Sunday, 24 February 2008

Leipzig Residential Property Market -- What makes an Investment so Interesting?

The economic environment

The outlook for the German economy is positive and the economic upturn is continuing. 2008 will see a change from purely export driven growth to more growth support through domestic demand. For the first time in years significant raises in salaries are currently negotiated and the consumer climate can be seen as friendly. This will be associated with further reduction in unemployment, as companies are prepared to take on staff. Growth in the economy can be expected to stimulate the German property market.

The Local Aspect

Many of the major investments went into the federal state of Saxony with the main focus points in the state capital of Dresden and the traditional economic center of Leipzig. With regard to the economic growth Saxony has pushed Bavaria off the first rank amongst the German states.

BMW has opened a new production plant near Leipzig, Porsche is extending their capacities to produce a 4-door-sedan and DHL the logistics subsidiary of the German Post has decided to develop their new logistics turntable in Leipzig at the Halle-Leipzig-Airport which will be operational in 2008. Here investments will be 300 Million and will directly create 3,500 jobs with another 7,000 indirectly related jobs and another 10,000 in the car sector.

The German Property Market

Germany has seen a major influx of international capital to its property market over the last 2-3 years with record year 2006 which was considered a record year still being outranked by 2007. The year 2008 is seen by most market players as a year of consolidation. Increasing numbers of institutional investors will become sellers which should offer interesting opportunities for smaller and private investors as it is unlikely that all sales will be in large packages.

The Leipzig Property Market

Leipzig is one of the few places in former East Germany with a positive population development which is expected to keep going at least until 2012. At the same time the city runs a program to demolish old unsuitable pre-fabricated housing blocks and thus take pressure from the residential market. It started out with 1,000 apartments in 2006 and will be continued until 2010 with a goal to reduce by 20,000 apartments. The statistical vacancy rate in 2005 was at ca 16% but half of these were not accepted by the rental market and did not constitute a competition for prospect tenants reducing the market active vacancy rate at its highest in 2005 to 8% (EUROHYPO).

In 2006 over 1.6 billion in property value were traded in Leipzig out of which 26% were apartment blocks. The figures for 2007 will be slightly higher with approximately the same share of residential buildings. The vast majority of these apartment blocks were bought by foreign investors with an investment perspective of 5 to 10 years. The objective is to improve the rent and drive yield and value. This will push for an increase in rents.

Conclusions

The economic situation in Germany and especially in Leipzig is positive with the prospect of at longer lasting prosperity. The property market has three main drivers for income improvement:

1. Positive population development accompanied by new jobs.

2. Reduction of vacant apartments by demolishing ca. 20,000 "outdated" apartments by 2010.

3. Active owners interested and acting on improvement of their rental income situation.

This looks all very positive but there are still many investments on offer you should stay away from. With a follow-up article I will provide information about the rent in different parts of Leipzig and vicinity. You will find this article on the Property Investment in Germany blog.

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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