Due to increasing rents and property prices in Germany, investors’ interest in the commercial and residential real estate market continues to be strong.
Most investors tend to focus on the seven prime locations of Frankfurt, Hamburg, Munich, Cologne, Berlin, Düsseldorf and Stuttgart. Recent studies have shown, however, that secondary locations are shedding their image as forgotten cities and may well offer excellent opportunities for investors.
In Germany, secondary locations are defined as cities with more than 100,000 inhabitants that do not fall within the top seven locations (for example, Nuremberg, Bremen and Dortmund). A 2015 study by the real estate company, Corpus Sireo, has shown that in 2014, commercial rents in secondary locations increased by 3 per cent while in the top seven cities, commercial rents increased by only 1.8 per cent. In Mannheim, one of Germany’s sub-prime locations, commercial rents increased by an astonishing 10 per cent in 2014 whilst in the same period, office rents in the prime location of Cologne decreased by 1 per cent.
One of the reasons for the burgeoning real estate market in secondary locations is that investors who still consider real estate in Germany to be a safe bet are encountering growing difficulties in obtaining adequate yields in the prime locations. Due to a lack of core properties and high prices, rents in prime locations do not increase at the same rate as the investment capital, encouraging, investors to look at secondary cities.
In order to make a rewarding investment in a secondary location, certain factors should be taken into account:
- Demographic developments should be borne in mind when investing in a secondary location. While the population in the top seven locations is expected to remain stable or to grow in the future, many other regions in Germany are expected to suffer from population decline and ageing. Especially in Eastern Germany and in the Ruhr area, many cities are shrinking and it is by no means certain that the current influx of refugees can reverse this trend. However, other cities in secondary locations like Ingolstadt and Kassel have experienced rent increases of 30 per cent in the last five years due to a growing population as a result of excellent economic development in these areas.
- From a legal perspective, investments in secondary locations should generally meet the same criteria as investments in prime locations. Buyers of properties in any location should undertake a careful review of leases, service contracts, warranties, building permits, public law requirements, etc before investing. However, particular characteristics of secondary locations should be taken into account. A study by Colliers International Deutschland showed, for example, that commercial lease terms in secondary locations are statistically shorter than those in prime locations. Also, real estate investors in less advantageous locations should evaluate their target property very carefully, given that any deficiencies in a property in a secondary location tend to have a stronger negative impact than deficiencies in a property in a prime location, which can often be offset by the excellent location.
- When investing in residential real estate, recent developments in German tenancy law should be borne in mind. In 2015, the German Bundestag introduced a rental cap (Mietpreisbremse), which is designed to cap the amount by which residential rents are permitted to rise in urban areas which are threatened by soaring rents levels. The law allows a maximum of a 10 per cent increase in rent on a new lease contract over an agreed rent table or index for the relevant district. Germany’s federal states have the power to designate areas within their jurisdiction which fall into this category. However, while the Mietpreisbremse has already been implemented in prime locations like Berlin, Munich and Cologne, many secondary locations like Hanover, Dortmund or Essen are not yet covered by any rental cap. This offers a further advantage for investors who can plan their investment in secondary locations without having to consider rent restrictions.
- Another advantage may be the willingness of the local administration to cooperate. As it is more difficult for secondary locations to attract real estate investors, their administrations tend to be more willing to compromise when it comes to the question of compliance with public building law requirements such as zoning plans or the protection of historic buildings and buildings of cultural value. Therefore, the local administration in secondary cities is often willing to meet the individual needs of investors in order to attract them to their city.
In summary, it is fair to say that Germany’s secondary locations offer interesting investment possibilities, combining the advantages of the stable German real estate market with affordable prices and attractive yields.