Overall view

Real estates, shares, interest...
What to do at the end of the year?

 

Exchange losses at Wall Street
Aids to decision
Key data to orienting oneself in the jungle
Forecasts
Argumentations
Top location
Top income properties
The right entry into the world of shares
Conclusion

 

Real estate, shares, interest…
What to do at the end of the year?

The market is upside down in some way. While the interest rates still remain on a low level and the real estate prices have mostly stabilized and are increasing again in the good locations after the ups and downs of the past years, shares have been dropped down almost steeply. It certainly was a “crash on rates”, citing a daily newspaper. Nevertheless one can say that the German share index has had a loss of around 30% within the past two months. Also the other international stock exchanges are not at their best. In the USA alone around 1.500 billion dollar have flown into “the gutters of Wall Street” in the past six weeks, due to exchange losses… that is about two and a half trillion DM! (Based on Frankfurt’s newspaper “FAZ” from 8th Oct. 98)

2.500.000.000.000 DM

The flop in six weeks

Just before the end of the year – meaning in the most important phase of decision of the year – a lot of investors and tax payers are wondering: should I still do something this year? And if yes, what exactly?

You are now in the most important
phase of decision of this year!

After all there are several possibilities and none of these is to be discarded from the outset:

Aids to decision

For fiscal reasons, meaning for top income tax rates, in this year the “special depreciation east”, available for the last time, is very interesting; it remains to be seen how attractive single property offers connected to this are (in this regard also compare our customer information no. 1/98).

Downright “yield hunters” are soonest getting their money worth when they invest their money in foreign funds; but they bear the currency risk connected to this (whereby the currently low dollar rate rather speaks in favour of such an engagement than against one).

If one is satisfied with a somewhat lower yield but wants to err on the side of caution he would still be well advised to acquire a rented out freehold flat or a profitable residential building in the old federal states.

Those who are already considering their tax advantages in 1999 and want to get some good bargains are possibly best served engaging into a new building project with completion in the coming year.

So what remains is entering into the world of shares – for whom this could be of advantage we want to decide further below.

In short, the market seems to hold something for every one – in fact it seems to have become unclear by the abundance of offers.

Key data to orienting oneself in the jungle

So let us bring some order into the jungle, because it is not that difficult at this point of time. Let us first have a look at which important key data we can take for orientation:

Altogether one can look into the near future carefully optimistic. Mind you: also our tips are not better than those from the numerous “experts” and augurs who all can do but one thing: forecast the future WITHOUT certainty; if one would be able to do otherwise he would do the right moves on the quiet and leave the spotlight again tomorrow or the day after as a millionaire or multimillionaire in just the same inconspicuous way…

Forecasts

But let us get back to the everyday life and next ask ourselves: what significance do the mentioned key data have? What conclusions can one draw from it?

 

FORECAST:

Careful optimism for the near future seems appropriate

 

Let us first take the development on the employment market. Even though the number of unemployed still lies above 10 percent, the slight change which can already be seen in connection to the change of government in Bonn give reason to assume that the trend will keep on bettering.

That means: more real earnings, more (careful) consumption, more demand for residential and living space, more demand for commercial and office space, gradually increasing turnover in the retail trade, gradually increasing rents in the large cities and, little by little, also increasing rents in smaller cities.

Additionally there is the (political) announcement that sponsorship for old buildings is to be regarded with more importance than new buildings – which again might lead to a shortage of living space and thus, to put it mildly, to increasing property value especially in the field of old buildings.

Even if we completely disregard the factor of “European monetary policy” and the introduction of the euro for a moment, we can still probably assume that

Now don’t you dare in what period of time all this will happen – it might be one year, it might also be two or three years; but certainly this scenario will not enter in overnight.

Argumentations

Simplified, we can conclude two things from this:

  1. Whoever is able to purchase properties now should do so
  2. Starting out with shares now is not wrong provided one follows the right strategy

TIP: Whoever is able to
purchase properties now should do so

 

An important point to mention is also the foreseeable cutback of tax advantages and benefits, especially for tax payers of the top range. Top income tax rates are planned to be (moderately) cut, yet at the same time the deduction possibilities that have existed up to now are supposed to be (thoroughly!) limited. To talk about this in detail at this point of time would be too early for sure; but what is worthy mentioning is the intention that tax losses are not supposed to be set off against income at any arbitrary amount. Possibly a maximum limit up to which a loss deduction is possible will be set here.

So what can one do when one is “bothered” by the problem of a tax rate of over 35%?

Aside from a solid real estate funds and several few recommendable participations in ship ownerships there remains the special depreciation for east – whereby here one should solely stick to vendors and locations with which one will still won’t need to worry about anything in five or ten years – meaning the quality needs to be accordingly. We do not want to give definite recommendations at this point but simply point out that such well tried and reliable market participants do exist.

Especially the special depreciation for old buildings remains attractive with its possibility of immediate write-off up to 40% of the refurbishment costs and allocating the remaining 60% of the refurbishment costs to the remaining time period of ten years total. In plain language this means: those who still purchase this year (un-refurbished residential space in the new federal states) can attain a large write-off in a time period of ten years.

Highest tax advantages only until 31st December 1998: un-refurbished residential space in the new federal states

So for all those whose tax rate is at the top meaning 40, 50 or more per cent this is reason enough to handle soon – perhaps even without using one’s own funds – because after the 31st December 1998 it is too late.

But how about all those who either do not fall into this category of taxes or who have a hard time deciding for an investment in the new federal states for some other reasons? Also here we can enunciate several very definite recommendations:

Top location

The best location for value-guaranteed property investments is Rhine-Main, especially Frankfurt am Main – called “Bankfurt City” by a few. Within Frankfurt the most sought-after residential areas are: Bockenheim, Bornheim, Roedelheim, Sachsenhausen, Nordend and Westend. Of course also within these districts one has to see where one buys. And of course also in other districts there are interesting and attractive properties – we just mentioned those locations here which are most sought-after at the moment.

 

TIP: Frankfurt am Main;

Top location with sought-after places
– but often low yield

 

Frankfurt however is not a yield location in regards to residential properties (and currently certainly not in regards to commercial properties either). So here those find investment possibilities who are settled in a high level of progression and thus can compensate for the (in relation to the rent) relatively high sales price with the tax; or those who acquire properties based on wholly different criteria.

Top income properties

Investors who rather pay attention to the property yield and do not only want to buy in the German top locations (with according entry level prices) but want to buy for low and lowest square meter prices will still orient themselves on Germany’s yield locations in the area of Rhine-Ruhr and the further vicinity in North-Rhine Westphalia. The motto of the refurbished old building here often is “solid rents along with low sales prices” – in good inner city locations.

 

TIP: buy income properties
in the area of Rhine-Ruhr and
North-Rhine
Westphalia!

 

Downright yield hunters should be looking out for a good USA real estate funds; we know about offers with yields of definite 8 and 9 per cent.

But also the new building remains worth mentioning: due to the higher declining deduction one here has an interesting possibility to save taxes and (secret tip!) in some places one even has these possibilities with entry level prices comparable with those of old buildings…

 

TIP: attractive investments into new buildings
bring security, tax advantages … and yield!

 

So what mainly remains is the question how one can take advantage of the current low level of the interest rates and the situation on the shares market? Very simple: absolutely take advantage of the low interest rates and set it on a long term. For owner occupants it is recommendable in any case to set a fixed-interest-period over ten or even up to twenty years; also capital investors are recommended to do a ten-year fixed-interest-period.

The right entry into the world of shares

And how about entering into the world of shares? At the moment there is no doubt that one is best off with an international shares funds. On one hand one banks on the experience and the know-how of the funds experts who know the worldwide shares market and know how to weight it accordingly; on the other hand one uses the so-called cost-average-effect which leads to a sort of “optimum average price” for years, for which one acquires the shares. In plain language this means: those who invest around 200 up to 300 DM into a shares funds per month actually barely need to worry about fluctuations at the shares market.

 

TIP: the ideal point of time
for entering into the shares market is – now!

 

After ten or twenty years he definitely has made “a fine margin”, which often consisted of, in the past decades, a yield of around 10 per cent or more. And this after all is a considerable yield – after half a year tax-free, mind you, as far as stock price gains (not dividends) are concerned. The costs which are to be paid ones upon completion (asset-based fees) are usually getting compensated by the yield during the first years.

By the way the best international equity fund according to the issue Finanztest (issued by “Stiftung Warentest”), issue 10/98, is: Metzler Wachstum International.

Conclusion

This combination – a financed property, parallel to this building up one’s capital by an equity fund – should be unbeatable in the coming years if one brings to bear the aspects yield, security, saving of taxes and rise in value.

 

 

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