What foreign investors should keep in mind when buying German real-estate. By Esther Lamers, Ralf Otto & Atty. Dr. Esfandiar Khorrami.  Published in the German American Trade (magazine)

The fall of the Berlin wall in 1989 and the following German reunification in 1990 had a dramatic effect on the Berlin real estate market. The euphoria at the beginning of the 1990s ended almost ten years later with disillusionment at falling real estate prices and oversupply of residential as well as commercial spaces in the new united capital.

Published in the German American Trade (magazine)


In the aftermath, the amount of construction decresed and investment appraisals for newly developed real estate did not work out in many cases. Rents fell short expectation and many private investors in residential properties suffer from the factthat the current market price is still below the former acquisition costs. Real estate developers scaled down their activities or retreated from the market entirely.But recently there’s been a surge in the German real estate market. Berlin especially has seen a sustained and strong engagement of institutional investors, mainly from the US. Cerberus and Goldmann Sachs, Blackstone, Fortress, and Morgan Stanley and Corpus have acquired over 250,000 apartment units in total. So what does the german and especially the Berlin real estate market have to offer in 2006?

The new German government has announced plans to introduce a general tax of 20% on capital gains starting in 2007. Until then capital gains are tax-free if a real estate property has been held for a period of at least 10 years. Due to this upcoming change, many investors will take advantage of tax-free capital gains by selling their real estate, introducing quite a number of attractive properties to the market in 2006. From a capital investor’s point of view, the German market offers another advantage. Until now Germans themselves have been quite reluctant to purchase real estate because of their unfortunate historical experiences with this type of investment. This is likely to change in the next 7 to 10 years as the German pension system can no longer offer security and there is need to invest and create stable income.

The past year has seen an increased demand from smaller investment funds as well as private investors from the U.S., U.K., Ireland, Scandinavia, Spain, Austria and Israel. The main motivation of investors coming to Germany (in the 1990s as well as now) is the over saturation of their domestic real estate market, where prices and interest rates significantly reduce the potential yields. Compared to the U.S. and other European countries, Germany offers attractive yields as well as a stable and recovering political and economic situation. In fact, on paper, Berlin is the real estate investor’s dream. Skimming through a newspaper’s real estate pages reveals prices so low compared to U.S. standards, that they look like printing errors. A new refurbished 70 square meter (753 square foot) two-bedroom apartment in a good and desirable area for 150,000 euros is not uncommon; a residential apartment block with 20 apartments can be had for 1.3 million euros with an initial rental yield of up to 7.5%.

Another reason for the increased demand is that the Berlin real estate market is considered to have an ample scope for capital appreciation. Especially in comparison to other European capitals, Berlin’s current price structure indicates a long-term potential for development as prices are still far from the highs of the1990s. In addition, the historically low interest rates for mortgages (below 4%) create a further bonus for investors as they increase the achievable yields.

In the 1990s financers’ lack of knowledge about financing facilities and security interests led to the aforementioned problems. Furthermore, real estate was often heavily encumbered and overindebted which resulted in insolvency for the investor and a loss on the side of the lender as soon as rental losses occurred. After this painful experience financers as well as investors have changes their business strategy, resulting in more elaborate investment projects.

From our experience, the American and any foreign investor needs to be aware of some typical German peculiarities in the acquisition of German real estate. Their impact on real estate investments is not to be underestimated. When purchasing residential real estate, consider that the types of leases and any contractual conditions in the building play a crucial role regarding the ability to increase rents. Another aspect of major importance for the financing is whether the buyer accepts grants from the federal government, as well as any kind of deal-sweeteners from the city. In the case that the prior property owner took on such grants and entered into subsequent agreements with governing agencies, the buyer has the option to take on the aid and resulting obligations, or not.

A crucial aspect to be thought out before acquiring real estate is the investor’s “exit strategy”. To subdivide ownership in a residential apartment block with condominiums to capital investors or owner-occupiers is a possible and often economically attractive approach, although this requires the investor’s knowledge about this special legal form of ownership-right.

From a tax point of view the use of a German company in the form of a GmbH (Ltd.) or GmbH & Co. KG (private limited partnership) is beneficial for real estate acquisitions. Formally this puts the foreign investor into the position of a German investor and increases his potential to finance an acquisition and make use of special depreciation rates, e.g. for real estate in defined redevelopment areas. Few investors are aware that an acquisition can be designed in such a way that they are not liable to German property acquisition tax of 3.5% of the purchase price. In the perspective of a later “exit” the tax burden (Income and Gift & Estate Tax) can be optimized as well. Too often the legal structure of the acquisition is not considered until the time of negotiation of the deal.