Dec. 13, 2013
Germany is the locomotive of the European economy. In search of a stable life and good money people tend to move to Germany preferring it to the rest of the EU countries. It is not surprising that even in during hard times like now residential property prices in Germany are growing at the rate of 11% per year, which is much faster than in neighboring countries of the Western and Central Europe.
Not long ago ee24.com portal published an interview with an expert of Baden-Wuerttemberg Land market, which has revealed that now Russians invest in business projects and commercial real estate in Stuttgart more often and with a good understanding of what they are doing.
Today ee24.com presents an interview with Vitaliy Chupin, an expert of Bavarian market and also a managing partner of Campus Consulting GbR. The company principally deals with commercial real estate in Bavaria, not only in Munich but also in small as well. The fact is that the malls and outlets in small town usually do not experience any competition and are always able to attract buyers because they don’t have much choice. But the most popular place for residential real estate is still Munich, the capital of Bavaria and a large industrial city.
Munich city centre
– Which areas of Munich are preferable for buying residential and commercial real estate?
– First of all it is the city center. In case with commercial real estate you can make money from renting your property. At the same time, land prices are rising so buying in the heart of Munich is a profitable investment.
Speaking about residential sector, the prices here have been on the rise: over the past couple of years apartments in Munich rose in price by about 30%, and we expect the trend to persist in the future. This is due to the fact that Munich is quite a small city where only limited areas are allocated for construction. Literally only a few big projects can be found in Munich simultaneously. It’s not enough even to cover Munich citizens’ demand let alone people from other parts of Germany and foreigners.
– Which districts of Munich apart from the center are also advantageous?
– As for residential property, it's Bogenhausen located near the center, to the right from the Isar River. Bogenhausen is considered an elite area; there are very beautiful villas and elegant parks there, including the famous English Garden. I can also recommend Grunwald district; it is in the suburbs and is an analogue of the Moscow Rublevka. But unlike Rublevka it takes only 25 minutes to get from Grunwald to the Munich center.
There is also Schwabing district, one of the old, classic German districts. The Ludwig-Maximilians University and the Technical University are located there; therefore the area is crowded with young people. On the other hand, indigenous Munichites love Schwabing for its proximity to the English Garden and a large number of historic buildings.
And in general, of course, Munichites prefer the old parts of the city. Areas with new buildings are not very popular.
Lively street in Munich
– What are the average prices in the districts that you’ve mentioned?
– It’s really difficult to tell in case with commercial real estate because too many factors should be considered. The offers are so scarce that each is a blessing in its own.
As for housing, the average tendency is that if 10 years ago elite real estate in Munich cost €10 thousand, now it’s up to €22.5 thousand per square meter. Main real estate and new buildings cost €5-6 thousand per square meter. In the historical center, in decent houses prices range from €10 thousand to €12 thousand per square meter. In the secondary market it is very difficult to find anything for less than €3 thousand per sqm.
|Minimal price of 1 sq.m in Munich||€3 thousand|
|Properties in outskirts||€5-6 thousand|
|Properties in city centre||€10-12 thousand|
|Luxury real estate||€22.5 thousand|
Munich is clearly the most expensive city in Germany; it is slightly more expensive than Frankfurt, which holds the second place. Berlin is way behind. Just a few years ago you a secondary residential property in decent areas of Berlin could cost only €1.2 thousand per square meter.
New buildings in Munich
– Please, tell us in a nutshell about attractions of commercial real estate in Germany
– Now purchase of commercial real estate in Germany is becoming popular among Russian investors. Just 5-6 years ago, the Russians did not want to invest in German commercial real estate. Their excuse was the fact that the profitability is uncertain. At the moment, the market has changed, people began to wonder. Profitability ranging from 5% to 8% combined with high reliability of Bavaria being the most stable region of Germany makes the purchase of commercial real estate very attractive.
– What types of commercial real estate can give a good income?
– To begin with, I often see offers in Germany related to tenement buildings, as well as mixed residential and commercial real estate. We dissuade our clients from buying such buildings, as it brings great difficulties when tenants leave. Finding a new tenant is a rather difficult task. This also applies to business centers and offices. Therefore, mainly we offer outlets or major business centers with at least one solid anchor tenant, for example, some German retail chain with a lease contract for 10-15 years, the solvency of which is beyond doubt. I think, anyone would agree that the possibility of a huge retail chain with hundreds of branches across Germany going down is negligibly small. Such shopping centers usually have some smaller tenants (eg, bakery, pizzeria, laundry) in addition to the anchor one occupying 5-10% of the area. If they decide to leave, it will not significantly affect your income.
– And if the contract is for, let us say, 10 years, but the tenant moves out earlier, will he suffer some losses, pay fines?
– If the tenant signed a contract for 10 years, but decides to move out, he is still obliged to pay for 10 years of rent. In other words, the tenant cannot move out; it implies huge losses. These are so-called binding contracts that tenants cannot terminate prematurely. The only option to move out not paying is bankruptcy.
– How much is the property that you offer?
– We deal with commercial real estate from €1 million. Given that almost all our customers are credited we presume that it is necessary to have at least €500 thousand (50%) of seed capital.
For example, we have a very interesting object in Munich, a beauty salon worth €1,1 million in the city center, just a hundred meters from Central Station. In 2012 the building was completely sanitized; historic facade remained as a monument of architecture. Area is 118 sq.m. The owner works with leading show programs on television and agencies. It’s a big name for the market. We signed a long-term lease contract with profitability of around 5%, which is very, very interesting for Munich. And anyway a commercial property worth €1 million is a rarity for the city.
We offer properties in the range of €1-3 million, but there are also objects worth €6-7 million. We don’t work with a large property database but rather with individual needs that we treat very objectively. Many property owners whom we work with prefer not to be exposed on the Internet, and many properties from our database are available only on request.
– And what are the rental rates?
– For that beauty salon, which I mentioned, rent costs €42 per square meter. But there are streets in Munich, where rates could be 2 times higher. As for commercial real estate, there are just certain priceless streets in Munich. And if you drive off from the city center the rates drop significantly.
– Which streets, in your opinion, are among the "priceless" ones?
– For example, there is Munich Kaufingerstraße, the central shopping street, which runs from the central Marienplatz square; the main shopping infrastructure of Munich is all there. There are insanely high prices for commercial real estate on that street.
Or let’s take Maximilianstrasse where the major boutiques are. The prices there are very high too. Accordingly, if you want to rent an office on Maximilianstrasse a small room of 10-12 sq.m will cost €1,300-1,500 per month.
– Many customers are interested in buying entire buildings for rent. Are there risks associated with such investments?
– Sure. German law provides tenants with the right for 3 months to move out. That is, he or she may notify you 3 month in advance and, respectively, you will have 3 months to find a new tenant. For the owner, located in Russia, it is a very difficult thing to do; so it is necessary to hire a realtor or a management company to look for a tenant, but without any guarantees, of course.
Yet Munich isn’t the worst scenario. If you have an apartment in Munich and look for a tenant, 10-15 people come to see it. In other smaller and less interesting from a financial point of view cities finding tenants can take a long time.
– What is the reason that in the last 4-5 years the proportion of homeownership has been rising in Germany, the country where this figure was traditionally low?
– People have a sense that the Euro is uncertain. Moreover, investments in real estate have historically been very reliable for people. Having bank deposits and securities is one thing, and owning something very physical is completely different.
– In Russia people think: why pay rent when mortgage payments take the same money
– Rent is preferable because the modern world is becoming global and any specialist must reckon with the fact that the next day he or she may have to leave the city. Direct purchase and sale of real estate is a costly occupation requiring payment of taxes, and, in addition to this, people have neither energy nor inclination nor time. Many specialists move around Europe literally changing cities monthly. Therefore, the purchase of real estate becomes difficult psychological decision for Europeans.
– Let’s talk about taxes and expenses when buying commercial real estate
– Additional costs account for just under 10%. Tax on the purchase of real estate is 3.5%. Brokerage costs range depending on federal land and for Bavaria the figure is 3.57%. Notary Fees amount to 1.5%. We also recommend having legal review of property; it is approximately 1%. The concept of our firm is that we do not charge extra money for package of offered additional services (eg translation of documents); instead we charge fixed for Bavaria realtor percentage only.
– What the legal review can reveal?
– It includes lease checking property’s lease documents and debt encumbrance. Grunshuld is a concept specific to German law: in order to get a mortgage from bank you need to encumber the property with the amount of the mortgage. It’s important to note that the tax debt is carried over to the new owner. The legal review is absolutely essential for avoiding these unpleasant moments, especially when buying commercial properties.
– Is it permitted to individuals to buy commercial property?
– It is. However, for many reasons, we recommend that you create a company and buy on behalf of that legal entity. The difference is in taxes. The German tax system is complex and confusing and in each individual case it is necessary to consider all needs, desires, and input data. Commercial property can be purchased by a legal entity registered even outside Germany.
– How long and expensive is the company registration?
– The procedure is simple. We work with the most common form that is GMBH (LLC); it takes one month and one property buyer’s visit to Germany for notarial registration of the company. Costs depend on the object that the investor is going to buy. We try to keep these costs low: opening a company in a free market can cost up to €3 thousand, and we limit the customer's expenses to state duty (€500-600), while the rest is done as additional services.
– What are the annual taxes?
– Like in the rest of the world, companies have extensive opportunities on lowering taxable income, ie the expenditure side can be written off. This is the main advantage of buying property on behalf of legal entity. We recommend taking loans for property purchase; engage ourselves in granting loans being an official partner of Deutsche Bank. Loan is the main tool of lowering taxable income. Let’s not forget about property management and bookkeeping costs too.
Average taxes in Germany are high enough. When it comes to a company, approximately 25% goes to taxes in case with legal entity, and 30% if we speak about individuals. That is €30 of taxes on every €100 of income. The entities have only one significant drawback: If you want to withdraw profit regularly there are additional taxes. Therefore, we recommend keeping funds in the company.
– How profitable is mortgage lending of commercial real estate?
– We have the lowest mortgage rates in Germany for the last ten years. We provide loans to foreign investors at 3.5% per annum for commercial real estate and 3% per annum for residential property. The average loan term is 10 years. It is both the lease term and property payback period. Banks are wary of Russian investors who have no credit history. Therefore, a 10 years lease contract is a certain guarantee for the bank. If you need a loan for a longer term the rates will change accordingly.
Aerial view of Munich
– How difficult in terms of legislation is property conversion?
– Russian developers often ask us to find a land plot for residential development. We say that it’s extremely difficult to find a plot in Munich that is not tied to a developer. Local companies are in constant hunt for such plots.
Repair of buildings is an interesting and profitable business. Residential houses are often bought, sanitized, tied up and then sold at retail.
Obtaining a building permit is a very complex procedure. If you own, for example, land without building permit, it may take 6-7 years to obtain one. Depending on the initial situation and the complexity of property, the resolution can be a very serious problem. Developers prefer to buy land plots that already have such permits.
– Recently, there was news that German real estate overvalued by 20%. What can you say about it?
– I believe the German real estate market is very stable, and overvaluation of the German real estate is out of question, because I regularly communicate with business partners and banks. To me the situation is clear: the market is oversaturated with capital. Huge number of foreign investors is operating in the German market. Even large Asian investment companies entered the market. Russian investment firms make major deals too. A Moscow-based company bought a building in the center of Munich for €350 million last year, which is unprecedented. Demand for real estate in Munich is so high that I do not see prerequisites for the formation of any bubbles.
Interview: Pavel Kuznetsov, ee24.com