A Case Against Investing in the German Residential Real Estate Market

Why I am not a fan of the German residential real estate market.

Investing in real estate is often considered a lucrative and safe venture, but in Germany, the private real estate market presents a series of challenges that make it less appealing for me (and other investors, I assume).

Here's why:

High Construction Costs Due to Laws and Regulations:

Germany's stringent laws and building regulations contribute to making it one of the most expensive countries to build standard multi-family homes, even without adding luxury features. Furthermore, investors, landlords and homeowners can be affected by heating laws (keyword: heat pumps), the obligation to install photovoltaic systems, because from January 1, 2024, for example, all new buildings in Hamburg and existing buildings whose roofs are replaced by "significant roof conversions" will be required to be fitted with a photovoltaic system. There are also efforts to increase the tax rate on unused land in order to force owners to build on it.

From strict energy efficiency standards to complex zoning laws, navigating the regulatory landscape can be both time-consuming and costly for developers. These high construction costs ultimately translate into higher property prices and lower returns for investors.

Government Policies Increasing Burdens for Homeowners:

The current government's stance on real estate regulation signals further burdens for homeowners. From proposals to increase property taxes to stricter rent control measures, such policies add layers of uncertainty and risk for investors. The prospect of additional regulations can deter potential buyers and suppress property values in the long run.

Challenges in Dealing with Problematic Tenants:

Landlords in Germany face difficulties in removing problematic tenants, even if they cause significant damage to the property. Stringent tenant protection laws prioritize tenant rights, making it a cumbersome and lengthy process for landlords to evict tenants or seek compensation for damages. This lack of flexibility in dealing with tenant issues can significantly impact the profitability of rental properties.

Low Rental Yields for New Buildings:

Despite high property prices and construction costs, rental yields for new buildings in Germany remain relatively low. The combination of rent control measures and increased competition in urban areas compresses rental yields, limiting the potential returns for investors. As a result, investing in new residential properties may not offer the desired level of income generation compared to other investment opportunities.

Rising Energy Costs:

The escalating costs of energy further erode the profitability of real estate investments in Germany. With increasing emphasis on sustainability and energy efficiency, property owners are faced with additional expenses for retrofitting buildings and meeting regulatory requirements. These rising energy costs reduce net rental income and diminish overall returns on investment.

Market Saturation and Lack of Growth Potential:

In some regions, the German real estate market is experiencing saturation, with supply outpacing demand. Oversupply in certain segments of the market can lead to stagnating property values and prolonged vacancy periods, posing challenges for investors seeking capital appreciation. Moreover, limited population growth and demographic shifts in certain areas may restrict the long-term growth potential of real estate investments.

Low asset liquidity:

Due to high prices even for standard homes, selling a property can take a very long time. Therefore, the real estate market is not for everyone, especially if you value flexibility and liquidity.

Obligations and Property Managers:

The obligations as a landlord are enormous. If you own properties in the dozens or hundreds, are not prepared to rush to a burst water pipe or a toilet overflowing with black water at 3 a.m., you will have to hire a property manager. This costs a return on investment and requires paperwork. Furthermore, I have personally had experiences where invoices between tradesmen and property management were optimized so that both parties earned a little more than they were entitled to.

My two cents:

The entire article refers only to purely residential real estate. First of all, the market can change in the event of interest rate cuts, or new government leaders. There are also opportunities to obtain enormous subsidies for real estate projects, such as the "Entwicklungsprogramm Ländlicher Raum", or others. This can also make investments in residential real estate attractive.

I am also a big fan of commercial real estate, especially in the area of logistics properties close to highways. I may devote a separate article to these in the future.

But now to my conclusion for ordinary residential real estate:

While real estate investment can be lucrative in many markets, the German private real estate market presents unique challenges and risks that may not align with the objectives of all investors. From high construction costs and regulatory burdens to low rental yields and rising energy expenses, the hurdles facing investors in Germany's real estate sector require careful consideration and strategic planning before committing capital.

No matter what self-proclaimed Instagram real estate gurus tell me about imaginary refinancing options and loans on unpaid-off properties with realistic 2-4% rental yields, I'm not a fan. Of course I sometimes invest in REAL bargains. Otherwise, however, I prefer to invest my money in my companies, the capital market and alternative investments.

Just to add: I am not a hater, our family office owns multiple real estate properties in multiple countries, including in Germany, both in the commercial and the residential area. So I know first-hand the perspective of an investor, homeowner and landlord.

And that’s my lecture for today, Dear subscribers.

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