subject: Property prices in Leipzig over time and the effect of German reunification on real estate values [print this page] Property prices in Leipzig over time and the effect of German reunification on real estate values
A common question we get from investors is what has been the price history in the areas in which we operate. Whilst some good data is available in the capital Berlin, finding price history in cities such as Leipzig can be difficult to find in the public domain. During this article, we will try and provide some guidance on price histories since re-unification and of the past 3 years in particular. We will then make some predictions on how prices will develop in the coming years.
It is true to say that a freshly re-unified Germany was somewhat out of sync with the rest of the world in terms of financing policy and the mortgage market. Whilst the former West had an economy and housing market broadly in line with other mature markets, the unique event of re-unification in 1990 brought about changes which make the conditions in the former east completely out of phase with the rest of the developed world to this day.
Between 1990 1996, when interest rate policy was restrictive for investment across most markets, a wave of speculation of the real value of property in the former East took hold. With the market in the East effectively held under a social regime and property ownership was not possible, the value of the property was unknown. A common-held view that the re-unified country would equalise in prices to a great extent as the East caught up with the successful development of the West during the period of separation. Investments flowed into the East from domestic and foreign sources and the appetite for investment was increased by high bank lending values and government-backed grants for development of historical property.
What happened as a result is a familiar story of over-exuberance, albeit based on a unique event of the fall of the Berlin Wall. As investments were made through the period to 1996 or so, the performance of those investments became unsupportable. The expectation of rent levels being similar to those in the developed West were unrealistic, population fell in many cities and towns due to the pull of the more affluent West and the ability for free travel and high interest payments of the time began to bite. Many investments failed, or needed to be supported from external income to prevent foreclosure. Think about it, just as the developed world was gearing up for a decade in which property values increased by 200-300% on the back on low inflation and low interest rates, so Germany dropped like a stone. Prices paid for property in this time climbed to 1000 Eur per sqm or more, and often for unrefurbished stock which needed around another 800 Eur per sqm investment to get in a condition for tenanting. It is not uncommon to hear of over-exuberant investments to fall by 50-70% during this period. Despite the prevailing low interest conditions, particularly after joining the Euro, the incentive or ability to support these failed investments waned. Only the very toughest survived the markets of the East.
What happened next? Germany went through a programme of fiscal reform and set a course for low-inflation and increased productivity. Wage bargaining was tough, and output of the prized high-value German goods increased. All parts of Germany stabilised and began the process of reform. In terms of the property market, equilibrium was found in most areas between 2000-2005, with prices in Leipzig around 400-800 Eur per sqm for apartment buildings in the various parts of the city.
So, what about the last 3 years? Well the story has been very interesting for investors in the area. During a period of falling property prices in much of the developed world, the market in Leipzig has held up very well due to the fruits of 20 years of government investment in infrastructure, good capital values recognised by investors and the business climate returning to decade high levels of optimism across Germany. In 2007, it would be typical to conduct a search in the average locations in Leipzig for apartment houses in the price range 450-600 Eur per sqm. Steady increases have been seen since then, with an increase in demand from local buyers with increasing access to bank finance. A typical search of the market today in the same areas of Leipzig will be for property in the 550 700 Eur per sqm price bracket. In most cases, property over the last 3 years has seen around a 20% increase in prices which is good going in this climate. There are exceptions to this, depending on sub location. Some of the areas to the east of the city such as Neustadt and Volksmardorf and Sellerhausen have seen little or no capital appreciation, the stock being characterised by inhabitants of working class or non-working people. Banks still find it more difficult to finance to any great degree in these areas. On the other side of the coin, property prices in Schleussig and Plagwitz have really caught investor attention, with increases of between 30-50% being seen.
So, what's ahead of us in terms of capital appreciation? This depends on a number of factors:
Investor confidence
Investor access to finance
Rental level development
Increasing owner-occupation
In turn, investor confidence will be the key to purchase prices increasing with all other factors being equal. Right now, an investor feels rightly rewarded with a net yield of between 7-11%. With interest rates for 5-10 year fixes at around 3-4%, there is still room for an increase in confidence pushing yields further down. Yields in a stable market would equate to around 2% over lending-rate, so around 5-6%. Should yields drop due to this increased buyer confidence, then prices have the capacity to rise by around 40%, should finance remain low.
Access to finance shows now real sign of abating, certainly for local buyers. It is not unusual for projects to be financed to 80% [or even higher] for German nationals, and 60-70% for foreign buyers. These levels have remained reasonably intact through the financial crisis, and should remain for investments where rents cover finance payments by at least 125%, so called "rental coverage". Currently, rental coverage is often 200% or more, so there seems no immediate threat to tightening financial conditions.
Increasing rent levels are the typical trigger for capital appreciation in the more mature markets in Germany. As rents creep up 5% or so per year, so the capital value increases by the same amount, all other things being equal. The current rent levels in Leipzig are very low and have remained so for the last 10 years or so, whilst excess capacity has been worked through with the increase in population or through demolition of unrefurbished stock. Some real anomalies remain to this day. For example, rental levels across the city for professional tenants lie in a thin range, usually between 4-6 Eur per sqm, a small deviation. As popular areas are developing,, higher rents are now being achieved. For example, in Sudvorstadt and Schleussig and Gohlis South, rents in excess of 7 Eur per sqm are now not uncommon and on the rise. The development is having an effect across the city, with pressures on areas in demand or well-presented units with benefits such as balconies. With wages increasing, the proportion of take home pay used to service rents is now very low, around 20%, and shows capacity for rental increases to be absorbed. Finally, the effect base level for rents, the amount the government pay for unemployed people has not changed in 12 years. The current level of 3.85 Eur per sqm is the lowest in Germany, and is seen as very out of sync with other smaller and less economically vibrant cities. For example, nearby Halle which is half the size of Leipzig has a social tenant rate of 4.35 Eur per sqm. Leipzig must catch up at some point, and when it does the floor on rents will rise over night.
Finally, and perhaps of greatest interest, is a fairly unique feature of this market. In 1989, all property was held by the state and before the wall fell every inhabitant of the city was effectively a council tenant. Since that time, owner-occupation has risen steadily to around 15% today. Some may wonder why this has not risen quicker, particularly with the low capital values of recent years. An answer to this lies in the appetite and culture of those with sufficient funds to buy their own home in the last 20 years. Typically, it is those aged around 25 years old or more that aspire to home ownership. It has taken some time for the lack of a housebuying culture to work through the older generation and arrive in a new generation with funds to buy. For sure, many of today's 25-35 year olds aspire to own their own place, much in the same proportion to the rest of Germany where average owner occupation is just below 50%. Today, it is typical for out of town suburbs with new build single family houses or the very best areas of town in apartment houses to support this growing sector. The real point to note is the typical much higher price paid by an owner-occupier to an investor of a complete apartment house. The property is not purchased on a yield-return basis, more on the ability to pay and service the mortgage through income. So, areas in Leipzig where owners occupiers are buying their own apartments are typically paying from 1.200 Eur as a very minimum to 3.000 Eur per sqm or more. This is between 2-3 times investors buying apartment houses alongside them are paying. Quite an odd situation!! So, as owner-occupation increases to a more mature level towards 50%, so the average to good areas of the city will see viability for investors to divide their apartment houses into individual units and dispose of them, in a good refurbished state, to owner occupiers at a very significant uplift to the original price paid. In some areas, this may take 3-10 years to be a viable option, in other areas such as Gohlis South, Sudvorstadt and Schleussig this is an option to do right now.
