Where Are Investors Looking in Germany for the Great Deals?

The stall is well laid out for Germany to see a strong housing market in the short to medium term. Business and consumer confidence is now higher than it has ever been since re-unification in 1990, interest rates are at record lows and unemployment falling fast in many regions. Against this backdrop, German house prices have been fairly unremarkable, indeed boring, over the last 20 years showing no real appreciable gains in real terms against inflation. Affordability for housing is at record lows, as low as 15% of take home pay needed to service the housing costs, and access to finance for German residents and international investors alike is very good.

The German market remains the most under-valued in the world, according to the OECD. This is all quite different to the picture that is other developed countries, who are nursing the direct losses of their nation’s wealth, that of their housing stock and banking sectors at least, after the credit binge and subsequent financial collapse. So, it makes you think “what is going to set this market on fire?” and “where will the fire burn the brightest / the longest?”.

Lets take a look a some German cities, and see where advantage lies for investors who have short, medium and long term views on the return of their money. As the re-unified country develops, it makes good sense to look to the more established markets in the former east of the country, and then turn attention to some markets within the former East. So, lets look at some really contrasting markets in the country, to spark some thought.

Munich

Munich enjoys one of the most prosperous micro-economies in Germany, and indeed has done for centuries. Its dominance in the German economy, being the 3rd largest city at 1,35 million people, is undoubted and is often voted in the top 3 as one of the world’s most liveable cities. The economy is set to continue its growth in coming years, with an additional 60,000 inhabitants in the city by 2015. In terms of housing, for a 60 sqm central apartment with a balcony:

Rent Levels – 15 to 30 Eur per sqm

Single Apartment Prices – 4.000 – 15.000 Eur per sqm

Typical Yields – 2.5 – 4%

With few apartment houses examples on offer, here is a student building which could be interesting to larger investors:

4.7 Million Euro

57 student apartments

270.000 Euro per year net income / 5.7% yield

This city will continue to prove attractive to cash investors, looking for alternatives to other asset classes which are delivering lower returns. In terms of capital increases, it is difficult to see the high levels of today being breached anytime soon to any great extent. It is regarded that the city follows 10 year cycles, with the last rise being triggered 2001. Quite different to other parts of Germany, and more like cities in other parts of the developed world. But well worth a visit.

Bremerhaven

Still in the former West, but on the other end of the scale is Bremerhaven. Boy, is it cheap here. The town numbers around 114,000 and is built around a port. The population here has dropped every year since 1960, from 140,000 steadily to its current level. A real concern for an investor, as is its stubbornly high unemployment rate of 16.5%. On the positive side, a lot of development has recently gone into the port, bringing needed tourism, and its traffic as a container port [mainly for cars] is growing and now the 4th largest in Europe. In terms of typical housing, well it is cheap. Rent levels tend to be 4 to 6 Euro per sqm, and prices can be almost unbelievable:

A single apartment example here, priced at 11,500 Eur for a 59 sqm apartment which is rented at 180 Eur per month, giving a yield of 18%! Due diligence required here, as it is a foreclosure unit.

So, we can certainly say that Bremerhaven is cheap, by any standards, and perhaps prices will recover at some point as the national economy powers on. But like any town or city with a decreasing population, care must be taken to secure the right investment otherwise the attractive yield falls, perhaps down to zero in the wrong building or location. That all said, finance can be had for international clients at 60%, so some confidence is in the market. Somewhere to visit perhaps, for the yield investor weekend away by the sea. Do you do those? Me and my poor wife do. A lot.

Berlin

So, how to summarise such an interesting and diverse market in a few lines. Well, I cant. Perhaps I can point you to this excellent market report on the city, and make a few comments of our own.

[http://dl.dropbox.com/u/4386292/Misc/berlin%20report%202011.pdf]

Well clearly the city offers excitement, interest and intrigue for tourists, residents and investors alike. The past of the city is scarred by the war and occupations that followed, being divided by the wall for so many years. Berlin took the interest of many international investors around 2002, when their domestic markets got expensive. Around 2005-07, 70% of the investment money into Berlin came from outside Germany. Perhaps this was due to the stigma as a poor city to folk from Munich say, not being translated to international clients.

Well the city is still relatively cheap, very cheap in places, but its position as a capital when compared to London or Paris say needs to be considered carefully. The above guide will give better reference to current prices and yields. But the general story is of rapidly rising rents. It is still possible to rent a studio which is 2-3 stops from the Reichstag for around 200 Eur per month. Sounds cheap? Well, it is. The investment money at the moment tends to follow this trend, and it is a case of picking areas where rental increases will be accepted most easily, and so rental yields will increase. Areas such as Prenzlauer-Berg and parts of Mitte can be argued to be oversold, having increased dramatically in recent years, but great places to live and some solid investments there no doubt, albeit not so “yieldy”. My recommendation would be to include Berlin if possible into any property tour of Germany. Most the aeroplanes land there, so it is easy to access and the nightlife alone will not disappoint, even if the feeling of “I wish I was investing 10 years ago” does.

Here is an apartment house with commercial elements to the ground floor, in the district of Lehe. It has 408sqm, offered at 115.000 Eur with a rental of 18.414 Eur per year in place, or 16% yield

Leipzig

I have dedicated the last 4 years of my investment life to this city, and still find it so fascinating, to the point that it is all I talk about. You get the picture, if you buy me a drink in the pub I will drivel on about yield and various streets in Leipzig until the bell goes and the use of legs has become questionable. I do this a lot. So why is it so interesting? Well some big-hitting points:

● It is pretty much as cheap as anywhere in Germany per sqm, indeed in Europe, indeed in the world.

● Its population has grown quickly during the last 5 years, and is set to grow for the next 20 years.

● The city formerly being once of the richest in the world, has some of the finest period housing anywhere.

● The city has a buzz, some locals inform me it is what is what like in the 90s in Berlin.

● The economy is really motoring, being home to BMW 1 series manufacture, Porsche and a bunch of logistics companies including the huge presence of DHL.

● Yields around the city range from 6-12%, with finance up to 80% possible.

● Around 85% of the city rent their house, but this is changing rapidly.

● Oh, I just love it there.

In terms of property, and why I talk about it so much, well the graph below tells us a lot.

In each of the 3 categories of property, we can see that after the aberrations and exuberance of the mid 90s [a whole story] we are near the start of a cycle which properly took hold 2009-10. The city has taken the eye of investors from all over Germany and indeed all over the world. Additionally, owner-occupiers are taking up residents increasingly in certain parts of the city, pushing values up at an astonishing rate in places. Lets take a couple of examples.

Although most property is still traded as a complete block of apartments, the single apartment market is becoming increasingly interesting. Property such as the unit below are fairly easy to pick up, and are very compelling from a yield perspective:

The market for single apartments is quite immature, with minimum finance levels for Germans and international clients being set at 50.000 Eur. But it is one that should see great increases, as confidence and rent levels climb away. In terms of apartment houses, these come as cheap as 180,000 Eur and go all the way up to millions. The yields range from 6-12%, and here is a typical example:

With rent levels set to rise in the coming years, great yields and finance in place together with the strategy to divide apartment houses into single units becoming increasingly viable, Leipzig is well worth the 1 hour train journey down from Berlin to take a look. Or just give me a call, always happy to discuss the city at good length!!

Anywhere Else??

Well, there are yield markets all over Germany. Sticking to the knitting of a stable or growing population of a city will be a first good point. In the east, this could lead you to cities such as Dresden, Erfurt or Jena for example. In the west, Bavaria, Frankfurt and Hamburg spring to mind. But there are a host of others around the Rhine-Ruhr, the most populated part of Germany that could be worthy of research.

So, good luck and enjoy this market whilst it is in the early stage of the property cycle in many parts of this booming economy. Just get in touch with the ProVenture team to discuss any areas you have of interest. We like to help, where we can.