Why does Germany attract foreign investors in real estate?

The attractiveness of the German economy for investors

Germany's strong economy, clear legislation, stable political environment, and high standard of living make the country very attractive to investors from other continents. These aspects create a sense of a reliable "harbor" for capital investments, which is why the real estate market in Germany has long been of interest to foreigners.

Real estate rental in Germany

In the German residential market, renting predominates significantly. On average, renters make up about 50% of the total population, and in major cities like Berlin, Munich, and Hamburg, the rental share can reach an impressive 90%. According to Forbes, Germany ranks first in Europe in terms of rental housing affordability, which stands at around 55%, making it particularly attractive compared to countries like Austria and Poland.

Rise in real estate prices

It's not surprising that in 2018 there was an increase in housing prices in this European country with a stable economy – the growth was 5.6%. This increase can be explained by several factors:

• low interest rates on loans;
• increase in population
• low unemployment rate.

In the same year, the volume of transactions in the residential real estate market reached a record level of 124.8 billion euros, according to a study by Team Global Corporate Communication. In comparison, in 2017, the investment volume in this sector was lower, amounting to 119.3 billion euros.

Trends in the real estate market in 2019

The trend of rising real estate prices continued in 2019. While this trend was previously observed mainly in major cities like Berlin and Munich, interest in real estate is now also spreading to lesser-known locations. With the increase in housing prices in key cities, investors have started to pay attention to alternative locations. Towns like Nuremberg and Hanover, along with their surroundings, are becoming increasingly attractive due to affordable prices and noticeably high rental yields.

Annual growth in real estate prices

It can be noted that the real estate market is showing a steady annual increase in prices for both residential and commercial properties in the seven largest cities in Germany and their surroundings. Over the past three years, the value of residential real estate in cities such as:

• Berlin;
• Munich;
• Frankfurt;
• Hamburg;
• Düsseldorf;
• Cologne;
• Stuttgart;

increased by more than 30%. Experts predict that this trend will remain stable in the future as well.

Imbalance in the real estate market

In large metropolises of Western Germany, there is a pronounced imbalance between the supply and demand for real estate, which is due to a significant influx of labor migrants. If we take the prices of residential properties on the secondary market in March 2007 and November 2017 as a basis, it is evident that the prices for such apartments have increased by180.2%while new buildings have become more expensive177.4%This trend creates interesting opportunities for investors, as many properties are purchased with the intention of subsequent rental. In a growing market, investors have the chance to enhance their financial situation in two ways: first through rental income, and then thanks to the potential increase in the market value of the property.

The appeal of the suburbs

According to data from the German Association of Investment Real Estate (dave), suburban areas of major cities in Germany, located within a radius20-30 kilometersare becoming increasingly attractive for investments. This is due to the fact that such areas have lower prices compared to the central parts of cities and a larger selection of affordable apartments. It is important to note that even settlements with a small population, less than10,000 people...can boast a developed infrastructure and well-established transportation links, including:

• kindergartens;
• schools;
• sports facilities, such as swimming pools and fitness centers.

Mortgage lending in Germany

As for mortgages in Germany, there are also some interesting developments. Interest rates range from0.8%to1.8%...which makes them accessible even for those who are not residents. Low default rates on mortgage loans combined with low interest rates...EURIBORmakes Germany one of the countries with the most favorable mortgage conditions in the world. Currently, the average mortgage rate is approximately1.6%annual. However, it is important to consider that borrowers will need to make a down payment of about20%from the loan amount, which helps prevent the occurrence of what is commonly referred to as"credit bubble".

Opportunities for non-residents

Non-residents can obtain a mortgage for the purchase of residential real estate for both investment and personal use. Additionally, the availability of loans for purchasing income-generating properties is also quite high – banks assess the building's potential and quality, its location, and the occupancy rate. Loans can also be arranged for the purchase of commercial real estate, such as stores, with long-term lease agreements (lasting more than...10 yearsHowever, it is worth mentioning that banks are cautious when financing the hotel business if the hotel has less than100 numbersIn such cases, they prefer to conduct a more detailed analysis.

Market prospects

Thus, the real estate market in Germany continues to actively develop and offers broad prospects for both private buyers and investments, despite some challenges. This creates interesting opportunities for anyone looking to enter this field or expand their investments. Investors can benefit from the rising property values and stable rental income, making the market dynamic and attractive for both foreign and local investments.

Loan for purchasing real estate

If you are planning to take out a loan for real estate investment, you need to ensure that you have about 40% of the property's value in your account in advance. Foreigners seeking financial support are required to provide the bank with proof of stable and sufficient income, as well as the availability of the necessary funds.

Potential buyers should remember that both locals and foreigners are subject to a speculation tax, which is 30% for 10 years after purchasing property. After this period, tax obligations will no longer be a concern.

Trends in the real estate market in Germany

Previously, Germans preferred to purchase real estate closer to their retirement age due to the high mobility within the European Union.

However, the current conditions with low interest rates encourage them to start purchasing property not only for personal use but also for the purpose of subsequent rental. According to the latest data, Germans invest over 160 billion euros in real estate each year, which confirms a steady trend towards the expansion of this market.

This creates a competitive environment for foreign investors, and it can be argued that a strong market for real estate is beginning to develop in Germany.

Popular types of housing

Currently, the following are especially in demand:

• Small apartments with a number of rooms ranging from one to three;
• Apartment buildings;
• Apartments in small towns where there is potential for price growth.

The interest in such compact housing is due to the trend in Germany of decreasing family sizes, even though the overall number of families is increasing. This is especially noticeable in large cities, where there is a rise in the number of childless couples.

Migration processes, both internal and external, also play an important role in the real estate market, especially in megacities that are experiencing a massive influx of migrants.

Commercial real estate

In the commercial real estate sector, there is currently a particular demand for the purchase of supermarkets with long-term lease agreements, regardless of their location.

Experts advise foreigners planning to buy apartments or multiple properties for rental purposes to pay particular attention to new buildings. In this category of real estate, prices are generally less inflated than in the secondary housing market, and there is a wide selection of options available to meet various financial interests.

New buildings also offer the option of phased payment and a warranty from the developer for up to five years.

Changes in legislation

It is important to note that foreign buyers should take into account the changes that occurred in 2016, when the requirements for applying for funding for companies with foreign capital became significantly stricter.

This implies that the sources of capital origin must be as transparent as possible and subject to verification, which requires additional preparation on the part of potential investors.

In situations where a foreign citizen decides to purchase real estate in Germany without applying for a loan, financial institutions, banks, as well as notaries and sellers are obligated to carefully verify the sources of funding for the acquired capital.

According to recent data, the real estate sector in Germany has seen significant growth, reaching 10.5% over the past year. Hamburg ranks third in terms of price levels, with the average price per square meter of housing reaching 4,587 euros. In contrast to the western part of the country, including federal states such as Bavaria, Baden-Württemberg, and Schleswig-Holstein, the market situation in the new federal states appears less optimistic.

In various eastern regions, a decline in housing prices is predicted; in other words, there is a consistent decrease in the value of residential properties in these areas. The main reason for this situation is the shrinking population, which poses a serious problem for many eastern territories of Germany.

Investments in real estate in Germany

Regarding investments in German real estate, they are influenced by a variety of factors, including individual investor preferences. Some investors focus on the hospitality sector, others prefer opening retail outlets, while some find it more profitable to invest in apartment buildings.

• Hotel business
• Retail outlets
• Apartment buildings

The main trend is that liquidity is crucial for successful investments, which can come in the form of commercial properties as well as residential apartments intended for rent. Experts advise investors with a limited budget to focus on purchasing apartments. For example, in the Frankfurt am Main area, the amount to start acquiring an apartment usually does not exceed 1 million euros.

Real estate yield

It is important to understand that the returns from residential real estate are generally lower than those from commercial properties. On average, the profit from investment real estate ranges between 5% and 8%, while the expected return from renting residential properties is approximately 3.8%. However, it is worth noting that private apartments have a higher potential for value growth.

Typically, they appreciate in value faster than commercial real estate, averaging between 7% to 10% per year. Therefore, there is a high likelihood that in three years, your apartment could increase in value by 30%.

Predictions for the future

According to forecasts from international experts, interest in real estate in Germany, and consequently prices, will continue their upward trend in 2020. However, this process will be under strict control from the German authorities, who have the ability to prevent unjustified growth and the emergence of a "price bubble."

The Institute of German Economy in Cologne conducted a survey among 600 real estate companies regarding the future of the real estate market next year. The study addressed general economic issues as well as problems related to investments, rentals, and sales, including land plots and other aspects.

The results showed that61%The respondents are confident that real estate prices will continue to rise next year, while only39%They do not expect significant changes in housing prices. All experts unanimously agree that price declines are not anticipated in the foreseeable future.

Conclusion

In conclusion, it is remarkable how an old country like Germany, with its rich history and culture, continues to demonstrate outstanding results in the real estate sector. Against the backdrop of a strong economy, a stable political climate, and an attractive legislative environment, investments in real estate are not just profitable but also a strategically sound move for foreign investors. I see how market trends reflect a constant increase in interest in rental properties and a shortage of supply in major cities, creating ideal conditions for investment.

I became particularly interested in observing how the external real estate market adapts to changes in demand, which I believe opens up new horizons for investors, including in so-called "new" cities like Nuremberg and Hanover.

Low interest rates and opportunities for investors

It is important to note that the low interest rates on loans in Germany, available to both local and foreign investors, create additional opportunities for effective investment. I believe that the opportunities provided by this market will only continue to expand. However, the process of purchasing and investing requires a thoughtful approach, research, and an understanding of the local market's specifics.

Prospects and new trends

Over time, we are likely to see changes in the structure of demand and supply in real estate in small towns near major metropolitan areas. This will create new conditions for growth and development for both investors and tenants.

In the end, I have an optimistic view of project implementation in Germany, and I believe that this market will only continue to grow, offering new investment opportunities.