German real estate

[Cutten]

This has held up relatively well in the current decline. Often when one market sector or area holds up well when everything else is getting hammered, it is a strong indication of solid value and demand for that particular sector. Once normal conditions return, often it will lead the way to the upside.

German real estate is very cheap on a price per square meter basis compared to the rest of Europe and indeed most of the industrialized world. Yields are also pretty attractive in some areas.

I have a feeling that before the G7 property bust has finished, German real estate will start climbing, and could be one of the best performing assets over the next decade. The only real risk is the currency, but this can be reduced by using a mortgage and a modest deposit (i.e. put down 30% instead of buying for cash).

It would be also interesting to look at real estate stocks in Germany, although the correlation is never 1:1 with the underlying market. Any thoughts?

 

[Debaser82]

I read an article on it some time ago

German homes as good as gold

German residential property is joining gold as a safe haven for investors disillusioned with equities and afraid other assets will be eaten away as measures to combat the financial crisis prompt a spike in inflation.

"Residential property is boring. There is no 'sexy story'. But today, boring is beautiful. Today, capital preservation is more important than high returns," said Udo Scheffel, Chief Executive of German residential property company GBW.

The German cities of Munich and Hamburg were the top two investment locations in Europe for 2009 in accountancy firm PricewaterhouseCoopers' latest annual survey of real estate executives and fund managers, and four German cities were in Europe's top 10.

http://uk.reuters.com/article/fundsNews/idUKLNE51G00D20090217

There was a small debate on the matter elsewhere on ET

http://www.elitetrader.com/vb/showthread.php?s=&threadid=164411&perpage=6&pagenumber=4

Quote from makloda:

Germany is still suffering from a gigantic glut of homes/apartments from the 1990s reunification-fueled homebuilding frenzy. Tons of private investors got burned back then in semi-fraudulent real estate developments/investments.

Home ownership is relatively low, rent increases are barely keeping up with inflation. German law is structured in a way so tenants rights are given higher priority in court than owners' property rights (i.e. you have a single mom with children in your apartment and she can't pay rent, you will have a tough time evicting her -- unless you can provide her with an alternative place to live in. Thousands of owners are being burned by tenants that can't pay but that can't be easily evicted).

Real returns after taxes on owning and renting out e.g. an apartment building are low (< 3-4% annualized is not uncommon). Why the hassle when the good ole' German Bunds pay the same 4%?

Cheers.

 

[ASusilovic]

Quote from Cutten:

This has held up relatively well in the current decline. Often when one market sector or area holds up well when everything else is getting hammered, it is a strong indication of solid value and demand for that particular sector. Once normal conditions return, often it will lead the way to the upside.

German real estate is very cheap on a price per square meter basis compared to the rest of Europe and indeed most of the industrialized world. Yields are also pretty attractive in some areas.

I have a feeling that before the G7 property bust has finished, German real estate will start climbing, and could be one of the best performing assets over the next decade. The only real risk is the currency, but this can be reduced by using a mortgage and a modest deposit (i.e. put down 30% instead of buying for cash).

It would be also interesting to look at real estate stocks in Germany, although the correlation is never 1:1 with the underlying market. Any thoughts?

German real estate and the German consumer are faring well, because they do not live in a debt burden situation like Anglo-Saxon economies.

I mentioned it several times here. Germans have a savings rate of 11-12 % since the end of World War II.

Lately, the savings rate exploded to 18-19 % ( according to official Bundesbank statistics )!!!!

Ergo : no need to fire sale real estate. German consumers are sitting on rock solid savings.

 

[Debaser82]

Quote from ASusilovic:

German real estate and the German consumer are faring well, because they do not live in a debt burden situation like Anglo-Saxon economies.

I mentioned it several times here. Germans have a savings rate of 11-12 % since the end of World War II.

Lately, the savings rate exploded to 18-19 % ( according to official Bundesbank statistics )!!!!

Ergo : no need to fire sale real estate. German consumers are sitting on rock solid savings.

This is the case for more countries in Western Europe (Belgium, France, Netherlands.)

Unfortunatly some of their bigger banks decided to load up on foreign mortgage CDO's in search for higher returns creating giant holes in their balance sheets today but in general people do save indeed.

 

[makloda]

Quote from Cutten:

This has held up relatively well in the current decline. Often when one market sector or area holds up well when everything else is getting hammered, it is a strong indication of solid value and demand for that particular sector.

Look up a long-term chart of German real estate prices. There was basically no real appreciation (in excess of inflation rates). That's why prices were stable since global property prices peaked and went into a tailspin -- they were never in a bubble in the first place, hence little downward price pressure compared to Spain, UK, US etc.

 

[Cutten]

Quote from Debaser82:

I read an article on it some time ago

German homes as good as gold

German residential property is joining gold as a safe haven for investors disillusioned with equities and afraid other assets will be eaten away as measures to combat the financial crisis prompt a spike in inflation.

"Residential property is boring. There is no 'sexy story'. But today, boring is beautiful. Today, capital preservation is more important than high returns," said Udo Scheffel, Chief Executive of German residential property company GBW.

The German cities of Munich and Hamburg were the top two investment locations in Europe for 2009 in accountancy firm PricewaterhouseCoopers' latest annual survey of real estate executives and fund managers, and four German cities were in Europe's top 10.

http://uk.reuters.com/article/fundsNews/idUKLNE51G00D20090217

There was a small debate on the matter elsewhere on ET

http://www.elitetrader.com/vb/showthread.php?s=&threadid=164411&perpage=6&pagenumber=4

Cheers.

Did Makloda give a source for his figures? From what I understood, yields are far higher than 3-4%.

 

[Cutten]

Quote from makloda:

Look up a long-term chart of German real estate prices. There was basically no real appreciation (in excess of inflation rates). That's why prices were stable since global property prices peaked and went into a tailspin -- they were never in a bubble in the first place, hence little downward price pressure compared to Spain, UK, US etc.

The "lack of bubble" (actually a secular bear market in some places) means there shouldn't be any meaningful price falls just due to credit contraction and deleveraging/distress selling from speculators. That is a bullish point. There has been a massive collapse in prices in many areas. Land prices in E. Berlin for example have fallen over 75% peak to trough since the late 90s. A couple of years back I saw a plot of land sell at 60k Euros that had a prior sale in 1997 for 220k.

If you look at the typical features of a deep value situation, then see how many are present in the Berlin market, it is quite interesting:

1. Prior historic price collapse - Berlin land prices down 75%+ over 10-15 years.
2. Low price to cashflow - rental yields are in double digits in former E Berlin apartment buildings. Blue chip properties yield 7-8%. A typical gentrifying area will have gross yields of 9-10%, compared to bunds at 3.6%.
3. Sentiment & speculative participation - very negative & low, most speculators have long since been wiped out, and foreign investors are in risk-aversion mode right now. Very few Berliners & Germans own their own properties. There is little coverage in the media, and people like yourself are dismissive of the prospects.
4. Credit cycle - we're at a very low point in the credit cycle, access to credit is the tightest it's been for a long time.
5. Price below replacement cost - most buildings can be bought for less than it would cost to build them from scratch.
6. Comparables - Berlin property is cheaper than Bucharest, Warsaw, Budapest, Bratislava, Prague etc on a per square meter basis, let alone Paris, London, Amsterdam, Madrid, Dublin, Milan. For example in Bucharest a decent up & coming area goes for about €1000-1200 per sq m (although that might be a bit stale now since it's a bear market), in Berlin it's 600-700.
7. High carry - it is cheaper to buy and pay a mortgage than it is to rent.

Whenever I have seen those features in the past, it has been a great buying opportunity for long-term investment. The one bear factor right now is the global credit crunch and recession, but *if* that is met with resilience in market prices, rather than the normal reaction of significant price falls, that would be a significant market tell that it is a good time to buy. You would have a divergence in price from the fundamentals and from related markets, which is a classic bullish timing signal.

Investors who are willing to pay higher prices in return for less risk and more certainty on timing, have the option of waiting for a decent uptick in prices. Just wait for the recession to end, and/or real estate in Berlin to increase 15-20% from current prices, then buy. Property is not really a good asset to time however due to the delay in transactions and extreme illiquidity.

 

[zdreg]

Quote from makloda:

Look up a long-term chart of German real estate prices. There was basically no real appreciation (in excess of inflation rates). That's why prices were stable since global property prices peaked and went into a tailspin -- they were never in a bubble in the first place, hence little downward price pressure compared to Spain, UK, US etc.

would some one please post a chart or a table that is more update. spanish housing prices etc have fallen of a cliff and are not reflected in the chart.

tia

 

[FerdinandAlx]

German real estate prices will stay where they are unless some reforms are made to promote home ownership. Germany is one of the few countries in Western Europe where it is required to pay down 10-20% on a mortgage. It's also one of the few countries where mortgage interest isn't deductable from income taxes. Once the German homeowner has the same financial options as homeowners in France or The Netherlands you'll see Germany's real estate market take off. When that happens I'll be in the market for some properties in the Main-Tanus-Kreis.

As it stands right now the yields are attractive but the capital gains are not.

 

[makloda]

Picking out Berlin as an example why German (i.e. the entire country) real estate is cheap is like picking out GE and claiming how "US stocks are cheap across the board".

Possibly there are good reasons for GE and Berlin real estate being in the dumpster. For once, GDP per capita is 23.300 EUR/capita in Berlin (with one of lowest annual growth rates @ 0.3% among German states = the disparity is likely to grow rather than shrink) vs. e.g. 47.800 EUR/capita in Hamburg. Unemployment is high in the East in general, Berlin is no exception. Berlin is amongst the weakest job regional job markets @ 17.5% unemployment, compared to Bavaria's 6.4%. Do your comparison again, exchanging Berlin for Frankfurt, Dusseldorf, Hamburg or Munich. How do real rental yields in Munich or Frankfurt stack up in international comparison?

I know real estate sites are trying to pitch Berlin as a hip destination to expats, e.g. to Londoners who are used to paying 10,000 GBP/sqm -- IMO, Berlin is unfortunately going nowhere. Being ruled by a coalition of socialists and the former East German communist party one shouldn't be too optimistic about change.

If you think Berlin is cheap why not go for the real thing, e.g. Görlitz -- 2 hours from Berlin:
http://www.immobilienscout24.de/immobiliensuche/eigentumswohnungen/sachsen/goerlitz.htm. How's that for EUR/SQM?