Investing in the German property market
Beat Ernie - Fri 08 Sep, 2006
...What they are implying is that Germany is too cheap when compared to UK or the US. No one is considering the idea that the other markets may be overvalued...If you still are drawn towards real estate investments, there are more promising investment opportunities around than actually buying a house somewhere...Positive impulses for the German property market can be expected in 2007 or 2008, when listed REITs are making their way into Germany...
Asked what they think of 'real estate' or 'property' over the past five years, most investors would probably say something along the lines of substance, solidity and a great wealth builder – if they've been in that market for investment purposes.
Certainly here in the UK and in the US, but also in Canada and many other countries around the world, wealth acquired through investing in real estate has been the hottest topic of discussion over the last couple of years. And when you look at it, the economic growth in the States is largely due to the housing sector, making it the favourite speculation tool across almost all levels of society. Real estate has surpassed equity investments by some degree.
However, at least in the US and in many sunny spots like Dubai, we see signs of a turn in the market trend. A strong decrease in prices appears likely...and it could be about to happen. Media in the US is starting to prepare the common investor for a fall in property, arguing the price increases were far too fast to be sustainable. Speculators have created bubbles which will burst sometime soon. To a degree, the culture of easy credit, partly founded in the post September 2001 era to facilitate growth and the rebound of the markets, is to blame.
Investing in the German property market: Beware the optimism in Germany
In contrast to the press coverage about the overheated property markets, German bankers and investment advisors seem to be doing the opposite. Ever increasing potential profits are being predicted, often using the market (bubbles) in other countries as a justification.
More often than not, the reasoning is adventurous at best: Because the real estate market performance seen in country X over the last 5 years was 500% and country Z showed an increase of 300%, Germany's property market is bound to excel with a triple-digit percentage figure as well.
What they are implying is that Germany is too cheap when compared to UK or the US. No one is considering the idea that the other markets may be overvalued.
But we think both the comparison and the reasoning are faulty. A German property is unlike a UK property in our opinion. Not only are the markets different, but so is the prevailing mentality.
Just like every company differs from another, national property markets feature different tax, legal and political environments. Too many factors, including location, macro- and micro economic differences and geographic and demographic aspects can all have their impact on property prices - and cause great differences, even in the same country.
Investing in the German property market: Most investors have lost money and there's more to come...
Rising gaps between the city and countryside are shifting property prices massively. For example, Hamburg, Munich and parts of the Rhein-Ruhr area have been growing for several years, whereas some areas in the west and particularly in the eastern part of Germany have to fight increasing fluctuation in population. Banks still bang on about their fantasy about "tax optimized" property investments in the east, but the net effect is that just about all investors have lost money in the game, and more is to be lost.
At the end of the day, it always comes down to the individual property whether there is a chance for rising prices, or if it is one of the many where the likelihood is nil. To get positive cash flow out of a property requires a steady form of reliable payments from the tenants. In turn, this is highly dependent on a wide range of factors, such as whether the area and community provides enough work and infrastructure for companies to settle in.
Non-use or abuse of a property by current tenants may require substantial investments into a property to even get it on the market again - all factors contributing to a difficult and, sometimes unfortunately impossible, situation for the real estate investors.
Real estate is by definition not "moveable" like other assets, such as equities, funds or investments into other, more easily liquidized investment vehicles. The investor can therefore indeed be stuck or trapped with his investment in property! The hassle of paperwork is also to a great extend higher with real estate than with shares, which are, as we all know, easily bought and sold, especially these days with online execution.
Investing in the German property market: Keep your money mobile...
These more "mobile" investments also offer greater safety when it comes to avoiding political unrest in a country or other unforeseen developments. Selling a property within 24 hours is pretty tricky, let's face it, and usually comes with a great financial loss.
In the end, it seems more advisable to keep your money "mobile", so as to react and to move with the markets, to play the opportunities that arise, regardless of their location in the world.
If you still are drawn towards real estate investments, there are more promising investment opportunities around than actually buying a house somewhere.
Positive impulses for the German property market can be expected in 2007 or 2008, when listed REITs are making their way into Germany. However, thanks to the utterly indecisive German political arena, this may not happen at all. Meanwhile, the discussion for and against is rolling on...
Yours,
Beat Erni, in Germany,
for The Daily Reckoning
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