The German residential property market could be Europe's star performer of the next few years, but UK investors could be frozen out according to analysis of latest moves to restrict ownership.
A Tulip Financial Research study of high-net-worth individuals representing the top 1% wealthiest individuals in the UK, France and Germany has found people in Germany are more likely to invest in residential property.
This is partly because the residential market there has lagged other major markets around the world – German house prices there have actually fallen over the past two years – but also because the low rate of home ownership means rental yields are seen as more important.
By investing heavily now, Germany’s wealthier investors are looking to take advantage of high rental yields, but with an eye to more rapid capital appreciation in future.
“The German wealth elite is the wealthiest of the three, but the relatively low level of home ownership in Germany contributes to this as does the high importance of the rented sector,” Tulip Financial Reserch states.
“This leads many wealthy Germans to invest heavily in rented property as it provides high yields – and Germans invest more for yield as opposed to capital growth than do the wealthy in France and the UK. This explains why the German wealthy have a higher asset allocation to property than the French or the British.“
However, analysis from German property consultant Dr ZitelmannPB GmbH suggests local politics will get in the way of UK investors following suit and buying into the local market, whether on a collective basis, such as through Reits or other types of funds, or by individual investments, such as acquiring buy-to-let property.
The consultant notes recent events in the southern German city of Freiburg may have set a national precedent for the treatment of local authority or state-owned (German federal states) rental property.
A recent referendum in Freiburg saw voters reject the sale of housing portfolios, and now politicians in other cities and states have jumped on the bandwagon. The city of Berlin has reversed an earlier decision to sell flats, while the state of North Rhine-Westphalia now says it is unwilling to sell some 100,000 units to “Anglo-American financial investors”.
Dr ZitelmannPB points out these decisions have been heavily influenced by a concerted communications campaign led by the German Social Democrat and Green parties.
"Franz Müntefering, at the time head of the Social Democrats, coined the “locust” epithet while on the campaign trail. What he referred to were the Anglo-Saxon financial investors, especially those in the private equity segment," Zitelmann writes in a note on the market.
"Meanwhile, the hysteria against these so-called locusts has come to take on virtually grotesque features. In Freiburg, fibreboard kits for crafting toy bridges were actually handed out to children. The children were told they were going to have to sleep underneath bridges if the city’s apartments were sold to the locusts."
The voters of Freiburg voted more than 70% against allowing the sale of property in this particular referendum. Dr ZitelmannPB points out while those involved claim it has “sent a message to policy makers” it does nothing to solve the question of just who will pay for the mass-rennovations required for hundreds of thousands of units across German town and cities affected.
Foreign property investors do have the money required to upgrade these properties, but meanwhile must learn a valuable lesson in communication, the consultant says.
“When the time came, there was nothing to counter the agitators who shamelessly exploited the fears of people to lose their apartments or to face drastic rent hikes.”
Dr ZitelmannPB points out there is also another own-goal to be considered by those feverishly rejecting sales of residential units to foreign investors: Germany’s Reits market has already been nobbled by a policy decision to stop German Reits from acquiring residential property.
This is a point also brought up by Rainer Stockmann, partner at German law firm GSK Gassner Stockmann & Kollegen, which is associated in the UK with law firm Nabarro Nathanson.
Stockmann says stripping out residential property will hamper liquidity in the market - another reasons UK investors may think it not worth their while.
Also, German tax rules surrounding German Reits generally do not offer incentives making them attractive to individual investors to the same extent as UK Reits in the UK context. UK investors in German Reits would additionally suffer a withholding tax on any dividend payments because of income double-taxation treaties between the two countries.
Stockmann says a more practical alternative for those still intent on the German market is simply to look at so-called residential corporations listed on the German stock exchange, or possibly even open ended collective investment vehicles.
“It is easy to structure a stock corporation similar to a Reit, which can hold residential property anyway,” Stockmann says.
German Reits may play a role in trading existing real estate, but are not likely to be used as a property development vehicle, he adds. Ironically, Reits would be welcomed by many investors in Germany precisely because they would bring transparency to a market which historically has been poor at valuing residential property.
Together with improved access to data on property held by Reits, the market would likely experience a substantial improvement in liquidity, while the tax rules would help many Germany companies desperate to offload un-needed property holdings they currently cannot sell without incurring stiff company CGT penalties.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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