Commercial Property in Southern Germany

[neustria]

Greetings to all,

As this is my first posting on this forum I wish to thank all those who were responsable for creating this Property Forum, which appears to be of excellent quality.

I had been living in France until this summer, when we decided for a change of air.... and language. Our sights fell upon the city of Konstanz (Constance),which is located on the Lake of that name (der Bodensee) right on the Swiss border. Since we are in need of income, I had in fact been considering investing in Commercial property in this area order to take advantage of the higher yields than those offered for similiar properties in France.

My understanding is that commercial leases do not have the same constraints as residential leases, and that they typically last 5 years with an option for the shopkeeper to extend the lease under the same (or similiar) conditions, after which the rent in particular can be renegotiated. (Do correct me if I am wrong)

Those in this forum seem to mention investing in the major centers but little information is available to non-German speakers on towns in the 100,000 population-range. I think that it is important before investing to look at the national economy on the whole (generally on the upswing) and at the local economy in particular:

Konstanz's proximity to Switzerland means that many Swiss people come here to do their shopping for better value, and this remains the case despite the fact that the euro is so strong - even against the SFr... Its pictoresque location on the Lake, proximity to the Alps (sightseeing and winter sports),mild climate (second only to Freiburg, they say, for sunshine),and preserved historical center (untoucheded in WWII) make it a choice location.

Residential property is costly by present German standards - typically about 2500 euros/sq. meter and so are rents (9 euros/meter is about average in the town centre). Property (residential) in the best areas can be three times these figures. Prices have not followed the downturn affecting other parts of the country but for the last 10 years the prices have risen by less than inflation.

Some say (estate agents for the most part) that prices are now rising, others say that there has been no change, and the general outlook remains very guarded for the future.

In order to meet the strong cross-border demand, a second Mall-type shopping centre is currently under construction, but the outlook for industry has been less rosy. The biggest industrial employer in the city has just been bought up and the site closed down, although it is said that the company did arrange for those left without a job to be re-employed elsewhere. The city is, with some success, now promoting the town as a prime tourist destination.

So much for the background. I would be interested to hear your comments about Commercial Property investment in particular - a good idea, a bad idea, pitfalls and advantages? And especially such an investment in this part of the country.

I am a new resident of Germany so will need to pay tax on locally produced income. That too is a factor.

All comments very welcome. Thank you.

Neustria in Konstanz

 

[mart123]

Hi Neustria,

From what I know of Konstanz it'll be a very safe place to invest, prices won't rise significantly but nor will they decrease. I did look at some smaller German cities and one key factor is Expected population growth/decrease - The Germany population will start to decrease soon but not everywhere equally. Eastern Germany in particular is losing people even cities e.g. Berlin

I don't know much about Commerical property unfortunately, but you should look into the tax implications particulary if depreciation is possible. A German Taxpayer who buys a flat for someone else to live in (Kapitalanlage) can depreciate a portion of the property. This is set by the local authority which divides the flat value into "Bricks and Mortar" and Ground. The bricks and mortar element usually makes up to 70% of the value and you depreciate this over 50 years at 2% per year.

Most flat purchasers in Germany are therefore more interested in the Tax benefits than capital appreciation. Also if you keep the flat for 10 years then sell it, you don't have to pay capital gains tax on any increase.

Best regards,
Martin

 

[neustria]

Good points all to consider Martin. But I wonder if the "Kapitalanlage" provision also applies to commercial property...

I wouldn't think that the population decrease will be an issue in Konstanz. As a general rule (in Europe),people tend to move from the country into the cities, and from the northern to the southern climes.

People have gotten so used to stable (or dropping) prices in this country that few now can ever imagine a possible medium term (5-10 years) capital gain on their purchase. Germany has some catchup to do compared to the countries in its immediate vicinity so, in light of the better economic figues, I think that maybe prices could indeed start to move higher finally. In the meantime the reasonable yields compared to other markets do allow one to be patient.

All my best and many thanks for your answer. Neustria

 

[neustria]

In a post dated January 14 found on the economic news site Market Watch, (http://ww w.marketwatch.com) Paul B. Farrow proposes an article on the equity markets entitled

"14 Winning Strategies in a Recession Bear Market"

Farrow quotes largely from the 2008 US economic forecasts of "one of America's leading economists, Gary Shilling, Forbes columnist and editor of "Insight," a financial newsletter"
He (they) write:

"Leaping volatility in many markets is telling investors, painfully, just how far out the risk spectrum they had climbed. So the de-leveraging of the many areas of intense speculation beyond housing is at hand."

In strategy no. 8 he advises:

"Sell or avoid most commercial real estate. During the 1974-1979 recession, I (Farrow) was at Morgan Stanley helping REITs, banks and developers work-out huge problem portfolios. Today smells worse. "

Whether such a slump in commercial real estate will be exported globally is probably anybody's guess. Yet in today's markets, economic trends are global like never before. It certainly is a time for caution.

Neustria

 

[JMBroad]

I did look at some smaller German cities and one key factor is Expected population growth/decrease - The Germany population will start to decrease soon but not everywhere equally. Eastern Germany in particular is losing people even cities e.g. Berlin
Martin

Hi Martin.

Just curious, could you quote your source for this as all the info I've unearthed show that Berlin's population was decreasing every year however in the past year that has changed and Berlin is slowly seeing a growth again.

Additionally, the important thing about the population of Berlin is that it's swapping from lower income factory workers to higher income execs, so the purchasing power of the average "Berliner" is increasing each year.

 

[neustria]

Latest economic trend:

Commodity prices are breaking records and this, most economists think, is going to make it difficult for the US Federal Reserve to continue cutting interest rates, out of fear of setting off inflation.
If confirmed this will be bad news for the global real estate markets.

Neustria