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Germany: Germany

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

Germany isn’t a market often mentioned in property magazines or on television programmes. Neither is it the kind of property market that makes people jump up and down with excitement. In contrast to the rest of Europe house prices have actually fallen over the last decade. Purchase fees and taxes are expensive and the Germans have one of the lowest recorded rates of home ownership. Only 43% of Germans own their own home, a level which falls to 11% in the capital, Berlin. This is compared to 70% in the UK and US.

Yet something is stirring in the property markets of Germany. Big institutional investors are spending enormous amounts of money on residential acquisitions. Writers for dry finance journals are looking interested. 3% of knowledgeable Irish investors are now choosing Germany as their target market.

Somewhat paradoxically, the appeal lies in the property market’s sheer lack of fizz. The low sales price makes this one of the most affordable markets in Europe, while the German preference for renting creates reliable rental income of up to 10%. Germany may not be the place to look for capital appreciation, but a good quality house here should make a reliable return year in, year out.

Is this a good place to buy?

Germany is both Europe’s largest economy and the largest residential market, yet according to the Organisation of Economic Co-operation and Development, property prices here fell 6.8% between 1994 and 2004. In the same period house prices quadrupled in Ireland and doubled in the UK.

Since 2004 the outlook has improved slightly. Values are now rising slightly, although the 0.7% increase registered in the first three quarters of 2005 is not exceptional.

Prices have been depressed by a number of factors. The sluggish economy and high levels of unemployment has made people reluctant to commit to mortgages, rental costs are reasonable and the law provides strong protection for tenants. As long as the tenant continues to pay the rent they are effectively safe from eviction. The economic woes are compounded by demographic figures. Germany has a shrinking population which is expected to decline by 10% between 2010 and 2050.

The problem of depopulation also has an impact on a regional level. Much of East Germany is depopulated as easterners have moved westwards in search of employment and higher wages. There is now oversupply of property in the East with up to one million surplus residential units. About a third of these will be demolished by 2009 and others upgraded to try and increase appeal.

Despite this, since 2004 Germany has attracted significant investment from the large institutional investors. In 2004 Goldman Sachs was part of a bulk bid for 66,000 residential units worth 2.1 billion euros. Forbes Investment Group bought 80,000 housing units for 3.5 billion euros.

Before investing this amount of equity the big investors do their homework. Their reasoning for investing in Germany, and the reason that private investors are following suit are as follows:

1. Comparatively, over the last twenty years housing affordability in Germany is believed to have improved more than in any other industrialised nation. According to one European Economist at Merill Lynch in London, this places German real estate ‘amongst the cheapest asset prices in the world’ (Foreign Buyout Firms Moving into German Housing, Matthew Brocket, Bloomberg 5.12.2005)

2. The German economy may be in the doldrums but Germans are showing a new willingness to accept free market reforms. Despite the difficulties, the German economy is still the powerhouse of Europe. Buy now and you buy at the very bottom of the market.

3. Interest rates are so low that there is little difference between buying and renting property. The government is encouraging Germans to buy houses as part of their retirement provision. Together these factors should translate into more home ownership.

4. In addition to buying vast amounts of property, the big investors work to improve purchase conditions by linking up with mortgage providers to arrange easy financing. They then sell apartments and houses back to tenants at a slight mark-up.

So far, the model seems to be working. Tenants are buying their apartments. Whilst the market remains flat in East Germany, sale prices are rising in the West as demand increases. Real estate prices in prosperous cities such as Frankfurt are higher, but the market here is under-supplied and rents are going up.

At present most buyers look to Germany for this stable rental income rather than for capital appreciation. Yet despite over-supply in the East, the Federal Bureau for Building and Regional Planning calculates that 300,000 new residential units will now be needed yearly.

Put all of this together and it is possible to see why intelligent investors are thinking seriously about placing money in Germany. The entry threshold is low; should home-ownership rise, capital appreciation is on the cards. Alternatively, if Germans continue to favour renting, yields in the cities can reach 8%-10%. Not such a bad deal after all.

Price history

Across Germany prices fell 6.8% between 1994 and 2004, although rising in the cities of Western Germany. House values are now inching upwards, increasing 0.7% in the first three quarters of 2005.

More pages

Page 1: Guide to the Risk and Opportunity Ratings
Page 2: Buyers this market will appeal to
Page 3: Key risks and opportunities

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