Locations and the development of
the real estate market in 2002

 

Many factors play a role when acquiring a real property. One is the subjective factor: more properties are getting purchased based “on instinct” than with any expert knowledge about the real estate market or appraisal. That is the nature of man: the emotional component plays the major role in many decision processes, at least within these realms. An important decision such as choosing one’s marital partner are usually made based on ones emotion – and usually these are right. Also when buying a car; it is fainéant to discuss about how many people buy their car without even opening the cowling, or even just because of the design or the look.

It is often similar when it comes to properties. For instance, it used to be common for years to buy the property with the purpose of tax deductions, especially when there were factors like extremely high deductions, combined with 10-years tenancy guarantees and enthusiastic promises of capital gain. The emotions caused quite a stir and the common sense often got lost on the way – save taxes by any means.

One learns by the experiences one makes, and unfortunately the experience has been a bitter one in many cases. As we know by now, the economic development and the legislator have made some extrapolations a maculation. The extension of the speculative period to ten years – (the retroactive effect of which is still an argument at Germany’s highest courts) – as well as the economic downward development in our country has at once disabused us. 

Many investors have become careful thereafter and have invested their fees into the equity market instead – and have lost there as well.

Only those that were abiding by some very old guidelines, often also emotionally and based on instinct, were able to laugh up their sleeves: not listen to any boastful promises but only invest the money where it is most save for decades and centuries. Part of this is undoubtedly residential properties and houses in good locations.

In this respect, a new debate always keeps arousing: what are good locations? Where should one invest and where should one rather not.

The modern critics for a good property location can be listed easily:

Based on all these positive characteristics one could certainly compile a little checklist for choosing the right property location, but that is not even necessary. Reading the above list you certainly recognized that there are only a few locations in Germany which fulfil all of these criteria. And we are still lucky: in other countries the entire economic and cultural life is focussing on one city – usually the capital, while in our country the regions Hamburg, Munich, Duesseldorf, Frankfurt Main, Stuttgart, Berlin, Leipzig and Hannover can be listed.

Yet purchasing a property will be determined by other factors than just the location. On one hand there is the very crucial question: do I want to use the property myself or do I want to acquire it as a valuable investment and rent it out? Latter one should factually only be done in locations which undoubtedly fulfil the above criteria more or less completely. For only there the long-term property value retention is certain. But someone who wants to use the property himself, and perhaps resell it in a later point of life, is bound to different factors which influence his decision to purchase: one on hand he will want to purchase at the same location where he is earning his money – or at least not too far from it. The tolerance of accepting the distance to one’s job is also depending on how high the profit achieved by this will be – in plain language: someone working in Frankfurt and earning a somewhat better annual salary than in Giessen, yet only finds a house for 250.000 Euro in or around Giessen rather drives to work for an hour each day and another one back than spending 250.000 Euro for the saved travel time and the proximity to the city. In other words, the tolerance of the distance to the home is markedly extended by workforces concentrating on a specific location, combined with the income level. This again is affecting the real estate prices in the region, particularly if the hinterlands are getting equipped with good public transports. Usually the price increase ends abruptly where traffic by train is getting complicated and traffic by car is too longsome. Frankfurt, Munich and Stuttgart are good examples for price increases in the surrounding communities within up to 70 kilometres distance. This radius can be expected to increase again gradually in future. As long as the travelling distance to and from the job does not exceed one hour much, the distance is tolerable.

There is yet another trend: the single household. We are observing this trend since more than a decade already. Especially in cities with a high focus on jobs and particularly young workforces the decision for one’s own career is often superior to the wish for a family and children. The single or the couple without children living “in an alliance similar to marriage” are looking for homes close to their jobs – meaning about 10 minutes by bike, 20 minutes walking distance, 10 minutes public transport. This type of buyer is also willing to pay a high price for being able to use the cultural offers and the life quality of his residential area. Additionally you now have a range of buyers here which does not need to wait until the age of forty or fifty so they can afford their own home – as it used to be thirty years ago. Since it has been almost 60 years without war in this country and a lot of assets have been built that are getting handed down to the next generation, it is also possible for a lot of young people today to afford an apartment inside the major city, which conforms to their emotional and rational needs – whereby the price is no obstacle.

Another factor is at work here; we already hinted at it. Financing a property has become more difficult. The times of 130%-financings are over. To the contrary: the rate of own funds is being set higher and higher since the taxable income alone is no sufficient security for the banks anymore. The supervisions inside of the bank have become stricter. The controllers are letting heads get chopped off if fiddling occurs. Financially strong clients are what is wanted today as buyers. If someone wants to build his own home he should be able to pay 25-30 % himself, whereby today the internal labour, having been used as the sole capital in past, does not play such a significant role in financing anymore. As a result, however, there are also a lot of people “factored out” from acquiring real property, for they do not fulfil the criteria of the financing institutions. This again means: the demand for rentable space stays at a high level. We add to this the regressive building market and then we can easily conclude: the rents in the large cities and their hinterlands will also be stable hereafter or will increase. (The only exception to this is the furnished apartment getting rented out for a certain time period and is depending on the economic situation much more than the usual apartment or living space, for such apartments often get rented by companies for a time period.)

Altogether one can say: the market is moving. The major cities are gaining importance also for international investors. An economic slump has never affected the real estate prices in the economically important metropolises very much ever before. The demand for living space is almost unbrokenly high there. The trend is going more and more to the property financed by ones own funds. The weakening building situation leads to further shortage of living space. Whoever wants to invest should do that now – namely, invest in long-term profitable residential properties which are up to modern living standards. In doing so, one should not neglect, when calculating one’s yield, the maintenance of the property and should do some considerations about taxes.

 

 

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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.