by Peter Talkenberger
One of the most burning questions we hear from overseas investors currently is:
Did the US and UK / Ireland market slump effect the German property market?
The answer is Yes and No. Yes, because many investors have withdrawn from incurring new investments, partly due to anxiousness about the future developments in their own countries, partly because financing in their home countries has come more or less to a halt and that means, the cash needed for deposit is not available that easily anymore. This concerns both the single person investor as well as big companies who invested up to tens or hundreds of millions of Euro in the German property market in 2004-2007.
The consequences sound dramatic at first look: Foreign investment activities in Germany have dropped by about 50% in the first half of 2008. We did expect that the big rush would be over at some time but did not foresee the financial crisis and its subsequent effects on the anglosaxon markets – no one did in fact. But does that mean now that German property has dropped in value, like in the UK or Ireland or other countries? The clear answer is: No. Will it drop in value? Per all data at hand and evaluated as best as we can, the general answer is no as well. Beause the high interest of foreign investors had an interesting side effect: The private German investor has appeared back on the market. You may remember that Germany was well known for the low interest by private investors in the rental property market between 1999 and 2004 which in consequence lead to the low-price situation. Reasons for this were mainly found in the change of tax laws.
So things have changed now to the better even if tax laws haven't. Lets take the most prominent City where foreign investors have bought for billions of Euro since 2004, which is Berlin. Prices for properties in Berlin have been down below the bottom line since the late 90ies and only started to rise noticeably in late 2006 and 2007. But not because the economic circumstances in Berlin had improved (the contrary was the case), or because the rental market was good for high rent increases (the contrary still is the case…), or because all of a sudden demand for people moving to Berlin doubled….well, the contrary was not the case but yet, the demand was low. After the big investors the smaller ones followed suit in about 2006 and 2007 and it was only when more and more individual "single" buyers realized that Berlin is a good field for investment when the market prices started to rise in 2007 - and that kept going on into 2008.
At the same time a new trend was coming up in many of the large German cities: High class apartments in high class locations with top notch quality and individual character were sought-after by a clientel with good money in the pockets, very often cash payers, from all over the world. Living at the water, living at prominent locations in the City Center (the middle part of Berlin-Mitte or famous Prenzlauer Berg, later also in Kreuzberg) grew in popularity and demand, and so did the prices.
And what about condominiums, about whole blocks or classical style buildings with 12-20 apartments in them? Well they increased in price from a factor 9x annual rent to a factor 14x within three years only, and that with no substantial rental increase potential and rising prices for refurbishment work.
Indeed, there has been quite a hype about Berlin in 2006 and 2007, but even with the prices increasing Berlin still remains at a “subcontinental” level if you compare to other metropolitan cities, and the trendy charme of an apartment in Berlins “hip” locations has not lessened. To this add the fact that infrastructure is continually improving, that unemployment has gone down in Berlin quite remarkably since 2007, so there is no reason to worry about dropping prices.
Another city has been almost ignored by the larger investors, but part of that was due to the fact that the city refused to engage in any wholesale deals with community owned property. Instead, quality of refurbishment and location was the watchword, and still is. We are talking about the City of the Euro, Frankfurt am Main, which is the smalles big business town in the world. In a city of 680,000 population you have about half a million working people, but not all live in Frankfurt city of course.
Demand on property for both renting and buying in Frankfurt has increased dramatically in the last three years, and so did prices. Factors of blocks and multiple apartment buildings increased between 2005 and 2008 from 10x to 15x on average, in Westend from 14 to over 20x. Which means that blocks there are being sold with less than 5% yield! Other areas like Nordend and Bornheim as well as some areas in Sachsenhausen had a similar development with factors going from 11 up to about 16x annual rent. Upcoming areas like Ostend - where the European Central Bank builds their new high rise tower and traditional Oberrad are coming up now.
Most sought-after were large apartments, with 3-4 bedrooms and sizes over 120 sqm, and those were not purchased for renting out, but to be owner-used. So the trend has been to redevelope older buildings back to the initial one apartment per floor design, with sizes between 130 and 250 sqm depending on the initial size of the building. Or flats over two levels, so-called maisonettes, with sizes between 250 and 400 sqm. Prices here went up to 2 Million Euro in best Westend locations.
On the other side, if you look at the rental demand in Frankfurt, you will find that there is a very high request for one bedroom apartments in the price range between 500 and 750 EUR cold rent, a very high demand for two bedroom apartments in the price range between 700 and 1100 EUR per month, and a high demand for three bed apartments in the price range between 1000 and 1500 EUR per month.
Demand for houses for rent has decreased over the last 12 months which brought down the rents by about 10%. Reason may be that more houses are being sought-after for purchase, especially in the newly built sector, and that houses are rare and expensive anyhow inside Frankfurt City, and more sought-after outside of town in the suburbs where apartment rental is not going so hot.
Investors who bought 1 and 2 BR apartments in Frankfurt in the recent years practically never had any problems to get them rented out especially when they were unfurnished and nicely renovated. On the other side, ups and downs in the furnished market are nothing unusual and give no reason to worry; the reward is a higher yield in general in the furnished sector.
One thing you can take for granted: The rental market inside Frankfurt always goes fast and in its trend gets better and better on a longer term. That is also a result of the study of large institutions – rents in Frankfurt and other large cities are up trending almost independently of the economical situation because there is shortage of rental property offered against a high demand.
Financing as an issue is not really a problem in Germany, the arrangements have not worsened to what they have been in the years 2005-2007. However, we did experience some drawbacks from a few banks, but the main ones we are working with want to do business as usual.
To sum it up, there is enough fundamental data supporting investments in German property, especially now, and the clever investor should look for the smartest locations based on experience and advise of local property consultants.
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