Monday, 31 December 2007

Real Estate Investment, Pre Acquisition Phase - Information Gathering (Part2)

In Part 1 of Real Estate Investment, Pre Acquisition Phase, Information Gathering I have shown why this is one of the most difficult phases, with far reaching impact on the entire outcome of a Property Investment. Based on your Investment Philosophy, the Property Market Research and the findings from your project related information gathering you make your first adjustments in the ranking of your pre-selected property. This second part of the article series will help to further determine which property would be the right choice.

I will provide some sources of generally available information about properties and the area they are located, e.g. rent tables. They are used to determine if the property is at its prime rent level or even at risk of being over-rented in the current property market. Is there a possible upside on the income side or has the property been set up for a sale by incentivized renting to produce high rental income? Berlin is the local market with the highest relevance in Germany this article will focus on Berlin. In other regions and cities in Germany there is similar information available. You will see [Tool] in the text. This indicates tools that will be provided in a more detailed e-book to be published early 2008.

Rent Information

Probably the most useful source of information on residential rents is the official rent table (“Mietspiegel”, For more information on translations and abbreviations common in the German property market also refer to “German English Property Glossary). For commercial rents the chamber of commerce will give guidelines but you have to keep in mind that the chamber of commerce is business minded which in this case will be their paying members, the tenants.

In this article I will focus on the residential market as the more regulated sector. The rent table is important in two ways: It gives you a first indication of the rent level of your property compared to properties of the same age and standard in comparable areas. At the same time it marks the legal limits of rent raises in the near future. The rent table is re-issued every two years based on micro census and statistics and as a result of a political process involving tenants’ and owners’ representation. It constitutes part of the legal framework for rent raises and their limitations. It applies to existing contracts only. For new rentals you can ask whatever the market will accept.

An obvious public source available information are “for rent” or “to let” ads. There are several online portals easily available. Keeping in mind that the rents quoted there are sometimes a wish list rather than reality it is important to look up at least 10 similar offers to develop an understanding for the market tendencies. These figures will most likely be higher than the rent table figures.

Why is this relevant to my intended purchase?

The information gleaned from the analysis of the rent table and ads will let you determine the

  • likelihood of improvements on the rental income (upside) or;
  • risk of possible yield erosion if the rent is currently pushed to the limit or beyond.

The evaluation of upsides and risks will enable you to review your Key Investment Parameters [Tool] you have set at the beginning of the Information Gathering process (see Part 1 of this article).

Operational Cost Information

In principle there are two basic types of rental contracts:

  • All inclusive contracts with heating and ancillary cost included in the rent and fully born by the owner (“Brutto-Warm-Mietvertrag”)
  • Net rent plus ancillary cost and heating advance payments with balance at the end of the year (“Nettomiete mit Nebenkostenvorschüssen”)

There are variations with regard to the heating (coal heating, central heating per apartment etc.) which will need to be considered but are not relevant to the description of the general process at this point. For both contract types you need reliable information about the actual costs for the property. In the case of the inclusive contract it is obvious as you will have to cover the costs from the incoming rent. In the case of the net plus contract you might be forced to ask the tenants for high bulk payments if the advances are not calculated high enough. If your rent is already relatively high this might drive your tenants out and produce vacancy and renting costs at the beginning of the investment.

For cross reference on the operational cost you can again use the rent table which provides crude benchmarks for ancillary and heating cost. Also reference to experienced property managers or property consultants can give some idea about the appropriate cost level for this cost.

Next steps

The operational cost is one of the key areas for the Commercial Due Diligence for any property you want to take to the next phase. Another main topic is entries in the deeds register:

  • Is the property located in an urban redevelopment area?
  • Is it currently subsidized or was it in the past?
  • Are the bank securities higher than the asking price?

The next part of this article series will provide a list of questions to be answered by the Commercial Due Diligence and how all the findings can be best used in negotiations and Smart Purchase Contracts.

Uwe Falkenberg, the author is a Berliner and active in the German property market for more than 25 years. Experienced as project manager, developer and head of the German Business for a UK based property consultancy he now owns and operates Berlin Portfolio Ltd His international background and local expertise is an ideal combination for an international investor.
For Property Search we recommend Properties in Berlin

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