Turnaround of the real estate market

 

Overview

Current trends of the market
Ten important facts
The euro and the real estate market
Our most important tip
Attention: tax trap!
Bargain purchases
The income tax
Conclusion

Current trends of the market

In the past months people have been talking about a turnaround of the real estate market repeatedly. Different analyses of the market and real estate professionals confirm the clear increase of demand for office and commercial properties, especially in the inner cities where rentals have increased again notably.

On residential properties the trend that can be observed is that especially well equipped freehold flats in good locations of German metropolises are in high demand. On the other hand the demand for newly built private homes also increases; yet here mainly the situation of the land space is what matters.

Developed building land for affordable prices can only be gotten in clear distance to the areas of high population density; or in real rural areas where no concentrated economic power exists.

In any case it is worth inspecting the market precisely right now. Professional investors also don’t let themselves be stopped by the tax reform when doing so. By the way: we will summarize the most important fiscal changes in our next information bulletin; in this letter we merely already point out an important tax trap when making purchase decisions.

Ten important facts

Currently several trends can be observed on the real estate market in Germany which might be important for an investment decision:

  1. The demand for owner-used private homes has increased notably in the last twelve months
  2. Wealthy private customers are orienting themselves on the real estate market again more and more, whereby the income property on secure locations and with secure rents is being preferred
  3. International and institutional investors are concentrating on investing into real property again, knowing that asset values will play a vital role in future
  4. Tax advantages when purchasing real estate have taken a back seat as to being a factor of decision
  5. Property will remain a rare asset value; developing new building land is becoming more and more complicated and expensive
  6. Only a modern and energy-saving way of building has a future
  7. At the current interest rate it is still worthwhile to do a financing credit on 15 years, but at least ten years
  8. The new tax regulations are excluding terminatedly the decision to purchase a property only for tax-saving reasons
  9. The speculative period of ten years makes it indispensable to do every capital investment under the aspect of the long-term value creation
  10. The nuts and bolts of a decision to buy remains the location of the property

The euro and the real estate market

Based on experience the low interest rates are bringing the real estate market to live a little bit (even though one should be assuming the opposite; yet the past has shown again and again  that the rents and real estate prices only start going up when the interest rates do). By contrast, the course of the euro compared to the US dollar stands and drops, amongst other things, along with the various interest rates. If the interest rates in the USA are rather increasing – as right now – the euro goes down. If the interest rates in Europe generally go up again then the euro should also gain momentum as compared to the dollar; at least some are speculating this way. Yet others are relying on the fact that the recession in Europe is not resolved yet by far and thus they say that the low interest rates will remain for quite another while.

But the interesting factor in this is the psychological component: for instance, an equality of the euro and the dollar (i.e. 1 euro = 1 US dollar) is literally being evoked psychologically, as if this would be an exceptionally important “label”. As the Frankfurt newspaper cites a market watcher: “They want to see the one-to-one now.” (Newspaper from 9th July ’99) Additionally, experts also see the turnaround of the euro in the equality.

It is an open secret that the finance markets live at a considerable rate of speculations, emotion and even “gambling”. Bluntly: every day they take billions from one side and give it to the other – a game which has winners and losers on each side constantly.

The finance markets are what they are: an international playground of banks, institutional investors and wealthy private customers in which only the fast daily win matters, not the solid expansion of national economy.

But this much we know for sure: the euro will not recapture its original strength in the next five years. Because: every chain is but as strong as its weakest link. The budget deficits in the southern area of the EU, not measuring up to the budget discipline of Germany and other EU partners, will make the euro soft on a long term. Tremendous funds have already been crushed by the weakness of the euro.

Thus the downswing of the euro has a signal effect upon real estates: there is no trust into a common European currency. Insiders know that that they now need to invest their money into properties proof to decline in value. Thus people who know the market count on asset values – and real estate prices and rents start to go up again. Now is the time that an investor should consider to secure their funds and precisely invest into asset values.

OUR MOST IMPORTANT TIP:
Buy asset values now

Go back to overview

Attention: tax trap!

Due to the new “speculative period” for real estates of ten years, one can get upset if one has bought or built a property after 31st July 1995:

Mr. X has acquired a tax-saving property in one of the new federal states, in the end of 1995. It is a property that had to be newly modernized, old structure from the year 1928. The whole purchase costs including all added costs were 1,2 million DM. The garden- and property share was 200.000 DM and the old building structure share was also 200.000 DM. The cost of the modernization was 800.000 DM. From 1995 until 1999 Mr. X took advantage of the special depreciation of 50% of the modernization costs (400.000 DM) as well as 2% depreciation on the old building structure (20.000 DM).
So by the end of 1999 he has written off a total of 420.000 DM from the total purchasing costs of 1,2 million DM.

In the year 2000 he wants to resell the property for 900.000 DM, meaning with a loss of 300.000 DM.

Since the speculative period is also valid for properties which have been purchased before the new law has been passed in March 1999, it falls under this new regulation in regards to taxes.

Now you will say: Mr. X will have a loss of 300.000 DM and not get any capital from it. Wrong!

Because to the tax office the calculation looks like this:

…results in a surplus of 120.000 DM! And this needs to be paid tax on!

Rule:

All properties, no matter whether they are declining, linear or depreciated by the special depreciation, which have been bought or built after the 31st July 1995 are subject to the following: the depreciation drawn on always gets calculated on top of the sales revenue before the tax gain/loss is getting determined. The effective regulation prescribes:

“The win or loss from speculative trading is the is the difference from the sales price on one hand and the purchase- or building costs and the promotion costs on the other hand. The purchase or building costs reduce by the amounts of depreciation – increased depreciation and special depreciation – as far as they got deducted when calculating the revenues.”

By the way: gains from selling owner-used property is not subject to this tax, as long as the property has only been used by the all the time since it has been bought/built or has been used privately in the two past years before the resale, including the year of the sale itself.

Bargain purchases

The market holds some inexpensive opportunities to earn really well with bargains at the moment. For instance one can get properties (commercial as well as residential) with an annual net yield of 8% and more, provided one has the appropriate creditworthiness. In the case of financing conditions of e.g. 5,5% and an amortization of 1,5% one gets a surplus of 1%, which can easily be used to build up a safety cushion for vacancies or maintenances. Rent increases, finally, bring in a good yearly net profit.

And by the way, also here the nuts and bolts are the way of creating the financings. It is needless to say that you should avail yourself of the services of a professional agent if you are dealing with financings of a million euro or more.

The income tax

Did you know that the highest tax rate of 53% can be traced back to the year 1953? The income limit for the highest tax rate at that time was 110.000 DM for singles. That is equal to an amount of around 440.000 DM today! So the increase of the maximum income tax, amounting to only 120.000 DM in the past 46 years, did not keep up with inflation – correctly this highest rate should have been raised to 440.000 DM by now.

In clear language: the state, due to inflation, draws more tax income year after year by giving higher tax rates to lower income levels or bringing the tax rates close to the limits.

Also the new tax reform is only a cold comfort in exchange to this; even in a case of lessening the max. amount to 48,5% and the beginning tax rate to 19,9% starting from 2002, the tax-paying citizens will hardly get unburdened, and are certainly not getting a fair compensation. Since, additionally, both VAT and gasoline tax are going to increase even more in the coming years, we are ones more facing a giant shifting of the tax burden.

The current income tax system has to be reformed more!

Perhaps a better idea would be a model with which the income tax comes up to 28% max. for all income levels from 100.000 DM upwards, and 15% max. for all income levels below 100.000 euro. This would save the tax offices a lot of money which is spent only on handling the tax computations each year – money which could easily be done without in regards to the tax income.

In exchange it one could raise the VAT up to around 22%, whereby the so-called “ecological tax” should be thought over again and, perhaps, gotten rid of. This new VAT could be set for attaining a solid national budget (or until all national debts are paid back) and then be lessened again.

With this both citizen and state would get rid of a lot of grave sorrows: first one mentioned because the tax return would be simple and fast hereafter and latter one because he would be able to handle his indebted budget within the next years or decades. Of course it also provides that tremendous savings need to be deposited where the state has been living like a lord up to now. It is always easier to waste the money of someone else…

Like that the budget would be clearly defined and the requirements would simply be that the state would need to live with that, for good or for evil.

Special projects would need to be financed by public loans, the repayment of which mustn’t be taken from additional tax incomes.

Conclusion

The following factors speak in favour of purchasing real estate property now:

  1. increased demand for residential and commercial space in Germany
  2. value loss of the euro by around 15% since the beginning of the year
  3. low financing interest rates
  4. profitable yield bargains

 

Go back to overview

 

 

 

 

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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.