When we first started working in Germany, we were drawn by the excellent supportable gross yields of 10%+ that we could find for ourselves and our clients. As time has progressed, as we expected, the German property market has in the main enjoyed growth in recent years and we have seen yield compression in a number of cities we have operated in. Where we could source good quality property in Leipzig at 12%+ yields, we now are seeing comparable stock with yields at around the 6% level.
In order to find the best investments, we have sought to replicate our model in searching for property with similar characteristics and location profiles across Germany and now our main focus is on Bremerhaven, Bremen and North Rhine-Westphalia
But there is another factor to consider when evaluating the investments on offer. In 2011 a typical finance rate for a 10 year fixed deal was 4.25% – today it’s 2.35%. Let’s look at what that has done to the typical return on investment. For ease of numbers, let’s look very simplistically at a property at 1M euro in Bremerhaven.
In 2011 – a typical yield in Bremerhaven was 10.5%. So one would expect a gross rental of 105.000 Euro.
If we look at a 70% LTV – then finance interest costs on 700.000 Euro would be 29.750 Euro/year 1
Income net of finance interest being 75.250 Euro – a net yield (in the sense of this example) of 7.5%
In 2015 – a typical yield would be 8.5%. So one would expect a gross rental of 85.000 Euro.
Again, if we look at a 70% LTV – then finance interest costs on 700.000 Euro would be 16.450 Euro/year 1
Income net of finance interest being 68.550 Euro – a net yield (in the sense of this example) of 6.9%
Whilst I appreciate the above example is very simplistic, the point is that whilst the headline yield has dropped by 2% – the net impact is a 0.6% decrease in income. If you move to 60% LTV, then the impact reduces further to 0.1%.
In short, whilst we seek, and are asked, for 10%+ yields, as was the case when we started in Germany – these are harder to find, yet with the utilisation of cheaper finance, the returns are still there and we expect to see continued yield compression, through increased prices in the coming years. Get in touch to find out more.