Investing for Yield and Quality – The Case for the City of Chemnitz

In today’s property market, an increasing amount of investors seek a safe a reliable home for their money, beating the cash return offered by banks or other asset classes. A number of markets around the world offer high returns, sometimes up to 10% net yield and occasionally beyond. But the real skill is finding markets where this yield is sustainable, and supported by a sound economic picture. One good indicator of this sustainability of yield is when local and national banks are prepared to share the risk with the investor in lending to higher levels of finance. In this paper, we will look at one such market in Germany, the city of Chemnitz in Saxony where 10% net yields backed by 80% loan to value finance is possible for international investors. This is a rare combination, especially at today’s lower rates of finance, meaning real and sustained returns are possible.

Background to City

Chemnitz is the fourth largest city in the former east of Germany, behind Leipzig, Dresden and Halle and number around 240.000 in terms of inhabitants. It has a predominantly industrial past, and is still a leading business location with many companies such as Siemens and Volkswagen, who have settled here. In recent years, Chemnitz has become somewhat of a centre of innovation in East Germany, with employers taking full advantage of its proximity to eastern states of Europe for cross border trade in products and services.

Economic Factors

Whilst facing issues with the re-unification of the country, Chemnitz’s industrial past has served it well in creating an increasingly dynamic economy. The GDP growth outstrips most of the East of Germany, with a per capita now at 46,000 Euro [compared to 26.000 Euro in Berlin for example]. This stands at 76% of the level of Germany as a whole and is showing a rapid increase to nearer parity with the rest of the country as the export-driven nation moves on. Companies in town include:

Purchasing power for inhabitants, at just under 17.000 Eur per annum is only narrowly behind Dresden in the whole of the East of the country. This relative wealth in the city is at odds somewhat to the rental levels in the city, and point towards very good affordability for tenants, and capacity to develop in the future

The city of Chemnitz still foots the table for any major city in terms of rent level, which is increasingly at odds with its growing economy and increasing per capita wealth.

The drag factor on pricing and confidence has since re-unification been the population of the city, shown here below

Certain districts remain high in vacancy and are a tougher play for all but the most hardened yield investor. However, more wealthy districts of the city have seen continual growth throughout this period, as we shall examine later, and demand more attention in the search of sustainability and climbing rental values.

Finally, turning to unemployment, we see from the graphs overleaf that the rate was very high soon after re-unification, but falls fairly dramatically to the present day.

The stated rate in the city now stands at 11,5% and is still falling as the nations economy grows, and business enlivened by the allowance of labour from the nearby Czech Republic and Poland being allowed from 1 May 11 to work freely.

Focus on Kassberg

Whilst some parts of the city are still finding their way in terms of economic prospects and population, two areas stand out as prime locations for investment. One is the so-called castle area, a wealthy suburb just to the north of the castle itself, and then there is the affluent location of the Kassberg, perched on top of the hill in the middle of the city. We shall just focus on the Kassberg to analyse what kind of investments are possible today in the city for reliable returns.

The Kassberg is the most desirable district of Chemnitz, with 17,000 inhabitants and is the most populous district. Since 1997, there was a population increase of 24%, against a backdrop of a decline is many other districts. The inner city location, together with the easy access of motorways and trunk roads makes the Kassberg the ideal housing situation for newcomers and also an interesting area for locals to settle. Whilst some areas still require redevelopment of property after re-unification, 95% of all apartment houses are already refurbished, wit scarce free land created perhaps during the war being highly-prized and built upon. The vacancy of residential accommodation is very low at less than 5%, inhabitants favouring the abundant period property and boutique cafes in the area.

In terms of value in the area, as compared to other parts of the city, the Kassberg rates as “good” to “best residential area” in terms of rental pricing:

A website focusing on the life in this area can be found at http://www.kassberg24.de/ as is very informative.

In terms of rental price development in the Kassberg, chart below shows this to be up to 15% per annum is some parts, and increasing generally in all. It is only the main and more busy roads which have some price stagnation.

Property Examples

There are a mixture of apartment houses and condominiums for sale in this area, a sign of a high proportion of owner-occupation.

Firstly, below is an apartment house in the centre of Kassberg, with 14 fully renovated and leased apartments, priced at 600.000 Euro and just over 9% net yield.

In terms of single apartments, here we have a good condition 1 bedroom unit [pictured left] of 57sqm priced at 30.000 Eur and boasting an 11% rental income. On the right, we show a 37 sqm 1 bedroom unit, with a 10% yield and priced at 17.000 Euro.

Conclusion

The economic story in this city continues to improve, and population expectations are now positive for the city as a whole. Real value can be found in many areas, but wealthy districts such as the Kassberg offer a long history of growth and sustainability of yield, backed by 80% loan to value financing. Investors looking for quality property at a very affordable price should consider this area as part of their portfolio in Germany as it continues to grow economically.