ProVenture Property was born out of the onset of the global financial crisis. As a team, we very much surveyed the landscape towards the middle of 2007 and as investors ourselves saw little value to hold let alone invest in property in much of the developed world. We would not claim for a minute that we foresaw the global turmoil that was just about to unfold, but like many folks we knew something was up. We took our money, and advised as many people we knew to take their money, to areas of safety. Within europe, Germany seemed like the last market which stood up as an area of viability to invest. And so that it what we did, as investors and as consultants to other investors. How has it worked out, now the financial crisis seems to be easing 5-6 years on?
Well, the situation in Germany back on 2007-8 was very much of a market asleep, still licking its wounds after a collapse following investor exuberance of the re-unification and then the realisation of what that meant for the country. Unlike other markets in Europe, which binged on the cheap credit available, Germany between 1998-2005 had a generally torrid time property wise and values collapsed and rents went sidewise or declined. But investment conditions were generally good back then, with finance much more freely available than in the other european markets that were just waking up to the over-valued properties at higher LTVs which they held on their books. Rents seemed stable in most areas, and property values very cheap.
A look at the market as a whole across the country shows that over the last 5 years, rents are up 12% and capital values around 14%.
As ever, the view across an entire country masks what is going on in local markets. From a ProVenture perspective, investments made in Berlin and Leipzig in 2008 by us and our clients have developed by around 20% in terms of rent levels [higher in Berlin] and 40% in terms of the capital value. This is very encouraging, not only to have chosen a market in europe that offered good safety and also high leverage, but to have [with some luck] chosen markets within Germany which outperformed the country as a whole by such an amount.
That’s not to say that it has been a walk in the park, operating in new markets which are foreign to most of our clients. Property management has proven intensive in many cases, particularly in the investments made in the former east of the country in cities like Leipzig. But with support from good people on the ground, and the comfort of good gains, it has been a very positive outcome during the financial crisis.
Where Next for the Next 5 Years?
Really, just as we surveyed the landscape 5 years or so ago, we do the same now as the European economies seem to be coming out of the “intensive care” phase at least and limping towards some sort of recovery. Looking for the pre-requisites for viable investment around europe we look for factors such as:
a stable or falling unemployment rate
a stable or increasing population
affordable housing in terms of rent levels and also house values in respect of wages
readily available finance, at good rates
Following these criteria really help us dismiss much of europe from a property investment perspective. In most countries, against most of the criteria above, it seems to be far too early in the cycle to participate as yet. To some extent, an argument can be made for investment in parts of the UK outside of London and the southeast and also in parts of Ireland, although both markets really do need some care when thinking about the criteria above.
As we look to the next 5 years then, we make the case once more for Germany as the best investment area within Europe. But this time, rather than the still-developing east of the country we make the claim that small, rather undiscovered, pockets of the West of the country will perform above average as we look forward. Whilst the west is mainly more developed and higher in price than the east, we find the following conditions of favour:
A mature and reliable service sector, with robust property management in place, as the norm
Good levels of finance available
Stable rental returns and good rental demand
Very high rental yields, compared to finance rates.
The last point is really what drives us to these small pockets in the west. We are finding rental yields, for good units, at between 8-11% and finance is now between 2-3%. Making sure that these returns are sustainable, this gap between yield and finance rate will no doubt bring investor attention and the subsequent dramatic price rises. All within the safe economy of Germany, which faces a very kind decade ahead many pundits say.
You will find some examples of these investments for the next 5 years on this newsletter and on our website. Just get in touch if you want to be part of the story in the next 5 years…