How to properly invest in real estate in Germany?

Stability of the German real estate market

The German real estate market is rightly considered one of the most stable and reliable in a global context. Currently, there is a clear trend of increasing sales: the demand for housing significantly exceeds its supply, creating a favorable situation for owners looking to sell their property.

Investment in residential real estate

Investors interested in the real estate market should pay attention to the possibility of buying housing for subsequent rent, as it seems to be a simple and profitable option. In this case, you can count on a return within the range of2-3%per year. Although this level of income may seem insignificant, it is offset by the ease and speed with which one can liquidate the asset, thereby providing the necessary liquidity.

Dynamics of housing prices

What else is important to consider for those planning to invest in income-generating real estate in Germany? One of the key aspects is the dynamics of housing prices. Over the last decade, the German real estate market has demonstrated its stability through a steady increase in prices per square meter. Unlike many countries in Europe, there was no sharp decline in prices in Germany following the financial crisis of 2008. According to Eurostat, from 2008 to 2013, the average housing price in EU countries decreased by 8%, while in Germany, on the contrary, there was a growth of 12%.

Rental market

It can clearly be seen that against the backdrop of eight years of rising house prices, rental rates are also on the rise. For example, the real estate portal immowelt.de has been monitoring prices since 2011. According to their data, by 2017 rental rates had increased by an average of18%, having risen from6.6 euros per square meter per monthto7.8 euros.

In large cities, rental rates are even higher. For example:

• In Berlin, renting an apartment with an area of 60 square meters in August 2018 cost11 euros per square meter.
• In Hamburg - in12 euros.
• And in Munich — in18 euros.

Economists' forecasts

Economic analysts, such as specialists from the Trading Economics portal, express the opinion that by 2020, the value of real estate in Germany should increase by almost20%. At the same time, some experts warn about the risk of a "bubble" and a potential drop in prices. However, economists are confident that a strong economy and steady demand for housing will prevent the market from falling. Forecasts by the European Commission state that Germany's gross domestic product will increase at a rate of approx.2%in the coming years.

Price growth restrictions

There are certainly certain limitations on price growth. It is possible that the rate of increase will slow down over time and, in some situations, even become comparable to inflation levels. However, for a real decrease in prices to be observed, serious factors must occur, such as a sharp rise in interest rates or large-scale economic problems within Germany, which, at the moment, is one of the most stable economies in the world.

Demand for rental housing

The high level of demand for rental housing has a significant impact on the market. According to Eurostat, on average across Europe...30%The population lives in rented housing. Germany ranks second in the world in terms of the share of renters, which reaches48%, yielding only to Switzerland with its55%.

In large cities in Germany, a significant portion of the population rents their housing: according to data from the company LBS, in Hamburg70%Residents live in rental housing, and in Berlin, this figure reaches80%These statistics from the immobilienscout24 portal highlight the current state of the rental market in the country.

Overview of the rental market situation in Germany

In 2016, the number of people looking to rent in Munich was 77 people per apartment, 75 in Stuttgart and 53 in Cologne. Data collected by immobilienscout24.de shows that Berlin is in last place among the ten most active rental markets in Germany, with around 33 potential tenants competing for every apartment.

Reasons for the high demand for rentals

One of the key reasons for the high demand for rentals is the constant increase in the number of immigrants. According to an OECD report, in 2016, Germany ranked second after the United States in the number of foreigners who obtained legal status.

Demographic changes in Berlin

As Boris Eliasson emphasizes, the demographic situation in Berlin has undergone a significant change: every year the capital's population increases by 50,000 people, eventually reaching 3.5 million. Most of the newcomers are educated, well-qualified and middle-aged.

They have sufficient means and are looking to rent or even purchase high-quality housing, which in turn contributes to the rise in real estate prices in the region.

Taxes on rental housing

Owners who rent out their properties are required to pay taxes on the income they receive.

• Individuals pay income tax, which ranges from 14.77% to 47.475% depending on their income.
• Legal entities are liable to pay income tax at a flat rate of 15.825%.

The income tax is calculated based on the difference between all earned amounts and incurred expenses, which include:

• Acquisition costs
• Utilities
• Services of management companies
• Property and land taxes
• Interest on borrowings
• Depreciation, which amounts to 2 to 3% of the building's value per year.

Depreciation of real estate

Particular attention should be paid to the method of calculating depreciation, which is determined based on the initial cost of the building.

Documents for tenants in Germany

In Germany, tenants looking for housing are required to provide landlords with a set of documents that confirm their financial ability to pay rent. This document package includes:

• Copy of the employment contract.
• Certificate of income for the last three months (according to German law, a tenant has the right to use no more than one third of their monthly income before taxes to pay for rent).
• Confirmation of credit history.
• A letter of recommendation from the previous landlord confirming that lease obligations were previously honored without delays or debts.

Deposit for tenants

As a rule, tenants are required to pay a deposit (kaution), which ranges from one to three months' worth of "net" rent — that is, excluding additional utility costs. This deposit serves as a guarantee for the property owner that they can cover losses in case the tenants stop paying rent or cause damage to the property. If the terms of the contract are met, the owner is obliged to return the deposit to the tenants at the end of the lease.

Restrictions on rent increases

In addition, German law sets limits on rent increases, which protects tenants from arbitrary increases. In accordance with the legislation:

• The rent cannot increase by more than 20% over three years (in Berlin, no more than 15%).
• In the case of a major renovation aimed at improving the energy efficiency of the housing, the owner has the right to increase the rent by 11% of the cost of the work.
• When signing a new lease agreement, the cost should not exceed 10% of the official city rental index.

For example, if the index is 8.50 euros per square meter, upon renewing the contract, the owner can raise the price to a maximum of 9.35 euros per square meter. This limitation is known asMietpreisbremseIt is used in more than 320 cities in Germany. However, in some major cities like Hamburg, Frankfurt, and Munich, this rule does not apply.

Expert opinion on tenant protection

According to Robert Reitzman, head of the office in Munich, the city administration was supposed to prepare new measures to protect tenants in July 2018, but this initiative has been forgotten for now. As a result, potential tenants must be ready to provide landlords with all necessary documents and be aware of their rights in the housing rental sector.

The existing legislation is aimed at protecting tenants; however, in certain regions, there may be restrictions and specific nuances that should be taken into account when renting housing.

Conclusion

In concluding our discussion about the German real estate market, it is very important to emphasize its unique characteristics and the amazing opportunities it offers to investors. As one of the most stable and predictable markets in the world, Germany is capable of providing secure investments even in the face of global economic upheavals.

Seller's market

Since the housing market in Germany is currently a seller's market, many potential investors in residential real estate are facing limited supply. However, for those willing to invest, rental income offers the prospect of generating a steady income on average.2-3%annual. It's also important to remember the high liquidity of real estate, which adds extra confidence.

Increase in the cost per square meter

Over the past ten years, the cost of a square meter of real estate in Germany has shown steady growth, indicating the unwavering reliability of the market. Unlike other European countries, Germany has withstood the crisis.2008 yearand even managed to demonstrate price growth during this challenging period.

Potential risks

Although some experts are beginning to worry about the possible formation of a“bubble”In the market, many analysts are confident that a strong economy and stable demand for housing will prevent property prices from falling significantly. The German economy is one of the strongest in the world, which creates a solid foundation for further growth in housing prices.

High demand for rental.

Undoubtedly, the high demand for rentals is sustained by a constant influx of immigrants, which also intensifies the competition for available apartments. This factor can be both an advantage and a challenge for investors, considering that tenants are willing to pay more for quality housing.

Tax aspects

Ultimately, for successful investment in German real estate, it is important to consider tax aspects, as they can significantly impact the profitability of your property. Germany offers opportunities for tax optimization, which can be beneficial for employers and individuals alike.

Result

Thus, if you are considering investment opportunities, the German real estate market can be a solid choice for you. With the right approach and knowledge of all the nuances, you can achieve excellent results and make the most of the opportunities the market offers.