I. Recent changes of law and their influence
on the Germany Real Estate Market
Lets have a new look at the market in
Germany. For a foreign investor some things are important to know in general
and specifically as related to this time, the beginning of the year 2003. Keep
an eye on our website to be up-to-date as to changes, that may occur. Honestly
spoken, the current government’s decisions as to the taxation of Real
Estate profits and as to the cancellation of tax advantages has irritated many,
to say the least. But what is bad for the one may be a chance for the others.
What have been the changes that have occured?
After the 2002 elections the SPD has had a
problem. The state deficit of Germany has exceeded the limits set by the
European Monetary Union (ECB) which is 3.0% of the Gross National Income.
Germany has reached 3.7% and so got reprimanded by the EU officially to reduce
its state deficit.
Apparently the best way to do this seems to
be the taxation of profits made from investments of any nature. The original
design of the new laws have been so shocking that most likely much of Germanys
investment capital, private and corporate, would have left the country. In view
of that the changes have been revised and the new laws now are intended to go
in force in February 2003.
As these laws do and will affect the Real
Estate market in Germany in general, it is needed to discuss these somewhat.
1. The so-called speculation-tax for profits on Real
Estate sales will be changed. The past rule of tax-free sale after 10 years of
ownership and taxation of the profit before that period will be changed.
Property purchase before 21 Feb. 2003 will be taxed if sold after 22. Feb. 2003
with 1.5% on the sales price. For any property purchased and sold after that
date, a general 15% tax on the profit will be charged. Profit is defined as the
sales price minus purchase price and any additional costs of buying or building
and advertising for sale.
1. The past rule that depreciations granted over the
last years must be added to the sales profit if the property is sold before the
10 years period is over will be cancelled from Feb 22, 2003 on.
2. The so-called „Eigenheimzulage“ –
state support given for people purchasing a home the first time in their life
and for their own use – will be shortened dramatically (again!). As this
will affect the number of people qualifying for buying a home, the rate of
newly built houses and apartments is expected to shrink even more than it
already did.
3. Investments done for maintenance of the property
cannot be deducted in the year when they were done if they exceed 15% of the
purchase price. They have to be added to the depreciable value of the property
instead.
4. Depreciation is generally set at 2% for existing
houses, for newly built houses at 3% for the first eight years. (In the past
some depreciations were higher).
These are the main changes which will affect
the house market in Germany. It is estimated that newly built houses will be
much less in the coming years than they were in the past.
That means: more people will rent instead of
buy. Less new apartments mean the ones available will be more demanded for renting.
That again means, that in the metropolitan cities the rents will go up. And
that again means for the foreign investor: It becomes more attractive to buy
Real Estate in Germany for renting.
As to buying for ones own use, the formula
is very simple: Will the time of living in Germany be long enough to make up
for the additional costs of buying plus the taxes to be paid at the point of
selling, or will renting be making more sense? As no tax deductions will be
granted for property used for own living purposes, those aiming at tax
advantages should rather look for houses to rent.
II. What is the current market situation
and what are the most attractive places for buying houses?
In the major metropolitan areas the prices
have settled at a certain range with a tendency to drop in areas of the city or
region which are less attractive as of infrastructure and cultural supply. This
has to do directly with the general economical situation worldwide and
specifically in Germany. As most parts of the world, the economy in Germany is
suffering from the slumps that occured over the past year. Many of the banks
and companies that have been the economical „motors“ have reduced
their numbers of staff and contracted workers by 10-15% or even more. As the
world market slumped, so did many of the German companies. And with a higher
percentage of people „on the dole“ (currently over four million
again, the highest figure since four years) the money spent in general is
declining, so do the rents paid and the number of people looking for apartments
to rent.
That again means that as investor one has to
strictly concentrate on cities and areas which are still most wanted for
renting. But rents that were paid two or three years ago in many cases will not
be obtained again. In the past, many companies rented dozens of apartments to
have them available for short-time staff or high-class apartments available for
their directors and higher management level staffs. Today, most of the time the
staff have to pay their rent themselves, and that will almost always be at a
lower budget than it used to be.
Looking at specific cities, the most
attractive and those with the highest rental level are Frankfurt, Munich,
Stuttgart, Dusseldorf, Hamburg, Koeln (Cologne). Those are the key metropolitan
areas which will also keep their importance in the economical development.
Politically Berlin may be the center of Germany, but economically and as
relates to Real Estate, Berlin may not be considered as a very attractive
market – there is too much „on the market“ as we say. And the
prices have gone down in Berlin more than in almost any other city in Germany.
This is also attributable to the fact that in the whole of Eastern Germany, in
the 90s, Real Estate investments were heavily supported by tax advantages, this
to a point where we now have thousands of flats in eastern germany empty
– and not rentable for yet a while, or only for a much smaller rent than
calculated.
On the other side, Cities like those named
above are pretty stable in rent, especially in the very good areas. With the
perspective in view that the number of new houses built per year has been
decreasing over the past three to five years and is now nearly on a historical
low, this could mean a rise in rent in those areas where there are too few
apartments on the market.
Refurbishing old buildings and either
keeping them as rental income property or selling them apartment by apartment
as condos might be very worthwile now, in view of the situation with too few
new houses being built.
II. Market view by Real Estate category
Rental homes
So called "Zinshäuser" (Rental homes with 8-20 Apartments or flats)
are most attractive as investments in Germany. In Frankfurt they are very hard
to get at all; in Düsseldorf, Hannover and Berlin this seems currently no
problem. Most sought after are what we call „Altbau“; buildings
that were constructed at the beginning of last century and so are between
80-100 years old. If these houses are modernized, they are unique with their
high rooms, ceiling level at about 3.20 to 4.00 meters (buildings since about
1950 have ca. 2.50 meters room height).
A modernized Altbau is also a very good rental property as these flats are most
wanted.
Buying prices range between 300.000,- Euro and 1-5 Million Euro for a 8 - 20
apartment house. Sqm prices range from 500,- to 2.000,- Euro; anything higher
than that is not very recommendable as a capital investment.
Rent houses are preferred by so-called "Aufteiler"; this being
companies that buy and divide such houses into individual condos so that the
apartments can be sold as single units. Sqm prices being obtained in the sale
then range between 1.000,- and 3.500,- Euro. About 20-25% of the net profit
have to be calculated to be sales costs.
On such houses as rental houses the
investment return rate ranges between 6 and 8% p.yr. in general.
Supermarkets and Malls
In general this is a very difficult market. Well-known supermarket chains have
been going very well in one area and bad in another. Having rented out a
supermarket to such a chain says not very much as of today. The situation might
change very fast. Supermarkets that have been going well for many years and
where they are situated very centrally they are a good investment, though. But
those opportunities are rare to get at. The capital investment return can be
expected to lie somewhere between 8,5 and 11% per yr. One needs to research
very well where to buy and be careful when buying in easter Germany no matter
which chain the market is rented out to!
Mixed
Houses that have a mix between shops and apartments are most recommendable when
located very centrally. They still are of the best investments possible. The
value increase can be expected to be very good. Investment return is somewhere
around 6 and 10% p. yr.
New apartment house building
Difficult proposition, only recommendable to experienced building companies
which ally with a german house building company with some experience on the
German City bureaucracies and who know the sales possibilities very well. Otherwise
might wind up as a big flop.
Single family homes
Very much asked for. But not interesting as a capital investment, as of low
return-on-investment rate (3-4%). Is of much interest for those families who
buy to live in the house.
Can be bought in several categories, single-standing, double-house (two houses
attached to each other), terrace houses etc.
Prices around Frankfurt range between 300.000 and 800.000 Euro, within
Frankfurt 750.000 to 1.5 Million Euro for a single-standing house or bungalow
or villa.
III. Steps to take when
buying
Depending on the size of the investment a thorough research should be
undertaken as of the location, first of all. The price needs to be
verified thouroughly, preferably with a surveyor or estimator. Expenses for this
value estimation are usually borne by the party buying the Real Estate. It is
no must though.
Most important is to have the house inspected carefully, if not by oneself,
then by a knowledgeable person in the area. This can be a broker or someone who
knows what points to look for.
Another point is the study of the annual meetings of all apartment owners in
the house. The importance of these minutes cannot be overstressed. Any and all
problems relating to the house community and the house itself which may incur
future costs will be discussed in these meetings and will be reflected in the
annual meeting report which needs to be done by the management company
responsible for holding these meetings.
Any rental contracts are to be examined. The actual rental situation has to be
examined carefully. Especially so-called non-payers amongst the tenants have to
be verified. Non-payment rates can be as high as 20-25% sometimes in bad areas.
Any renovations or repairs of damages need to be checked into. The ground sometimes
is wet and the house needs to be dried out in the cellar area which can become
expensive. The roof should be checked by an expert or a good eye before buying.
Age of the heating system is a very important point. Lots of restrictions and
new laws have been passed over the last years. New standards have been set that
must be met until 2005. It might be necessary to renew the whole heating system
by then if it is older than ten years.
Next, the actual resale value needs to be estimated. Could that property be
sold well again and for what price? What would be the possible ways and
channels to sell the Real Estate again?
This being answered, the calculations of the living space (in square meters)
and of other areas presented on paper should be verified at the actual
location.
All factors being well aligned, the financing needs to be secured. In
Germany we request the buyer to present a so-called irrevocable acceptance of
loan financing by a good bank before going to sign the notary contract or if he
has the cash deposit, to bring proof of the existing funds.
Then the Deed of Purchase and any accompanying papers (like the official
declaration of partition <Teilungserklärung>) should be checked into
thoroughly. If you are not german-speaking it is better to have a professional
translation done first of all even if that might cost some extra bucks.
The notary public date for signing the Deed is being agreed upon. At this
meeting the Notary Public will read the Deed aloud for both parties, with any
needed translator present. After making any changes or additions the Deed is
being signed by both parties and the notary public. This contract is
irrevocable, it cannot like a usual purchase be revoked within the next two
weeks! What is written here is the agreed-upon purchase and all conditions
thereof, like the day of payment, the day of handover to the new owner, any
needed repairs or other actions to be done by the seller, any other
specifications as needed.
It is the Notary Public who will perform the next actions needed like any and
all applications in the so-called Grundbuch - the land title register,
without which no sale of property can be done.
At the notary date the Real Estate agents commissionhas to be payed.
This ranges between 3,5% and abt. 6% of the buying price, including VAT,
depending on the federal country where one is buying in Germany.
Between two to four weeks after the buying contract was signed the purchase
tax on Real Estate needs to be paid. This is exactly 3,5% of the buying
price stated in the contract. This tax must be paid within short time when
requested as otherwise the tax office will not issue the clearance
certificate - an important paper for transferring the possession from the
seller to the buyer. Without that paper that transfer is not possible!
Within the same period of time the fee for the notary and registration fees
have to be paid. All in all they comprise about 2.0 to 2.3 % of the buying
price of the Real Estate.
The terms of the contract can be very variable. That is why a contract needs to
be checked by someone experienced in sales of Real Estate in Germany. There are
many legal obligations but also legal finesses which can be to the advantage or
disadvantage of the person buying.
At the notary public date all persons that are buyers have to be present, and
show their legal papers (valid passports!). If a company is buying, the
person(s) signing the contract need to bring their legalization papers from the
company (authorization and an excerpt from the Chamber of Commerce entries
showing the authorization status) plus passport. The contract needs to be
personally signed after the notary public has read it aloud. It is legal
procedure that the notary public reads the buying contract out loud. If the
buyer does not understand German language, it will then be read in english by a
qualified translator.
It is the task of the notary public to ensure that all parties understand what
they sign in the end. Any questions that come up need to be answered.
IV. Financing
German Real Estate financing can be done either with mortgage banks or with any
usual bank or financing institute (Sparkasse, Volksbank,
Insurance company, Bausparkasse). Financing usually is done for about
60-70% of the buying price by mortgage loan. Anything above that up to 100% of
the buying price needs to be secured either by additional securities like
insurance (with actually that exact value) or other financial securities that
have to be deposited at the financing bank. It can sometimes be done based on
the income of the person or company alone buying but that case is very rare as
of today.
Financing foreigners not resident in Germany and not earning their money in
Germany is possible under certain circumstances but cannot be expected to
exceed 60% of the buying price.
Financing should be secured before any contract of purchase is signed.
Sometimes one can sign a reservation which holds good for an agreed-upon period
of time, enough time to get the financing secured. However, the only binding
document is the purchase deed.
V.
Frequently asked questions
Do I have to be german
resident in order to buy in Germany?
No. Anybody can buy in Germany who has a
valid passport and the purchase funds that will be needed. Owning a property in Germany does not
give one a right to immigrate to the country. This point is vital to know. We
had the case of a person who already owned an apartment in Berlin and had a
deposit of about half a million USD at a german bank in Germany, and wanted to
buy from that money another apartment in Frankfurt. She asked for a visitors
visa for that reason – and got her application declined. The german
embassy in her country (somewhere in Asia) said: „The risk is you buy an
apartment and then stay in Germany and we do not want that.“ All her
assertions that she wanted to buy this apartment for investment only –
and the apartment was already rented out which we told the embassy – were
fruitless.
So if you intend to buy property in Germany in order to live here, make sure
first to get a Visa for being a permanent resident in the country.
What are the costs
accompanying buying property in Germany?
In Germany, the buyer has to carry the
following costs and fees:
1. Purchase Tax („Grunderwerbsteuer“): 3.5% of the buying price.
Due about four weeks after the notary deed has been signed by buyer and seller.
2. Notary fees. These are about 1.2 – 1.5% of the buying price, plus any
fees for a needed translation of the deed. As they can vary strongly we
recommend to check especially the translation fees in advance. We have seen
differences from 300 EUR to 3000 EUR for the same type of work.
3. Agent fee. The buying fee for agents in Germany varies from Federal country
to Federal country slightly. In most federal countries it is 5% plus the VAT.
4. Registration fees, these add up to about 0.8-1.2%.
5. If financing is needed, there might also be fees from the bank side for the
mortgage, plus any additional notary and registration fees for that mortgage.
Any mortgage needs to be secured in the land registry (Grundbuch) and that can only be done by a notary public.
So the total fees on top of the purchase
price are about 10-12%.
How long will it take until
I own the house?
From the moment of signing the notary deed until
receiving the land title register confirmation several weeks can pass. This
however has no bearing on when you can take over the house as your own: this is
usually the moment when the buying price is paid in full to the seller. That
date is agreed upon in the purchase deed.
What are the costs
accompanying owning property in Germany?
The costs that are to be paid are property
tax - this is different from town to town but very small (between 150 Euro and
300 Euro usually for an apartment per year, a bit more for a single-house; it
depends on the size of the property ground).
Then the building reserve fund which is mandatory when owning an apartments as
part of a community; it is usually about 0.75 to 1.5 Euro per sqm living area
per month;
Garbage disposal, water, common house electricity, housekeeping, maintenance of
the heating system etc. are additional costs which sum up to about 0.5-2 Euro
per sqm and month. All of these have to be paid by the tenant if apartment or
house is rented out. Even the property owning tax normally needs to be refunded by the tenant to the owner or should be made part of the normal utilities prepayments.
Who takes care of the
property when I am not in Germany?
Any house can be given into the care of a
property management. On apartments this is mandatory as of today when these
belong to a partitioned apartment house. Cost for property management is about
25,- to 35,- Euro per month for an apartment. Rental management is separate
from general house management and can be transferred to an agency for a fee
that is agreed upon by both parties.
Who would assist in selling
the property once I want to do this?
At any given point, when you decide to sell
the house or apartment again, you can give it to a Real Estate broker or also
offer it freely on the market. There are no rules or laws saying that you must
go via a broker. There are no shared listings in Germany where all brokers
would offer their houses, this is a pretty individual market! It has the
advantage that anyone has the chance to get his house on the market. Usually
you put the house into local newspapers on the weekends and also would offer it
on related websites.
- it
might be helpful for others too!
For more information and specific offers of Real Estate or for any help on
buying Real Estate in Germany:
Please be sure to include your full name, address,
phone and fax number and have a return-to email address.
Want to buy a home or apartment in Germany?
Want to sell a home or apartment in Germany?
Examples of property
For sale by owner (german site)
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Disclaimer:
The information provided
here is meant as an assistant guide to your attempts to invest into the german Real
Estate market. No part of this information claims to be complete, up-to-date or
binding. The publishers will not take any responsibility for consequences of
following this information or tips given here but rather advice to personally
consult an agent, notary public, tax consultant or Real Estate expert in Germany.
AllGrund Real Estate Marketing, Postfach 10
22 10, 63263 Dreieich, Germany
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