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Micro-Apartments as an Investment

Micro-apartments, also called micro-flats, are one-room separate living spaces. Usually, they contain an area to sit, sleep and study, a small bathroom and kitchenette with a size of up to 28 square metres. In some properties residents also have access to shared bathroom and kitchen facilities, on rare occasions even patio and roof garden.

This type of investments seems nowadays to be everybody’s darling.
Even the German government wants to lower the pressure on the housing market in urban centres and invests 120 Mio Euro to speed up innovations around micro apartments. (see press article here)

Purchase prices and rental prices correlate to a certain extent (while rents increase, sales prices increase and vice versa).
If rental prices increase a certain number of people decides to rent smaller flats instead of moving to lower priced areas (oftne further out). These lower prices have to be paid with:

  • time to commute and
  • the cost of the commute.

Especially older people tend to stay in the city, as they don’t want to depend on public transport or car.
Students don’t even want to think about rural areas or the suburbs.
On top there is a growing number of singles in most of the western world.
In Berlin every second marriage gets divorced. More than 50% of all Berliners are singles, with a growing tendence.

In all cities of the world while prices increase flats shrink.

The benefits of small flats are easy to understand:

  1. Small total rental amount, while the sqm-rental price is a good parameter to compare offers, what counts is if the overall sum is within the budget of possible tenants.
  2. Small side costs, because typically the unmeasured side costs are calculated by the size of the flat.
  3. Depending on the contract and the type of renter the turnover of a renter is, in general, much higher than with bigger apartments, this is better for the investor, as rent increase is limited with a sitting tenant. If there is a change in the tenant the rent could be adapted to market rents more easily.*
  4. Because of the size and the overall total rent and side costs, there is always a market because it will be on of the lowest offers on the market. This is only true if the supply of small apartments stays under the demand in this area.
  5. Small total investment size, therefore it might be better to buy two micro apartments instead of one bigger on, as obviously the risk is spread on two renters.

Conclusion

As an investment small flats up to 45 sqm and micro solutions up to 28 sqm in urban locations or close to an important technology, university or student hub is an excellent decision from an investment point of view.

*adaption to market rents might be subject to legal limitations

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Attic conversion legal traps

​As the city of Berlin becomes more and more popular and therefore dense, and penthouses are more and more attractive attic conversions are getting popular. Private buyers are more and more willing to buy such a project instead of a finished flat. On top a lot of small developers use this type of development as a starter to gain market knowledge and understand the process of buying, refurbishing and selling flats in Germany.

Attic conversion in Berlin

Attic conversion in Berlin

Challenges to face
As a developer with experience in such conversions I have to say that its probably the most tricky real estate development one can do.

There are

  • technical
  • commercial and
  • legal challenges to face.

In this post we only cover the legal aspects.

Special situation in condominiums
The legal challenges especially if there is (or will be) a condominium (WEG) involved are big.
My advise is to use a notary that is very experienced in such attic conversions.

Legal definitions of space in condos
If you design the condominium you have to make sure that future attic space has a certain legal status.

The partition deed (“Teilungserklärung”) typically differs between so called three types of spaces in the condominium (in Germany always a common-hold).

Wohnungseigentum = Sondereigentum (an einer Wohnung) + Miteigentumsanteil (an dem gemeinschaftlichen Eigentum), z.B. Grundstück und Treppenhaus + Sondernutzungsrecht besteht.

  1. Teileigentum” is a space like a flat or an a office with defined borders (walls or balcony railings clearly visible)*.
  2. Miteigentum” is co-owned space and used by all parties of the condominium and their guests (the staircase, the lift etc.) and
  3. Sondernutzungsrecht” is a special usage right space that is part of the co-owned space and typically accessible by third party (like co-owners) but there is an agreement that one party uses this space exclusively (e.g. a garden, a terrace, a cellar, or a space within the property like a storage in the attic of a house)

Traps to avoid
The biggest and very common trap is to put the attic in a legal status of special usage right(s) so called “Sondernutzungsrecht (SNR)”. The reason why to avoid this is the power of the condominium (Beschlusskompetenz) to make decisions effecting the common spaces of the condo. As the special usage right is above all a space belonging to the common area and only after this space dedicated to the usage of one particular owner, the condo has a lot of decision power over a space. This can cause a lot of trouble, stress and delay, while the purchaser of such a right thinks he fully owns the space like a flat.

Conclusion and advise
  1. always use an experienced lawyer or notary to design your partition deed “Teilungserklärung”.
  2. always put attics to be converted in a flat in the legal status of part-ownership “Teileigentum”.

Acknowledgement and recommendation
The importance and the solution of the aspect of developing properties in Germany was stressed to me by
lawyer Dominik Schüller of Sawal Rechtsanwälte Berlin, specialized in condominium law.


* to be correct. The law differs between space which is used for residential and space which is used for non-residential usage (“Wohneigentum” vs. “Sondereigentum”)

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Residential property under 100.000 Euro, here is how and why

Get my explanation that my clients typically pay for.
It is hard to find properties below 100.000 Euro nowadays,
especially when it should have features like:

1.) vacant
2.) lift/elevator
3.) central heating
4.) refurbished or new,

and above all
5.) location, location, location.

Why those features are important, and what are the benefits of buying either into a non-attractive ‘ugly’ flat or a small one, I will explain in this video.
Why tenant turnover should matter for every investor and why student housing is therefore so attractive.
I have a couple of offers in the range of 75.000-100.000 Euro for you in this video.

And I show you a brand new development close to the biggest university of Berlin, that offers yields of 4% and more, while the total costs (including side costs) is round about 75.000 Euro / 80.000 US$ / 511047 Chinese Yuan (as of Nov. 2015).
If you like what you see and would like to get invested in German real estate, please contact us under www.berlininvestment.com

Make sure to read the FAQs on my site berlininvestment.com if you want to get into the details, and subscribe to this blog to get more hands-on advice, offers and more info that makes the difference.

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Disruptive startup for office space

We interview with setting.io founder Johnathan Teh.

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Berlin Real Estate Market Update 01-2015

Angebotsmieten 2009 vs. 2013 in TOP5 German Cities
While most Berliner hope that the strong rise of housing prices since 2009 will come to an end, the top broker agencies, as Zabel and Ziegert report strong demand from foreign, as well as from domestic buyers.

The shortage in flats and the growing demand for space in combination with historical low interest rates (both for loans, as well as for alternative investments, in combination with a tendency for fear of inflation) fuels the market.

But right now the prices for plots and empty houses, the basic resource needed in order to produce residential space are growing faster than the prices for new constructed flats.

The problem of Berlin is that only in a few districts the rents are that high that new constructions make sense. Even the local municipality owned housing cooperatives admit that they need round about 9€/month/sqm net cold rent (without side costs) in order to produce new constructed multi-family-housing break-even. This is only the case for about 25% of all rental offers in Berlin, as stated by the BBU Marktmonitor 2014.

In this areas (were new construction makes financially sense) supply of plots is very limited, if not non existing.
Berlin still does have a lot of unbuilt plots in the city but the rents there are to low to justify new construction, which typically needs a price tag above 3000 €/sqm.

On one hand we can understand the politicians that want to save the tenants from increasing rents, but we should treat people equal, says Alexander Korte of AMLT Group, a Berlin based residential developer. Why does a new relocated household have to pay 2-3 times more rent than a household who lives here since ages. That sounds highly unfair to me. Please take into account that those household typically have well payed jobs in the strong technology and start-up sector in Berlin, and therefor not only pay more tax, but bring money in the city via consumption and public fees (In Germany fees for public goods, as kindergarden are linked to the income.
Taken into account that the preservation of rents is exactly the number one parameter that keeps developers from building the strongly needed housing, the strong legal tools just introduced to minimize rental growth is exactly the wrong medicine.

The paradox is that the politicians keep rents low and therefore increase the problem.
New housing doesn’t make sense in most Berlin areas, so new supply is nor planed, neither executed.
Here we need higher rents that developer start to build in this areas.
As demand grows and supply stays limited the rents have to rise, and they will find a way to rise.
Talk to an senior property manager and he will tell you what happened when in the 1960ties the rents were artificially frozen by the government. Landlords started to collect money on the side. s.th. like this will happen again.

Since years the output in new housing in Berlin is on a historical low of around 3500 units per year, this is less than in Munich (1,4 Mio inhabitants) or Hamburg (1,7 Mio). Experts see a number of 19.000 new units per year in Berlin needed to cover the demand.

In the end investors in income producing rental property, who typically take much less risk as developers will benefit from the low new output. Rents will rise no matter which legal frame wants to tie them, and tenants will stay tenants, rather than become economical thinking and retirement planning real estate owners, because they hope and believe that politics can and will fight the market logic.
But in the end nobody is helped.

Is this really what politicians want? What do you think? Please comment.

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Maybe the most important Berlin map for Real Estate Folks

Berlin U-Bahn Bar MapDrinking might be the only solution after a hard day of researching and sourcing property out there. This map shows a good bar close to every U-Bahn stop.

We recommend the U2 and U8 drinking line.

Find the original big version here.

Filed under essentials ;-)

Big thanks to the guys from Thrillist.com.

 

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ZIEGERT Condominium Report Berlin 2014

ZIEGERT Berlin Condominium Report 2014We added the brand new ZIEGERT Condominum Report 2014 to our extensive research report library.
This issues is published by ZIEGERT for the first time.
Do you need Berlin Real Estate Market Data ?
Drop us a line and we give you free access to our archive dating back to 2005.
Get the ZIEGERT Condominium Report 2014 (German or English Version) directly from Ziegert Immobilien here.
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The Economist interactive guide to the world’s housing markets

Very interesting data and  cool graphics from the economist on global real estate markets.
The stand outs are:
  1. Germany still cheap absolute and especially relative.
  2. Most Anglo-saxon markets excluding the US in a clear bubble.
  3. Italy and Spain reversing downwards towards their average and becoming more affordable but not yet cheap.
Here is the link:
Enjoy
Want more research data? Post us a note:

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Rising locations in the Berlin property market updated

The biggest challenge property investors face in a new city is the location question.

Therefore we regularly publish location information for the Berlin property market.

In 2014 we added so far:

  1. Potsdamerstrasse, the north part of the street towards Potsdamer Platz
  2. Area around Gleisdreieck
  3. Victoriastadt typically named Kaskelkiez

The full list of our Berlin location recommendations can be found here.

Potsdamerstrasse, the north part of the street towards Potsdamer Platz

Area around Gleisdreieck and Gleisdreieck-Park

Victoriastadt typically named Kaskelkiez

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Investors are facing company structure decisions effecting taxation, profits, liability and exit possibilities.

As a family office for wealthy private investors we could gain a lot experience in the last years regarding those issues. This article is a basic introduction and doesnot substitute professional advise.
The article is suitable and addresses the needs of investments between 500k and 20 Mio Euro.

Executive summary:

  • Company and tax structure have to be decided before acquisition, otherwise decisions are made under (time) pressure.
  • German corporate law offers flexibly company structures to minimize liability and taxation.
  • German tax law offers very convenient tax rates especially for foreign investors.
  • Cross border and double taxation treaty experienced advisors are needed to set up the corporate and taxation structure.
  • To keep strategic options open and to avoid negative effects on taxation a separate entity for each property is highly recommended.
  • Advise of a cross border tax structure advisor is highly recommended.
There are a lot of options how to structure property investments in Germany. Upfront we want to stress that we found the typically used “offshore” Luxembourg company structure expensive and inflexible, at least for single investors and small groups of individual with a investment range of between 500k and 20 Mio Euro per single property.
German company law offers 2 types of taxation options.
  1. non-commercial entity
  2. commercial entity

The status depends of the volume traded. The line between non-commercial and commercial is crossed after selling more than 3 units (!) within 5 years. A unit hereby is defined as a single legal unit. A legal unit could be a multi-family dwelling with 2-500 residential units, as long as the property has one land register its one property no matter how big the value might be,

The main benefit is that the German tax law allows to choose between a commercial and a non-commercial, called asset management entity (company). The non-commercial entity is designed for investors that buy and hold property longterm. If you plan to buy-and-flip or buy and develop to resell you are a trading business and considered commercial, therefor the non-commercial status will not apply. At the start of the company you choose the non-commercial status, and you should alwas start as a non-commercial even if you plan to split and sell. Because the status will be automatically switched if you trade more than 3 properties within 5 years. Especially for foreigners a non-commercial GmbH structure with its 15,6% income tax and its extemption from commercial tax (Gewerbesteuer), is more or less a tax-haven and makes sense from a taxation poont of view. The possibility to treat the equity of a sharholder as a loan, and the right to treat the intrest (payed out or not!) as a cost is another advantage of this structure. However the down side of choosing a GmbH (or any other non-tax transparent vehicle) is that capital gains won’t be free of tax (after 10 years of holding the property) . This could be avoided by a mixed structure like GmbH & Co. KG. In any case as a foreigner you should always take into account that the taxation law of your location of residency could apply. Especially if there is a double taxtion treaty. A tax advisor that is used to cross border deals and structures should be advised in any case. No matter what your tax consultant advises and not matter how urgent the situation might be, always choose one entity for one property. Property investmemts are a bet on a location, and this location quality might improve or not, on top the legal situation could be changed by the municipality (must known terms: Sanierungsgebiet, Millieuschutz, Denkmalschutz) forcing you to switch strategy. To make sure you can switch strategy on the property level and don’t harm taxation of other property investments you should use one entity for one property.
We can get you in contact with the tax-advisors that help us and many of our clients to structure cross-border deals.
Just drop us a note.
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