Germany - a market re-emerging
A brief glance at the property section of any main paper or specialist magazine and you will easily spot the most popular destinations of british investment money. The traditional markets of Spain, France or Florida are competing with the new favourite, Central and Eastern Europe, and destinations in the Far and Middle East, Caribbean, South America or North Africa appeal to the more adventurous property buyer.
And yet there is one market that despite its position in the centre of Europe seems to have slipped through the property investor's radar. A market that offers opportunities not available anywhere else in Europe (and possibly the world) - Germany.
Are you mad?! - I hear you saying. Hasn't german property been in decline and the country's economy sluggish? Yes, however, Germany is the world's 3rd largest economy, and I believe it will turn around...sooner or later. And property prices are - after more than a decade of stagnation and in fact decline - at the very bottom.
Now, I am not suggesting investing in Germany for capital growth. Price growth is very difficult to predict in any market, but nearly impossible in Germany. (Although, I am sure the time will come when german property comes back to more realistic - read higher - price levels.) The truly amazing thing about investing in Germany are the rental yields - some of the highest in the world. Depending on area and property, 10% net yields are achievable.
The reason is simple. For one, Germans have the lowest property ownership rates in the developed world (under 45%, and as low as 14% in Berlin). Over the last 10+ years, with poor economic performance, high unemployment, and fall of property values, most Germans have seen an advantage in renting rather than buying...and that in a country where renting has already had a strong tradition and tenants often stay in their property for 10-20 years, or even for life. Of course the currently extremely low property prices also contribute to the high rental yields german market offers.
Now, it may all sound great...but things aren't that easy. As ever, you need to know the market and do your due dilligence before jumping into such a particular market as Germany. The country may offer some of the best property opportunities around, but get it wrong and you can lose everything.
You see, there is no such thing as a unified german property market. Some areas have enjoyed good economic performance, low unemployment, and consequently higher demand for property - cities like Munich and Stuttgart are a good example. Such locations are not likely to suffer a drop in property prices; in fact, prices should be increasing slowly as Germans from other areas keep migrating to the economically stronger regions. On the other hand, much of the former East Germany suffers from massive unemployment, and the overall lack of perspective drives many people to move out - these areas are already seeing a de-population, and the situation is to get worse over next years. And then there are very particular markets like Berlin.
Berlin, despite being the german capital, offers some of the lowest property prices in the country (60-70% cheaper than other west german cities). After a lot of enthusiasm and excitement post re-unification (as well as generous tax benefits from the government) an oversupply was created in Berlin. However, the expected arrival of large number of companies never materialized, and once tax subsidies were abolished, prices crashed. Today, we are seeing first signs of a market picking up, prices are slowly starting to strenghten, and the overall mood is a more optimistic one.
Foreign investors are increasingly putting their money into german property, be it large real estate funds purchasing thousands of apartments, or individual investors and smaller companies (Israeli, Irish, Dutch, British, US...the usual suspects) buying high-yielding apartment blocks. Perhaps more surprisingly, Germans are also starting to realize the opportunities, and single (usually tenanted) apartments are proving increasingly popular with small local investors. And while net yields of single flats are rarely higher than 4-5% p.a. (as opposed to 7-12% in case of apartment blocks), they still look more than reasonable - compared to the 1-2% interest rates german banks pay on savings.
So, with 10% net yields achievable on apartment blocks and mortgage rates of 4-5% p.a., it looks like a no-brainer, correct? Well...not unless you know what you're doing. For one, the german market is heavily regulated... particularly the rental side. You can't get a tenant out of a property (except if they don't pay the due rent), so you need to be aware that your tenants will stay as long as they wish - in many cases this is 10-20 years, and even longer. Which is not necessarily a bad thing, especially considered that tenants in Germany maintain the property, furnish it (even buy their own kitchens in some cases) and take care of most everything. They also pay all service charges, property tax, utilities; while you get the net rent.
But the rules don't stop there. You are not allowed to raise rents by more than 20% in 3 years, and rental values too are regulated. As a landlord you shall not demand rents higher than the area's rental limits (Mietspiegel) - the penalties are severe, so you may want to think twice before breaching it. The rental values for a property depend on many factors (area, standard, whether the property has bathroom and WC, modern heating, etc - you would be surprised how many older flats in Berlin do not have these amenities!). Typically, Berlin rents (net) range between 1.5-3 euro/m2 per month for very simple/low standard flats, 3-6 euro/m2 for better quality, and 6-8 euro/m2 top.
And while rents are extremely cheap for a major European capital (where else could you live in a nice, renovated 2 bed apartment in a good central area for less than 400 euro a month?), the purchase prices are very low too. Today, an "Altbau" (late 19th/early 20th century) block of (10-100) flats in a medium to good area of Berlin can be purchased at 400-600 euro/m2 - unrefurbished. Add the cost of renovation (200-700 euro/m2 depending on extent and standard) and you will have spent less than 1,000-1,5000 euro/m2 for a beautiful and fully renovated building. In top areas the cost is likely to be around 2,000+ euro/m2 for a renovated block, while in not so nice locations buildings (in need of renovation) can be had at just over 200 euro/m2.
So, the german market offers some exciting opportunities...but, where should one start as a first time investor in Germany? Well, there are a few strategies (for residential investment), each offering benefits as well as disadvantages.
1. Buying vacant property for renovation and rent/sale
By buying apartment blocks in need of full renovation and doing them up the best m2 price can usually be obtained. In many cases extention or roof conversion can also be pursued (subject to planning). After renovation the units can be rented out or, if appropriate, divided into separate titles and sold.
A word of caution - if this is your strategy, you may want to look for vacant buildings: renovating apartments while tenanted gives the tenants the right to stop paying rent until the disturbance comes to end. While buying for renovation is one of the best strategies in Berlin, it will require a larger investment, as german banks are generally unwilling to finance purchase of vacant blocks, neither lend on the renovation work itself. Once your property is refurbished and let, local lenders will typically offer up to 70%LTV mortgages, at 4.5-5% interest (and paying back 1.5-3% principal) - provided you are able to prove sufficient (personal) income.
2. Buying tenanted property
Most apartment blocks in Berlin are sold tenanted or partially tenanted. This offers the advantage of easier access to financing, but also means you will not be able to raise rents more than permitted. For this reason the best way tends to be waiting until an apartment becomes vacant, to then renovate (the vacant units) and re-rent at a higher rent (or sell where appropriate; before selling a unit all apartments must be divided into separate titles).
Other possible investments include purchasing land plots (at currently very low rates even in prime areas) for later sale or development. However, the current market does not offer potential for new development (except in very particular cases) since the cost of building is higher than the prices of the final product at present. Buying land should therefore be viewed as a long term hold strategy.
This is one of the reasons you will not see many cranes around Berlin...extremely few new blocks are being constructed (and these are either office buildings in top areas or a few small apartment blocks in the most exclusive parts of the city, where the final price allows for new construction cost). Berlin is also one of the few markets in Europe where investing in new built flats is a sure way to lose money. New builds tend to lose value after completion, as well as being far less popular with most Germans than classic period turn of century flats (Altbau). Rental yields on new property are also extremely low, as opposed to classic (renovated or unrenovated) properties.
And, finally, you may be well advised to buy in a good area, in demand with tenants as well as buyers. The Berlin market is still too risky to invest in anything than a solid area. While net yields of up to 15% can be achieved in less popular locations, further price drops in such areas are more than likely.
Berlin certainly isn't for everyone, but for those looking for good quality, high yielding income properties at rock bottom prices there aren't many markets offering the advantages Berlin does. Just don't expect any capital growth...it will be an added benefit when it comes (and it will...whether in 2 years or 20...for the right property in the right area). After all, this is the capital of Europe's largest and world's 3rd largest economy.
And yet there is one market that despite its position in the centre of Europe seems to have slipped through the property investor's radar. A market that offers opportunities not available anywhere else in Europe (and possibly the world) - Germany.
Are you mad?! - I hear you saying. Hasn't german property been in decline and the country's economy sluggish? Yes, however, Germany is the world's 3rd largest economy, and I believe it will turn around...sooner or later. And property prices are - after more than a decade of stagnation and in fact decline - at the very bottom.
Now, I am not suggesting investing in Germany for capital growth. Price growth is very difficult to predict in any market, but nearly impossible in Germany. (Although, I am sure the time will come when german property comes back to more realistic - read higher - price levels.) The truly amazing thing about investing in Germany are the rental yields - some of the highest in the world. Depending on area and property, 10% net yields are achievable.
The reason is simple. For one, Germans have the lowest property ownership rates in the developed world (under 45%, and as low as 14% in Berlin). Over the last 10+ years, with poor economic performance, high unemployment, and fall of property values, most Germans have seen an advantage in renting rather than buying...and that in a country where renting has already had a strong tradition and tenants often stay in their property for 10-20 years, or even for life. Of course the currently extremely low property prices also contribute to the high rental yields german market offers.
Now, it may all sound great...but things aren't that easy. As ever, you need to know the market and do your due dilligence before jumping into such a particular market as Germany. The country may offer some of the best property opportunities around, but get it wrong and you can lose everything.
You see, there is no such thing as a unified german property market. Some areas have enjoyed good economic performance, low unemployment, and consequently higher demand for property - cities like Munich and Stuttgart are a good example. Such locations are not likely to suffer a drop in property prices; in fact, prices should be increasing slowly as Germans from other areas keep migrating to the economically stronger regions. On the other hand, much of the former East Germany suffers from massive unemployment, and the overall lack of perspective drives many people to move out - these areas are already seeing a de-population, and the situation is to get worse over next years. And then there are very particular markets like Berlin.
Berlin, despite being the german capital, offers some of the lowest property prices in the country (60-70% cheaper than other west german cities). After a lot of enthusiasm and excitement post re-unification (as well as generous tax benefits from the government) an oversupply was created in Berlin. However, the expected arrival of large number of companies never materialized, and once tax subsidies were abolished, prices crashed. Today, we are seeing first signs of a market picking up, prices are slowly starting to strenghten, and the overall mood is a more optimistic one.
Foreign investors are increasingly putting their money into german property, be it large real estate funds purchasing thousands of apartments, or individual investors and smaller companies (Israeli, Irish, Dutch, British, US...the usual suspects) buying high-yielding apartment blocks. Perhaps more surprisingly, Germans are also starting to realize the opportunities, and single (usually tenanted) apartments are proving increasingly popular with small local investors. And while net yields of single flats are rarely higher than 4-5% p.a. (as opposed to 7-12% in case of apartment blocks), they still look more than reasonable - compared to the 1-2% interest rates german banks pay on savings.
So, with 10% net yields achievable on apartment blocks and mortgage rates of 4-5% p.a., it looks like a no-brainer, correct? Well...not unless you know what you're doing. For one, the german market is heavily regulated... particularly the rental side. You can't get a tenant out of a property (except if they don't pay the due rent), so you need to be aware that your tenants will stay as long as they wish - in many cases this is 10-20 years, and even longer. Which is not necessarily a bad thing, especially considered that tenants in Germany maintain the property, furnish it (even buy their own kitchens in some cases) and take care of most everything. They also pay all service charges, property tax, utilities; while you get the net rent.
But the rules don't stop there. You are not allowed to raise rents by more than 20% in 3 years, and rental values too are regulated. As a landlord you shall not demand rents higher than the area's rental limits (Mietspiegel) - the penalties are severe, so you may want to think twice before breaching it. The rental values for a property depend on many factors (area, standard, whether the property has bathroom and WC, modern heating, etc - you would be surprised how many older flats in Berlin do not have these amenities!). Typically, Berlin rents (net) range between 1.5-3 euro/m2 per month for very simple/low standard flats, 3-6 euro/m2 for better quality, and 6-8 euro/m2 top.
And while rents are extremely cheap for a major European capital (where else could you live in a nice, renovated 2 bed apartment in a good central area for less than 400 euro a month?), the purchase prices are very low too. Today, an "Altbau" (late 19th/early 20th century) block of (10-100) flats in a medium to good area of Berlin can be purchased at 400-600 euro/m2 - unrefurbished. Add the cost of renovation (200-700 euro/m2 depending on extent and standard) and you will have spent less than 1,000-1,5000 euro/m2 for a beautiful and fully renovated building. In top areas the cost is likely to be around 2,000+ euro/m2 for a renovated block, while in not so nice locations buildings (in need of renovation) can be had at just over 200 euro/m2.
So, the german market offers some exciting opportunities...but, where should one start as a first time investor in Germany? Well, there are a few strategies (for residential investment), each offering benefits as well as disadvantages.
1. Buying vacant property for renovation and rent/sale
By buying apartment blocks in need of full renovation and doing them up the best m2 price can usually be obtained. In many cases extention or roof conversion can also be pursued (subject to planning). After renovation the units can be rented out or, if appropriate, divided into separate titles and sold.
A word of caution - if this is your strategy, you may want to look for vacant buildings: renovating apartments while tenanted gives the tenants the right to stop paying rent until the disturbance comes to end. While buying for renovation is one of the best strategies in Berlin, it will require a larger investment, as german banks are generally unwilling to finance purchase of vacant blocks, neither lend on the renovation work itself. Once your property is refurbished and let, local lenders will typically offer up to 70%LTV mortgages, at 4.5-5% interest (and paying back 1.5-3% principal) - provided you are able to prove sufficient (personal) income.
2. Buying tenanted property
Most apartment blocks in Berlin are sold tenanted or partially tenanted. This offers the advantage of easier access to financing, but also means you will not be able to raise rents more than permitted. For this reason the best way tends to be waiting until an apartment becomes vacant, to then renovate (the vacant units) and re-rent at a higher rent (or sell where appropriate; before selling a unit all apartments must be divided into separate titles).
Other possible investments include purchasing land plots (at currently very low rates even in prime areas) for later sale or development. However, the current market does not offer potential for new development (except in very particular cases) since the cost of building is higher than the prices of the final product at present. Buying land should therefore be viewed as a long term hold strategy.
This is one of the reasons you will not see many cranes around Berlin...extremely few new blocks are being constructed (and these are either office buildings in top areas or a few small apartment blocks in the most exclusive parts of the city, where the final price allows for new construction cost). Berlin is also one of the few markets in Europe where investing in new built flats is a sure way to lose money. New builds tend to lose value after completion, as well as being far less popular with most Germans than classic period turn of century flats (Altbau). Rental yields on new property are also extremely low, as opposed to classic (renovated or unrenovated) properties.
And, finally, you may be well advised to buy in a good area, in demand with tenants as well as buyers. The Berlin market is still too risky to invest in anything than a solid area. While net yields of up to 15% can be achieved in less popular locations, further price drops in such areas are more than likely.
Berlin certainly isn't for everyone, but for those looking for good quality, high yielding income properties at rock bottom prices there aren't many markets offering the advantages Berlin does. Just don't expect any capital growth...it will be an added benefit when it comes (and it will...whether in 2 years or 20...for the right property in the right area). After all, this is the capital of Europe's largest and world's 3rd largest economy.
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