German Investment Property is good overseas bet

You would have to either be Martian or lodged in the deepest darkest corner of Amazonia or Antartica to have missed the 2006 FIFA World Cup, which this year is once again being hosted by Germany after 32 years. Since both the public and media spotlight is firmly fixed on the Wunderbar Bundesrepublik Deutschland, we felt Nubricks should follow accordingly so for the next few days we will be highlighting off-plan opportunities in Germany’s world cup host cities.

Home to Europe’s largest property market and therefore economy respectively, according to Moneyweek’s Sven Lorenz, Germany the only Western property market that has not seen any rise in prices since 1991 and therefore Europe’s worst performing real estate market in its failure to join in the global housing boom of the last ten years. This has been in part due a severely restrictive mortgage system, an economy where depressed is an understatement and fairly high unemployment and factors which have lead to it being a bad time to be a German property agent.

However late 2005 there were signs of a market on the move. Two major reasons for change have been the decision by German banks to direct their focus on mortgage lending as a real single market in financial products spreads across the EU. Currently banks offer consumers a limited choice in mortgage products across an even narrower range of incomes when compared to their European counterparts. In order to get competitive German banks will also have to take bigger risks in their lending strategy offering lower interest rates and a greater loan to capital ratio, there are some innovative firms prepared to offer 100% funding. Secondly, the German government’s decision to introduce REITS by early 2007 will play a large part in boosting the housing market. In PricewaterhouseCoopers third annual Emerging Trends in Real Estate® Europe 2006 survey, it reported that these tax-efficient real estate investment trusts are a continuing evolution in real estate markets throughout Europe and are likely to further spur interest from global investors. These very same innovations taking place in Europe are those that helped transform the U.S. real estate marketplace and in turn are helping to attract investment capital from around the world.

There have been a number of reports in addition to PricewaterhouseCoopers that have tipped the German property market in particular as a trend for 2006. As our previous post about about a A Place in the Sun noted, it ranked Germany 12th in 20 Best Places in Europe to profit from property investment as it believes the average current property price to be £96,000 and expects a £100,000 property investment could be worth £361,000 in 10 years time.

Of course a rise in house prices all rests on a vital wider recovery in Germany’s economy, which seems imminent considering Frankfurt’s DAX 30 reached its highest levels for almost four years during 2005. The Essen-based RWI Economic Research Institute says the German economy will grow by 1.8% this year and confidence among business leaders is at its highest point in 14 years, responding in part to a positive new government. Angela Merkel, leader of the conservative Christian Democrats (CDU), was sworn in as Germany’s first female chancellor in late November 2005, taking over from Gerhard Schroeder who had held the post since 1998. The World Cup 2006 is also expected to do wonders to German tourism providing a strong long lasting income boost as visitors travel between host venues. There is strong evidence to support the positive effect that global sporting events have had on the economic recovery and success of not only major cities such as Sydney and Barcelona when they hosted the Olympics, but also countries such as Japan, South Korea and Portugal who have benefited from being a world stage by hosting key footballing events such as Euro 2004.

Where to buy in Germany
Well with just 12% of people classified as homeowners, there is a lot of vacant property to choose from, though it has been noticed that a number of large foreign firms have been rapidly buying up blocks of real estate. Until recently you would have been obliged to purchase an entire apartment block, with sitting tenants included, but being prepared to invest such a large amount of capital upfront is no mean feat. Undervalued real estate has meant that property prices in some cases can be as low as Prague or Warsaw offering a real opportunity to invest into a somewhat safer and more stable property market place. There are current property yields of 7-10% are an especially attractive return on investment when compared to eastern Europe and abroad where the return is largely based on expectation. A tradition of renting similar to other major European countries such as France and Spain, again bode positively when deciding to purchase property here especially when considering a studios can now be purchased individually for as little as £20,000, locals still seem reluctant to buy preferring to subscribe to the rental culture as until recently unlike the UK there has been economic urge to buy.

The sensible choice would be to buy in main city, here growth is steady and whose population is supported by a good mix of industry providing jobs, usually a university creating a demand for student accomodation and tourism which requires a supply of short-term lets. Choosing which city in which to buy as always requires careful research, look for districts and areas where gentrification looks set to occur. You are more than likely faced with buying a refurbished apartment than a new build though there are some landmark developments underway as noted in our previous post on Birkbusch Haus. As construction costs are high in comparison.

On the negative side of things, reports from Germany suggest that Angela Merkel’s new government is likely to introduce a blanket capital gains tax (CGT) rate of 20 per cent, a move which will have implications for overseas property investors who have invested on basis of a return on investment on selling after ten years on a tax-free basis. Renting out is also a different kettle of fish with tenants rights taking priority. Contracts can be unlimited however there are options for 3 month break clauses, however this does translate to fewer void periods.

German Property Purchase

Purchase costs: Stamp duty, notary fees and other administrative costs could add 5-6% to the market price. In Berlin, unusually, agents’ fees — which can be as high as 6.9% — are paid by the buyer rather than seller, but you can avoid them by buying direct from the seller. (http://www.immobilienscout24.de/ for property listings, in German).
Mortgages: Relatively easy to obtain, with banks typically lending 70-80%. Rates can be as low as 3.5%, normally fixed for three years.
Title: Good. But be careful when buying in the former communist east that there are no outstanding problems over ownership.

As with buying any property abroad, sound research and good advice/representation is key.

For Berlin it seems the boom time is here, above all the overriding factor here is capital growth, as with any market is impossible to know how the German market will respond in the coming years, so in the end in comes down to the following:

1) Is it relatively cheap now? = Yes
2) Have other depressed markets managed to turn around contrary to evidence? = Yes (examples: Manchester, Glasgow, Newcastle, Ireland, Wales, the US etc)
3) Does the rental model stack up to generate enough rent to cover costs = Yes

At the very least German property is on the up !