While the U.S. real estate market struggles in the wake of the subprime crisis, the German real estate market could be on the rise. Although Germany’s real estate market struggled during the first half of this decade, values are recovering and experts predict that by 2009 the situation could provide worthwhile opportunities for investors.
Germany is home to more than 82 million people, making it the second most populous European country after Russia, and it is slightly smaller than the state of Montana, according to the CIA World Factbook. The population is shrinking at a rate of -0.044 percent because of low birth rates. “In the very long term…[there will be] shrinking of the population. Over, say, the next 40 years it will diminish by 10 to 15 percent,” Jacky Starck, owner and chief executive officer of Starck Management Consulting, an independent international real estate investment consulting firm in Berlin, said. However, because of shifts in cultural and economic ideas, it is still likely that the demand for housing will increase in Germany over the coming years.
Germany, the world’s third largest economy, had a GDP of $2.8 trillion in 2007. The vast majority of these funds go into the services sector (69.5 percent), with industry making up most of the remainder (29.6 percent). It is one of the largest and most technologically advanced producers of iron, steel, machinery and electronics in the world, according to the CIA World Factbook. Germany adopted the Euro as its currency in 1999.
The German government is a federal republic and is divided into 16 sovereign states. The city of Berlin is the country’s capital.
Why invest in German real estate?
Germany is a renter’s market, with only 45 percent of homes being owner occupied, according to a press release from HBOS, a U.K.-based investment services group. In Berlin, only 13 percent of residents own their own homes, according to Julian Power of Berlin Capital Ltd.
It has the second lowest rate of owner occupation in Europe, after Switzerland, according to Starck. By contrast, in Spain the vast majority—86 percent—of the population owns their homes, he said.
Low homeownership means the resale market is mainly composed of other investors, which results in lower prices for sellers. But investors could earn significant profits if the market turns to owning rather than renting.
Additionally, “there is no restriction on foreigners buying German property,” Joern Schaemann, attorney-at-law with Schaemann Law Offices in Berlin, said. Although foreigners may encounter difficulties with financing—because of U.S. banks not wanting to finance property in a foreign country and German banks being reluctant to fund investors with income in the U.S.—the purchase process itself is fairly straightforward.
Germany is a relatively safe market for foreign investors. “The safety is relatively high because of the property registry. If you look into the property registry you see [potential issues] with liens and other problems from the legal side. It’s relatively safe to do it that way,” Martin R. Weinhardt, rechtsanwalt (attorney-at-law) with Weinhardt & Associates in Utah, said.
And the subprime crisis and credit crunch have had a minimal effect on Germany because of the extremely low usage of adjustable rate loans. 99 percent of the country’s loans have fixed rates, Starck said. The small percentage of loans with adjustable rates are fixed for 10 years before the rate can change.
The German real estate market
Stark believes that the demand for housing in Germany is likely to rise over the next several years because of changes in the culture and economy. “The number of houses will increase because of new ways of life, more families separating and people choosing to live with someone else…it’s a trend in Europe and especially in Germany that we will have more households in the next 10 years,” he said.
And, because the rental market in the country is so active, this could be good news for investors. Rental properties can potentially provide investors with income up to 6 or 7 percent, according to Starck.
But investors should know that Germany has strict laws to protect the interests of its renters, and difficult tenants may prove tough to deal with as a result. “If you have renters that are problem renters that don’t pay on time or don’t pay at all…[or] renters that do damage to the property and things like that, you can do something but the process is very complicated, costly and lengthy because there are so many protections for the renter,” Weinhardt said. “You [also] can’t just buy a property and raise the rent…there are very strict restrictions on how much you can raise the rent and so on.” These restrictions vary by region.
Starck recommends sticking near major cities to ensure income from a German real estate investment. The areas surrounding Munich, Hamburg, Frankfurt, Cologne-Dusseldorf, Stuttgart and Berlin all offer excellent investment opportunities. He said holiday rentals are not a big market in Germany, but that rental property for the elderly may prove to be a profitable investment in the future.
For those interested in more short-term investments, Germany may not be the best option. “You cannot buy something [in Germany] and sell it three years later with appreciation,” Starck said. “In Germany you have very good rental income…but you will have some more difficulties [getting] appreciation in the short term. You’ll have to wait at least 10 years.”
The purchase process
The real estate purchase process in Germany is not drastically different from that in the United States. Foreigners’ property rights are equal to those of German citizens and there are no special requirements for U.S. citizens to be eligible to purchase German property.
The process is overseen by a German notary, which is different in background and function from a notary in the U.S. A German notary must have a J.D. degree and essentially serves the purpose of a third-party attorney by advising both the buyer and the seller, according to Weinhardt. The contract does not become effective until it has been notarized.
Investors would be wise to hire a German accountant to ensure that all taxes are properly paid. “There’s a double tax treaty between the United States and Germany. Income from real estate for the most part falls under the German tax [laws], even if the investor is in the United States,” Weinhardt said. “That can, under certain circumstances, be an advantage. But it can also be a disadvantage because German taxes, in general, are relatively high.”
“One should allow for 10 percent of the investment costs for…the agent’s fees, the stamp duty—3.5 to 4.5 percent—and legal fees,” Schaemann said. Property taxes vary depending on the region and the value of the property, and are typically paid on a quarterly basis.
Finding someone who speaks the language and knows the local market and laws is vital for investors considering purchasing German real estate. U.S. investors in search of a German real estate attorney can contact the German-American Chamber of Commerce or the German consulate for recommendations .