Brandenburg and Sachsen. Is it worth the effort?

[The Major]

Hello,

I am a Property Developer in the U.K, specialising in new build projects. Recently, I have been introduced to an individual who claims to own a large portfolio of mainly un modernised property and land that seems very cheap. I adopoted many years ago the adage of :"If it seems to good to be true, guess what"
Still I am intringued and as a result have joined this web site to find out more. For the more experienced of you out there, please tell me if you believe the areas in the eastern part of Berlin/Germany is worth the time and effort in respect to the following:-

1. Is they're a High rental demand and what accomodation rent's best.
2. The attitude of the finance houses to these areas and who is best to use.
3. Potential for capital growth.
4. Are the utilties and property tax now the responsibilty of the Tenant and if the unit is vacant, is the Landlord exempt from paying property tax/rates.
5. For building works, I understand it may be possible to get grants from the local goverment. How time consuming and worthwhile is that. Any matter here in the U.K takes ages to implement- if your lucky.
6. Would you yourself buy these type of investments that require work or look for higher quality/tenanted buildings producing lower yields. My motivation is to buy long secured income. Capital growth is a bonus.

Thank you so much with whatever help you can supply. Any un solicited advice is also welcome.

Regards,

The Major.

 

[JMBroad]

Hello,

I am a Property Developer in the U.K, specialising in new build projects. Recently, I have been introduced to an individual who claims to own a large portfolio of mainly un modernised property and land that seems very cheap. I adopoted many years ago the adage of :"If it seems to good to be true, guess what"
Still I am intringued and as a result have joined this web site to find out more. For the more experienced of you out there, please tell me if you believe the areas in the eastern part of Berlin/Germany is worth the time and effort in respect to the following:-

1. Is they're a High rental demand and what accomodation rent's best.
2. The attitude of the finance houses to these areas and who is best to use.
3. Potential for capital growth.
4. Are the utilties and property tax now the responsibilty of the Tenant and if the unit is vacant, is the Landlord exempt from paying property tax/rates.
5. For building works, I understand it may be possible to get grants from the local goverment. How time consuming and worthwhile is that. Any matter here in the U.K takes ages to implement- if your lucky.
6. Would you yourself buy these type of investments that require work or look for higher quality/tenanted buildings producing lower yields. My motivation is to buy long secured income. Capital growth is a bonus.

Thank you so much with whatever help you can supply. Any un solicited advice is also welcome.

Regards,

The Major.

My opinions: (I research property markets for an agency )

Unmodernised property in former East Berlin is very cheap. There are benefits of buying and renovating unmodernised properties in specific areas of East Berlin (not necessarily East Germany as a whole, but some areas of East Berlin. Most of the benefits only apply to people who pay tax in Germany as you can get tax relief from investing in those properties. Brandenburg and Saxony themselves don't really appeal to me at all. Some places like Leipzig and Dresden may potentially become interesting but as things stand right now I'd not touch either until I'd exhausted opportunities in Berlin.

1) With regards to purchasing property with tenants in it the german rental laws make that seem more like a nightmare than a dream.

High rental demand - yes, most of the population of Berlin rents. High rental prices - not really, but considering property prices are cheap, the yields can be attractive. However having said that because people rent for so long, (sometimes generations) there are numerous inherent problems with purchasing property which is already rented out.

2) Generally speaking, financing in Germany is complicated. Because of the subprime crash in Berlin in the 90's and now having had several German banks who had invested in the US subprime taking a hit, the maximum a foreigner will get as a mortgage is around 60% LTV and the process is quite slow. Best to either release equity in another country or plan well ahead.

3) Some areas (recently Potsdammerplatz, Prenzlauerberg and Friedrichshain for example) have seen as high as 50% growth (properties in Potsdammerplatz which were selling at 2000 €/m2 last year are selling this year at 3000€/m2.). This is largely due to the demand for properties in these areas and the lack of supply. Other areas, such as some of the Neuköln districts or Wedding are likely to see no capital growth or very little in the near future at least. Some areas, like Charlottenberg are low risk but also less likely to show capital growth.

4) Not sure - the whole permanent tenant thing put me off so I went looking for option 3

5) Not sure about grants for developers, but the grants for tax payers in Germany is huge. The majority of the investment into property in specific areas and buildings can be claimed back over the next ten years, in addition to the rental yield.

6) As an individual investor (considering I'm not a tax payer in Germany) - I wouldn't buy a building in Berlin which needs renovation, nor would I buy tenanted properties, I'd go with the third option.

As a developer, I would have to see what grants (if any) are available to me as a developer, then see how I could make the tax benefits work for me (what the restrictions are on "tax payer in Germany" by definition) and of course which areas. I'd also have to see who the end buyer would be and if you are looking at renovating to then sell to the individual investor, you need either a good product (concept is equally important as build quality in Berlin) or the will and ability to flog a bad product.

 

[The Major]

East Berlin etc

JMBROAD,
Thank you kindly for your prompt and knowledgable reply.
Are your research skills retainable and if so, on what basis?
Regards,

The Major

My opinions: (I research property markets for an agency )

Unmodernised property in former East Berlin is very cheap. There are benefits of buying and renovating unmodernised properties in specific areas of East Berlin (not necessarily East Germany as a whole, but some areas of East Berlin. Most of the benefits only apply to people who pay tax in Germany as you can get tax relief from investing in those properties. Brandenburg and Saxony themselves don't really appeal to me at all. Some places like Leipzig and Dresden may potentially become interesting but as things stand right now I'd not touch either until I'd exhausted opportunities in Berlin.

1) With regards to purchasing property with tenants in it the german rental laws make that seem more like a nightmare than a dream.

High rental demand - yes, most of the population of Berlin rents. High rental prices - not really, but considering property prices are cheap, the yields can be attractive. However having said that because people rent for so long, (sometimes generations) there are numerous inherent problems with purchasing property which is already rented out.

2) Generally speaking, financing in Germany is complicated. Because of the subprime crash in Berlin in the 90's and now having had several German banks who had invested in the US subprime taking a hit, the maximum a foreigner will get as a mortgage is around 60% LTV and the process is quite slow. Best to either release equity in another country or plan well ahead.

3) Some areas (recently Potsdammerplatz, Prenzlauerberg and Friedrichshain for example) have seen as high as 50% growth (properties in Potsdammerplatz which were selling at 2000 €/m2 last year are selling this year at 3000€/m2.). This is largely due to the demand for properties in these areas and the lack of supply. Other areas, such as some of the Neuköln districts or Wedding are likely to see no capital growth or very little in the near future at least. Some areas, like Charlottenberg are low risk but also less likely to show capital growth.

4) Not sure - the whole permanent tenant thing put me off so I went looking for option 3

5) Not sure about grants for developers, but the grants for tax payers in Germany is huge. The majority of the investment into property in specific areas and buildings can be claimed back over the next ten years, in addition to the rental yield.

6) As an individual investor (considering I'm not a tax payer in Germany) - I wouldn't buy a building in Berlin which needs renovation, nor would I buy tenanted properties, I'd go with the third option.

As a developer, I would have to see what grants (if any) are available to me as a developer, then see how I could make the tax benefits work for me (what the restrictions are on "tax payer in Germany" by definition) and of course which areas. I'd also have to see who the end buyer would be and if you are looking at renovating to then sell to the individual investor, you need either a good product (concept is equally important as build quality in Berlin) or the will and ability to flog a bad product.

 

[JMBroad]

JMBROAD,
Thank you kindly for your prompt and knowledgable reply.
Are your research skills retainable and if so, on what basis?
Regards,

The Major

I am currently employed by an international real estate agency, researching countries where I speak the language (Portuguese, Spanish, English & German). I have a confidentiality agreement with this company which prevents me from working on a freelance basis however that does not prevent me from offering general advice on the forums.

I'm participating on the forums as a potential investor myself and as such stated long ago that I wouldn't publicly advertise the company I work for or the product we are selling - my goal here is to hear the opinion of investors and debate the market trends with them.

We have established the right investment strategy to follow in Berlin and have done the groundwork to set up client support (legal representation, notaries, local agency to tour clients, etc) however there is a limited supply of the right product on the market. Almost everyone is selling the same product... When we started in Berlin 6 months ago we went with the flow and were doing the same pitch as everyone else. I was asked to look into Berlin quite recently and after I went out there in December with my colleagues we confirmed that we had identified the right investment opportunity which we feel will maximise the investment potential of the city... It was my eighth or ninth visit to Berlin since I first visited in 1997 and the change to the city has been tremendous.

We are currently using our network of developers on the ground to create the product which fits our assessment of the market, rather than contracting the product then work the pitch around what is available. It obviously takes some time for the developers to find the right properties and adapt them to our needs. Broker training was last week and we hope to have refined our product selection by the end of January, middle of February. We have one product on the market which fits our strategy and it has sold very quickly, including one of our own brokers invested in it when we contracted it at the end of the year.

Having said that if you want, send me a pm and I'll put you in touch with the broker who bought in Berlin himself and you can discuss it with him. Alternatively, you mentioned you are a developer in the UK. As we are working with developers to provide us with the product for our clients, we may be able to work something out where we identify the product for you, you adapt it to fit the strategy so that we can offer it to our investor clients.

 

[neustria]

JM Broad: As always I found these latest posts of yours of great interest.

Do you happen to know how residential rents are re-evaluated in this country? Are rent increases say linked to a specific inflation index , or are future rent increases set out per se in all residential lease contracts?

Wouldn't a German commercial investment (shops etc.) offer higher yields, conserve an equal potential for capital gain, and actually entail fewer restrictions than residential tenant leases?

Neustria

 

[JMBroad]

JM Broad: As always I found these latest posts of yours of great interest.

Do you happen to know how residential rents are re-evaluated in this country? Are rent increases say linked to a specific inflation index , or are future rent increases set out per se in all residential lease contracts?

Wouldn't a German commercial investment (shops etc.) offer higher yields, conserve an equal potential for capital gain, and actually entail fewer restrictions than residential tenant leases?

Neustria

Residential rents in Berlin are monitored by the Berliner Mietspiegel (mit Berliner Betriebskostenübersicht im Anhang) which is prepared by the Senatsverwaltung für Stadtentwicklung. Basically this booklet (30 pages long) explains in detail how much you can rent your property out for depending on the details of the property. Details include build year, condition of the property (renovated or not),location, furnishings and fittings, and a dozen other tiny details. It covers just about everything you can think of and specifies exactly how much a tentant has to pay (max) for their rented property. They can (of course) pay less and in many cases they do pay less.

By law, landlords can raise the rent by 6.5% per year (restriction is 20% over three years) until the figures reach those outlined in the Mietspiegel. However, as mentioned earlier, tenants in Berlin have free legal representation therefore these increases can take a while to push through or may even get blocked altogether as the lawyer can appeal the increase based on their interpretation of the Mietspiegel and the property in question.

Commercial property can be interesting in some areas of Germany, obviously some more so than others. At the moment I'm focusing only on Berlin. As the population is redirecting more towards cultural, art and execs rather than production office spaces do look good in Berlin however the offer is limited and in many areas already quite expensive - hence residential seems to offer the best growth and yields.

 

[neustria]

JMBroad writes:
"1) With regards to purchasing property with tenants in it the german rental laws make that seem more like a nightmare than a dream.

High rental demand - yes, most of the population of Berlin rents. High rental prices - not really, but considering property prices are cheap, the yields can be attractive. However having said that because people rent for so long, (sometimes generations) there are numerous inherent problems with purchasing property which is already rented out..."

*************************************
Re. German residential property

Greetings JM

Am I understanding you correctly by thinking that you are saying there is "no nightmare" if the flat is purchased empty, and THEN rented out? Would there be a legal distinction between the two scenarios in this country?

If not, you either 1. Keep the place empty which is bad for the property upkeep and deprives one of income or 2. Find a renter and then the "nightmare" (above) commences...

Please elaborate! (thanks!!)

Neustria