Real Estate Investments in Germany
Low interest rates and uncertain expectations on the stock market have lead to an increasing demand on the real estate market. While in most English-speaking countries the demand of foreign investors lead to unattractive high prices, the price level in Germany is still low. Therefore international investors are buying property in Germany at multi-million Euro volumes, but also individual investors are looking for condominiums or single commercial, spending between 50.000 and 3 million Euros. Many of the latter are our clients.
The reasons for investing in Germany seem to be obvious. The German real estate market is one of the most stable markets in the world. In German tradition real estates were never abused as object of speculation, most rental homes were built or bought as personal retirement funds for individuals. Therefore the German market never saw high increases, but suffered never from severe losses. Even now in 2012, while the Euro-crisis still goes on German economy recovered the losses of 2009 and shows the lowest unemployment rate since reunification in 1990. This showed up already in the increasing rents for apartments and commercial units as well as for office space in the mayor German cities like Frankfurt, Munich, Stuttgart, Duesseldorf, Hamburg, Cologne as key metropolitan areas which will also keep their importance in the economical development. Berlin was much sought-after by foreign investors and has shown price rises up to 25%. But still Germany has the lowest prices for real estates in all Europe.
Intending to spent more than 1 million Euros rental homes between 10 and 30 residential and commercial units in the inner city districts of the major German cities are a most attractive investment. There are 4 different general types of houses on the market: Pre-war (1880-1940 so called “Altbau”), post-war (1948-1989 so called “Neubau”), “new” houses, build since the 1990s and east German social dwellings build before 1990 (so called “Plattenbau”). In general an investment return rate ranging between 5- 8% per year can be calculated plus the rising value, at least if you done a proper due diligence by a German specialist. Learn more about due diligence.
Altbau (pre-war 1880-1940):
In general half of the inner city houses are built between 1880 and 1940. As everywhere in Europe these house can have specific Problems. Pre WW I buildings were build with oven-heating, toilets outside the apartment and had sometimes not even a bathroom. Most of these houses were (partly) modernized between 1930 and today by installing electricity, central heating, bathrooms with toilets etc. Crucial for the value of such houses is the extent and the date of modernization and the need of further refurbishments in the near future. Since prices start from 700 Euros per sqm for not modernized houses in simple neighborhoods can even exceed 4.000 € for a fully refurbished Altbau in the city centers. This range shows how important it is not to rely only on an estate agent, but to look for a independent due diligence.
Neubau (post-war 1948-1989):
Many of the Neubau-houses are multi-storey social dwelling with more than 30 units and prices starting from 1.000 Euros per sqm. Only few of these houses were recently modernized so that repairs on the fresh-water and sewage-pipes as well on the roof are likely. Most of these houses show a lightweight construction, which does not meet the actual environmental standards. In 2009 the federal government amended the Energieeinsparverordnung (energy saving act) which sets-up mandatory standards for the thermal insulation of those buildings. If a house does not meet these standards, the owner has to face costly insulation works which can amount 500.000 €. These risks can be lowered by a due diligence.
New apartment houses, built since 1990:
Only few of these houses are on the market, many of them already experienced bankruptcy of their builders or were offered in forced sales. In most cases rental revenues did not match the construction costs. The high prices still demanded for those houses are only justified if they can be covered by the incoming rents. And last not least: even new houses show specific types of defects (often mould-problems) which can result in high refurbishment cost. All in all a difficult proposition, only recommendable after extensive technical and legal advice – due diligence is a must.
Plattenbauten, East German social dwellings:
Even prices and the year of construction are quite attractive, an investor should not forget, that these house mostly meet NO actual standards and are often located in remote suburbs. First of all these buildings were made of precast concrete slabs showing no thermal and sound insulation. Energy-wasting heaters, leaking windows, electric lines made from alloy sewage pipes made from plastic. Many of those buildings were modernized, but only to a modest standard, since the suburb-rent hardly exceed 4,00 Euros per sqm. Since these house mostly come with 30 and more units investing in these houses is only recommendable to experienced real estate companies which ally with a German house management company with high experience on construction and the rental market; otherwise the investment might wind up as a big flop.
Condominiums or apartments
For every individual who wants to spent between 50.000 and 1 million Euros, condominiums in the mayor German cities are a first choice investment. They can be rented furnished or unfurnished. The return on investment can be expected to be somewhere between 4 and 6%. For a price of under 1.000 € per sqm. an investor can only expect a very modest dwelling, mostly located in back-houses, sometimes over-aged heaters or toilets outside the flat in the staircase can be expected. Since the standard of those apartments is very poor an investor can only expect a small rental income and/or high costs for refurbishments. Around 1.500 € per sqm. investors can expect an average standard in average condition. An apartment creating decent rental income, but some costly refurbishments shall be calculated during an average investment-time of 10 years. For more than 2.000 € per sqm. a fully refurbished optical and technical apartment rented to a decent long-term tenant shall be expected.
Buying an apartment with a decent tenant who rented the apartment for a good rent on a good lease contract, which takes care of the interests of the landlord is always good idea. Only in this way know what you will get in return for your investment since finding a decent tenant is not that easy. The poorer the standard of the flat, the more difficult is to find the right tenant. A miss-calculation has always been the idea of high rent-rises after acquisition. Learn more about German lease and rental laws.
Buying a condominium in Germany the buyer becomes a member of the house´s society of owners. While the current management like paying the service charges and small repairs is done by the elected house manager (Verwalter) all major questions are discussed during the annual owners meetings where resolutions are made under the principle of majority. The resolutions are binding for all owners and enforceable by law. Learn more about the German Condominium law.