, as far as these could be of importance to the objective and subjective success of the investment.