The prices for residential property in large European cities have been growing faster than rental rates, meanwhile rental yields have been decreasing over recent years. According to Wohnungsboerse.net, the average yield rate for a 60 m² apartment dropped from 4.4% in 2011 to 3.7% in 2016. This figure is even lower in the most liquid markets. For instance, a residential property located in the centre of Munich yields as little as 2–2.5% per annum.
|To those who look for higher yields we recommend investing in value-addedprojects, the essence of which can be expressed in three words: buy, repair, sell. Such projects yield 15–20% on investment per annum, reduced by the management team´s fee.|
Other advantages of value-added projects include them involving short-term investment (no more than six months) and no need for personal management: a professional team selects and buys properties; structures the transaction; organises financing; hires a contractor; and eventually sells the properties. Investors can buy entire projects or enter them jointly. In the latter case, the minimum investment amount is €30,000.
Where to invest
One of the most interesting markets in terms of value-added projects is Germany. There are several reasons why:
- high real estate liquidity: a high-quality apartment in the most popular markets, such as Munich and Frankfurt, attracts 20–40 buyers;
- affordable financing: non-residents can obtain 50% LTV mortgages at 1.5% per annum in Germany, whilst residents borrow up to 100% LTV at a rate of 0.8% per annum;
- high rental demand: on average, 50% of the population in Germany rent residential property, while in Berlin over 80% do so.
Buying apartments for renovation and subsequent lease is only recommended in the economically healthy cities of Germany, such as:
- Bavarian cities (Ingolstadt, Munich, Nuremberg and its surroundings area: Amberg, Weiden, Kümmersbruck, Lauf, Neumarkt, Pegnitz, Schwandorf, in addition to the city area between Roth and Erlangen) – the most affluent region of Germany;
- Berlin – the capital and the largest city in the country;
- Hamburg – one of the major port cities in Europe;
- Frankfurt – a banking centre of Europe and large traffic hub (Frankfurt Airport is one of the busiest in the world);
- Stuttgart – a global market-oriented industrial centre (Bosch, Porsche, Ritter Sport and other companies are headquartered in the city and its outskirts).
How to carry a project out
Let us consider an example of a value-added project carried out in the first half of 2017.
In February 2017, Russian buyers purchased a 69 m² apartment next to the historic centre of Munich, in the borough of Ludwigsvorstadt-Isarvorstadt.the property is located in the Glockenbachviertel, one of the busiest neighbourhoods: with lots of bars, restaurants and nightclubs.
The property acquisition value was €610,000, whilst the new owners spent €43,000 on renovation, furnishing and interior design. This resulted in the property being assessed at as much as €828,000 by May 2017. After adjusting for all the expenses and the loan repayments, the buyers’ total investment of their own funds amounted to €396,000. The return on investment less the management fee ran at 15%.
Yield estimate for a value-added investment project in MunichSource: Tranio
|Additional acquisition costs||9.07||55,327|
|— Acquisition tax||3.50||21,350|
|— Agent’s fee (incl. VAT)||3.57||21,777|
|— Notary and registration fees||2.00||12,200|
|Repair costs (incl. VAT)||43,149|
|Loan expenses (interest and fee)||5,000|
|Capital gain tax||30.00||34,357.2|
|Gross return on equity||20.20|
|Management company fee||25.00|
|Yield rate, less the management company fee||15.15|
Besides the value-added obtained through renovation, the project will generate extra rental income thanks to as many as three students renting the apartment at a time. Each of them will be renting one of three 11–18 m² bedrooms, whilst using a shared bathroom and kitchen.
This scheme is more profitable than renting out a newly built apartment to only one tenant. Each of the three tenants will pay €700 per month plus the utilities. The owners will receive €2,100 per month or €25,200 per year. The rental yield rate is 4.1% per annum.
If they had bought a newly built apartment and rented it out to just one tenant, the owners would earn €1,350 per month. Such an apartment would be smaller (as the price per square metre is higher in the new-build property market) and the rent would be more expensive for one tenant, whereas the yield would be 2.6% (1.5 times lower).
Rental yields for a new-build compared to a renovated residential property in MunichSource: Tranio
|New-build with one tenant||Renovated existing property with three tenants|
|Rental rate for one tenant, EUR/m²||27||10|
|Rent per tenant, EUR||1,350||700|
|Annual rental income, EUR||16,200||25,200|
|Rental yield, %||2.6||4.1|
|Renovation projects have their risks: budget deficit, schedule overrun, selling for a lower price than expected. However, they are justified, as value-added projects allow you to increase rental yields by 1.5 times and so earn 15–20% per annum on investment.|