Teutonic tonic
If you’re looking for a long-term low-risk investment, think German residential, says Andre Cooray
Property prices in Berlin are now as much as ten times cheaper than they are in London. In addition, Munich and Hamburg are the top two investment locations in Europe
The words exciting and German real estate are by no means synonymous, but seasoned investors delight in the market’s good-old-fashioned reliability. Stable, albeit lower, long-term returns are just what many investors, pushed to the financial edge by the recent downturn, are seeking. And in a country where only 40 percent of the population own homes, those in the know are drawn to the possibility of securing a guaranteed rental income.
“As the German property market has come through the last 24 months better than many others and the economy is recovering very quickly compared to other European economies, foreign investors are now returning to Germany,” says Guy Weston, senior associate of residential research at King Sturge. Its healthy reserves and robust banking sector, coupled with lower unemployment are all signs that Germany has survived the recent economic meltdown in tact.
According to Hypoport, the Berlin-based one-stop financial services provider, new homes have consistently out-performed existing, second-hand stock in terms of annual price change in the past three years. “By July 2009, new homes had seen prices fall by 2 percent year-on-year, compared to an 8 percent fall for existing homes and a 5 percent decline for apartments,” Weston says.
The Hedonic House Price Index published in May this year by Hypoport, showed that the average cost of apartments in Germany’s secondary market was €130,441 (HK$1.43 million); and the average home was priced at €167,678. In the upmarket suburb of Schoneberg in Berlin, a two-bedroom apartment costs €187,000 on average. In contrast, in the cheaper area of Kreuzberg in central Berlin, a 409-square-foot, one-bedroom flat with balcony is priced at €31,424. In central Munich, you can snap up a 1,399 square-foot apartment with three-bedrooms for around €130,000.
According to Weston, a new two-bedroom apartment in Berlin comes in at about €236.9 per square foot, and a three-bedroom unit costs €197.4 per square foot, both with estimated yields of 5 percent. Munich on the other hand, has the highest market price for new apartments. A two-bedroom apartment in this city costs €348.5 per square foot on average, and a three-bedroom approximately €290.3 per square foot, with higher returns of 5.5 percent.
It’s worth noting that 60 percent of Germans opt to rent rather than own their own property, and renting is the norm among the younger generation. “Home ownership despite being low in European terms, provides a deep tenant base,” says Weston. That said, he expects an increase in demand for property ownership over the next 18 to 24 months, and advises investors to take advantage of the current low market prices.
Property prices in Berlin are now as much as ten times cheaper than they are in London. In addition, Munich and Hamburg are the top two investment locations in Europe in accountancy firm PricewaterhouseCoopers’ 2009 survey of real estate executives and fund managers, and four German cities were in Europe’s top 10.
Experts predict the cost of new homes will increase due to growing construction costs resulting from a rise in wages and commodities. Studies have shown that Germans prefer to buy homes much later in life, therefore, as the population ages the demand for property ownership will increase, particularly in the larger towns – pushing up market prices in the future. Single-person households are predicted to increase also, adding to the demand.
Potential investors are advised to focus on popular areas like former Olympic cities, Berlin and Munich, as well as up-and-coming parts of southwest Germany with high population numbers. “Western Germany is projected to see household numbers rise by 7 percent in the 15 years to 2023, compared to 2 percent in the East, according to Empirica. Berlin, Oldenburg and Bonn have the strongest projected increases. Over this period, demand is expected to be more intense for detached and semi-detached stock,” says Weston.
“Supply-side constraints are expected to be most intense in Berlin, followed by the regions of Uckermark-Barnim and Oderland-Spreewald,” Weston adds. “In terms of apartment stock, vacancy rates by state saw Hamburg, Bavaria and Baden-Wuerttemberg produce the strongest results in 2008.”
Investors are advised to stick to high-end residential buildings in prime locations, which offer management services and the most sustainable yield profile. “Medium to large-scale properties with a need for refurbishment offer possibilities for investors who are focused on active asset management,” Weston says.
Homebuyers in Germany mostly borrow at a fixed rate, which helps keep the market relatively stable: when the economy is healthy, wages and rents are permitted to increase; and in times of hardship they are frozen. This means that rents rarely increase more than 20 percent over a three-year period. Investors should also keep in mind that it can take 10 to 20 years to make some capital gains. Therefore, a long-term strategy is paramount, something that could well result in a secure, steadily growing rental income.
For those with less time on their hands, purchasing a holiday home could be a good option. Market watchers suggest that foreign investors who purchase holiday homes in Germany can get more lucrative returns, because this type of property is exempt from the normal rent restrictions imposed by the government, allowing higher rental yields while waiting for capital gains.
“As in the past, the German market will be very stable in the future. In the last cycles, the market did not see exaggerations across a broad front leading to bubbles regarding the pricing. As the market is very solid in its structure, we expect a similar development for the future with adequate returns at reasonable risk,” concludes Weston.
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