Germany's real estate market: investment in a country with a stable economy

A strong economy, sound legislation, political stability, and a high standard of living - these factors make Germany especially attractive to foreign investors who view real estate in Germany as a reliable haven for investing and preserving capital. It is also interesting that the rental system reigns in the German real estate market: if the national average is about 50%, then up to 90% of the population rents housing in large cities. According to Forbes, Germany is the leader in Europe in terms of the number of rented housing, the volume of which is about 55%, leaving behind Austria and Poland with a large gap.

It is not surprising that in 2018, real estate in Germany, the country with the most stable economy in Europe, rose by 5.6%, largely due to low interest rates of German banks, population growth and low unemployment. The total amount of transactions in 2018 amounted to 124.8 billion euros, a new record for the German residential real estate market, - this is stated in the report of the Global Corporate Communication Team. For comparison, in 2017, the volume of investments amounted to about 119.3 billion euros. This trend continued in 2019, but unlike previous years, the wave of demand has also spread to secondary cities, since in such key megacities as Berlin and Munich, etc., prices have reached such a peak that investment properties are gradually losing their attractiveness to buyers, both foreign and local. New cities are gaining popularity today, for example, Nuremberg and Hanover and nearby cities, the cost of real estate in them is still available, so the percentage of capital investment growth, as well as profitability and rental profits are higher here than in more popular places.

 

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Trends

The first "seven" cities in Germany and their surroundings are characterized by a stable annual increase in prices for both private and commercial real estate. Over the past three years, the cost of residential real estate in Berlin, Munich, Frankfurt, Hamburg, Dusseldorf, Cologne and Stuttgart has increased by more than 30% and, according to experts, will continue to grow. This is due to the fact that in these cities the demand is several times higher than the supply, largely due to the large influx of the working population to the major cities of West Germany. If we consider residential real estate and compare prices for March 2007 and November 2017, the prices of apartments on the secondary market increased by 180.2%, and the cost of apartments in new buildings increased by 177.4%.This situation is "in the hands of" investors, since apartmentsin cities, they are often purchased for rent. Therefore, in a growing market, investors can earn twice  by receiving rental income, and also by earning directly on the growth of housing prices. 

Hence the following trend follows: according to the German Investment Real Estate Union (DAVE), the suburbs of large German cities located within a radius of 20-30 km are currently becoming more popular with investors, since prices in them are not as high as in the major cities themselves, and the choice of affordable real estate is greater.Accordingly, prices in these suburbs are also showing steady growth. It is important to understand that in Germany, cities even with a small population by Russian standards, for example, up to 10,000 people, have excellent transport links and complete infrastructure, starting from kindergartens and ending with swimming pools.

Loans in Germany

Another important trend in the real estate market in Germany is low loan rates from 0.8% to 1.8%, which can also be used by non-residents of the country. Low default rates on mortgages with low rates of Euribor have made the German mortgage interest rate the lowest in the world: now it averages about 1.6% per year. The borrower will need, however, about 20% of the down payment of the total loan amount, one of the levers by which the German government prevents the formation of a credit bubble.

The easiest way for non-residents of the country is to get a loan in Germany for the purchase of an apartment that is planned for rent or for their own residence. It is also relatively easy to get a loan for apartment buildings - the quality of the building, the location and the number of rented apartments (i.e. income) will be taken into account here.It is also possible to get loans for shops with long lease agreements (more than 10 years), but banks are reluctant to give funds for hotels, the issue is considered provided that the hotel fund exceeds 100 rooms. But in any case, in order to obtain a loan, the buyer must have about 40% of the cost of the object on hand. To obtain a loan, a foreigner must provide the bank with proof of the availability of funds and a regular high income. Buyers of square meters should also know that both a resident and a non-resident of the country has a speculative tax: within 10 years after the purchase, the sale of real estate is taxed at 30%, after 10 years it is not.

If earlier Germans, due to high mobility in Europe, bought a house closer to retirement, now they buy it themselves for rent at the current low interest rates. According to statistics of recent years, Germans spend over 160 billion euros a year on buying real estate, and this trend will continue. Thus, foreign investors have to compete, one might say, in tough conditions in the struggle for a good object with local investors. Therefore, at the current stage, they say that Germany is the market of the object, not the buyer.

Sought-after housing

The most popular residential real estate today are small apartments with 1-3 rooms, apartment buildings for several apartments and apartments in small cities, where there is a potential for cost growth, unlike megacities. The demand for compact housing is primarily due to the fact that in Germany families are becoming smaller, but their number is growing, especially sharply increasing in megacities families consisting of two people. Migration processes also significantly affect the local real estate market – the influx of internal and external migrants is especially noticeable in large cities.

In the commercial real estate market, the most popular now is the purchase of supermarkets with long-term contracts, regardless of their location. Experts recommend that foreign buyers who want to buy apartments or several apartments for rent, buy apartments in a new building, because their prices are not as inflated as in the secondary market, there is always a choice of several options in different price ranges, and there is also a phased payment of the object and a guarantee from the developer for five years.

Foreigners in Germany

Foreign buyers of real estate should take into account the fact that in 2016 the prerequisites for the issuance of financing for companies with foreign capital were tightened, so the sources of the origin of capital should be completely transparent. Even if a foreigner purchases without credit, banks, financial institutions of notaries and sellers are obliged to trace the origin of capital.But despite this, Germany, which has already firmly become the seller's market, is attracting more and more foreign investors. The saying "who did not have time, he was late" describes the current situation and the near future as accurately as possible. 

Restrictions and rights for foreigners

If you purchase real estate within the framework of a GmbH (an analogue of a Russian LLC), then in this case there are practically no restrictions, but subject to the transparency of capital for German banks and other structures. If you have your own capital, you can create a GmbH and then purchase real estate in Germany with the involvement of loans from German financial structures. When creating a GmbH for the acquisition of real estate, the type of activity of the company must necessarily be the management of its own capital, in other words, the acquisition of real estate and its leasing. With this type of activity, GmbH is exempt from the fishing tax (Gewerbesteuer), which varies in various lands from 13% to 17%, it is necessary to pay only a corporate tax of 15% and a solidarity tax (5.5%).But each individual case with the acquisition of real estate should first of all be accompanied by an experienced professional in the field of taxation.

At the same time, the same laws apply to a foreign investor when buying real estate in Germany as for a resident of the country. A foreigner is protected by German law, which eliminates the risks of investing in real estate - of course, if you buy liquid real estate in economically healthy regions of Germany. Therefore, when choosing a property, it is important to take into account, first of all, not what profitability it brings now (and in the eastern lands, the profitability of objects is usually higher than in the western ones), but how much it can increase in price in a couple of years, based on the location, condition of the object, etc. It is very important to analyze statistics: what is the population growth and economic indicators of the region. If we are talking about private real estate, then most likely tenants will always be waiting in line for an apartment in the largest cities of Germany and their surroundings.

Prices

The undisputed leader in the German real estate market today is Munich, where the average price is 7509 euros per square meter. In second place is Frankfurt am Main, where the average house price has risen to 5058 euros per square meter, that is, it has increased by 10.5% over the past year.Hamburg is currently in third place with an average price per square meter of 4,587 euros. Compared to western federal states such as Bavaria, Baden-Wuerttemberg or even Schleswig-Holstein, the situation in the new federal states is less optimistic: in many eastern districts, the forecast shows negative growth rates. In other words, local real estate loses its value every year. The main reason for this is the population decline in many regions of East Germany. 

German real estate investments

When it comes to investing in German real estate, a subjective factor plays a role, as well as buyer preferences. Someone wants to invest in hotels, someone in chain stores, someone in apartment buildings. But since everything that is liquid is usually attractive for investment, in Germany it can be both purely commercial facilities and apartments for rent. Experts recommend that investors with a relatively small budget buy apartments. For example, in the Frankfurt am Main region, a small budget for the purchase of an apartment is up to 1 million euros.

It is necessary to understand that the yield on private real estate is lower than on commercial real estate. The profit from commercial real estate averages from 5% to 8%, and the income of an apartment from its rental is about 3.8%. But it is also important to take into account that private real estate is growing faster in price than commercial real estate, by an average of 7-10% per year, so there is a high probability that in three years the apartment will rise in price by 30%.

Forecasts

International experts unanimously predict that the demand for German real estate and, consequently, prices in 2020 will grow steadily, but growth will take place under the watchful control of German state institutions, which have a number of levers that prevent excessive overheating and the risk of a bubble.. The Institute of German Economics in Cologne surveyed 600 German real estate agencies on the prospects of the German market in 2020. In addition to general economic topics, questions were also asked about the investment market, rental and sales, land market, etc. 61% of the surveyed companies believe that real estate will grow in price over the next 12 months, and only 39% of participants do not expect a significant increase in the cost of housing. At the same time, all experts unanimously agree that the price drop will not happen. 

Thank you for your help in preparing the material:

Irene Verkhovetskaya, General manager of the company Estate-Service24

Julia Fuchs, director of the companyFuchs Real Estate GmbH

Demi Pashalou, co-owner of company Kuenne Immobilien Gruppe GmbH

Ekaterina Demidova, an expert of the company DM Group