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Is buying property in Europe a smart investment?

As Europe watches the clock tick down to Brexit, all eyes are on the real estate market in the major European cities. 

After almost four years of strong house price rises, Germany’s housing market remains robust, with the average price of apartments rising by 6.78% during 2018. This is an improvement’s from 2017 - 4.45% growth. The reasons are wrong economic growth, 1.1 million refugees, high work-related immigration, record-low unemployment, weak construction supply, and low-interest rates.

According to Savills, residential property transaction volumes in Germany surged by 19% to €8.8 billion (US$10 billion) in the first half of 2018 as compared to the same period last year.

Berlin’s economy, which is very dynamic compared to other German cities, will continue to drive high population growth. The demand will continue to grow in the residential market. Berlin apartment costs are around €4,991per sq. m. The city is currently facing a severe housing shortage. It is estimated that Berlin needs about 194,000 new units by 2030. Both the IMF and the European Commission expects the German economy to expand by 1.9% this year and in 2019.

BERLIN: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Units Completion Date
EuropaCity Moabit 2,800 2025
Mein Falkenberg Falkenberg 1,200 2021
Mittenmang Berlin Moabit 1,000 2019
Pepitahöfe Spandau 1,000 2018
High rise building “Grandaire” Mitte 270 2020
Source: JLL

In Hamburg, median apartment prices increased 11.34% y-o-y to €3,985 (US$4,536) per sq. m. in Q3 2018. One- and two-family houses rose by 6.55% to €2,640 (US$3,005) per sq. m. Construction activity in Hamburg is well below demand. In 2016 and 2017, housing completions averaged 7,000 units annually, less than half of the estimated annual requirements for 15,000 homes, according to JLL. Hamburg Senate recently set a new-build target of 10,000 homes per annum.

HAMBURG: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Pergolenviertel Winterhude 1,400 2020
Othmarscher Höfe Othmarschen 1,000 2018
SonninPark Hammerbrook 750 2019
Tarpenbeker Ufer Lokstedt 750 2021
Wohnquartier – Am Weißenberg Alsterdorf 490 2018
Source: JLL

In Cologne, median apartment prices rose by 4.19% y-o-y to €2,857 (US$3,252) per sq. m. in Q2 2018. One- and two-family houses had a price increase of 5.86% y-o-y to €2,349 (US$2,674) per sq. m.Due to its growing need for houses, on top of the high demand backlog from previous years, the City of Cologne plans to build about 6,000 new homes annually starting 2019.

COLOGNE: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Clouth-Quartier Nippes 1,200 2021
Park Linné Braunsfeld 500 2018
Reiterstaffe Marienburg 500 2018
Cologneo I Mühlheim 490 2021
Wohnquartier Ossendorfer Gartenhöfe Ossendorf 430 2021
Source: JLL

With the highest apartment price increase in the region, Düsseldorf was rising by 8.7% to €2,625 (US$2,988) per sq. m. during the year to Q2 2018. Prices of one- and two-family houses also rose by 4.02% to €2,409 (US$2,742) per sq. m. Housing supply in Düsseldorf is not keeping up with demand, the same situation as in other German cities. There were just over 1,000 housing units completed in the town in 2017, a substantial decline from about 2,000 completions in the previous year and far lower than the annual requirement of 4,500 units.

DÜSSELDORF: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Le Quartier Central Derendorf 1,500 2020
Gartenstadt Reitzenstein Mörsenbroich 1,050 2020
Vierzig549 Heerdt 1,000 2025
le flair Pempelfort 900 2019
win win Wohnen im Medienhafen Hafen 410 2021
Source: JLL

In Stuttgart, apartment prices rose by 10.69% y-o-y to a median price of €3,261 (US$3,712) per sq. m. in Q2 2018, while the median price of one- and two-family houses rose by 7.54% to €2,992 (US$3,406) per sq. m.

STUTTGART: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Wohnquartier Giebel Giebel 340 2023
Wohnen am Höhenpark Killesberg Feuerbach 200 2019
Wohnquartier Am Schwanenplatz Stuttgart Ost 100 2019
SWSG-Wohnanlage Zuffenhausen 80 2018
Rohrer Höhe Rohr 60 2018
Source: JLL

Apartment prices rose by 6.71% to €3,317 (US$3,776) per sq. m. during the year to Q2 2018, in Frankfurt. One- and two-family houses had a y-o-y price increase of 5.71% to €2,579 (US$2,936) per sq. m.

Over the past five years, housing completions averaged around 3,500 annually. However, this is well below the current demand for almost 6,000 units annually, amidst strong population growth.

FRANKFURT: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Quartier am Henninger Turm Sachsenhausen 1,000 2019
Wohnquartier Wings Gallus 630 2021
Hafenpark Quartier Ostend 600 2022
Wohnquartier Westend-Ensemble Westend 470 2021
Bright Side Gallus 420 2018
Source: JLL

Munich had the most robust y-o-y apartment price hike in South Germany in Q2 2018, increasing by 11.24% to €6,361 (US$7,241) per sq. m. Uver the same period, prices of one- and two-family houses rose by 10.08% to €4,771 (US$5,431) per sq. m.

The problem of excess demand is unlikely to diminish over the years, given the demand backlog from recent years, and the forecasts for further population and economic growth.

MUNICH: RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION, 2018
Project Name Location Residential Units Completion Date
Quartier Paul-Gerhardt-Allee Pasing-Obermenzing 2,400 2021
Stadtquartier Am Südpark Thalk.Obersendl.-Forsten-Fürstenr.-Solln 1,440 2019
Stadtquartier DiamaltPark Allach-Untermenzing 800 2020
Stadtteilentwicklung Prinz-Eugen-Kaserne Bogenhausen 600 2020
Domagk-Quartier Funkkaserne Schwabing-Freimann 590 2018
Source: JLL
 

In Dortmund, median apartment prices rose by 0.53% to €1,515 (US$1,725) per sq. m. during the year to Q2 2018. Likewise, The median price of one- and two-family houses increased by 1.95% to €2,042 (US$2,324) per sq. m.

Median apartment prices also soared in Dresden by 11.24% to €2,489 (US$2,833) per sq. m. during the year to Q3 2018. The one- and two-family houses increased 7.89% to €2,349 (US$2,674) per sq. m.

Apartment prices rose in Hannover by 8.67% to a median price of €2,357 (US$2,683) per sq. m. during the year to Q3 2018. The median price of one- and two-family houses increased by 6.66% to €2,018 (US$2,297) per sq. m.

Moderate rental yields in Germany

Germany’s rental yields are weak to moderate because investment in housing (including buy-to-let) used to be heavily subsidized by tax-break, and also because of the recent price rises. Many Germans live in rented accommodation, while 51.8% of Germany’s total households own their homes, according to Eurostat.

Rental yields according to Global Property Guide research, June 2017:

In Berlin a 120 sq. m. apartment can rent for around €1,500 a month, earning a yield of 3.5%,

In Munich a 120 sq. m. apartment can rent for around €2,250 a month, earning a yield of 3.5%.

In Frankfurt, a 120 sq. m. apartment can rent for around €1,700 a month, earning a yield of 3.7%.

The interest rates have been mostly stable in recent years. Housing loan rates in August 2018 were (Deutsche Bundesbank):

IRF up to 1 year: 2.13%, slightly up from 2.05% a year earlier

IRF 1-5 years: 1.7%, down from 1.89% a year earlier

IRF 5-10 years: 1.71%, slightly up from the previous year’s 1.67%

IRF over 10 years: 1.97%, almost unchanged from the previous year’s 1.98%

London prices are now declining

London and the rest of the UK is the widest it has ever been, both in cash and percentage terms. According to Nationwide, the average London home worth 136% more than the average home elsewhere in the UK (In Q3 2018). The average difference in price is almost £270,000 (US$ 348,421).

The divergence accelerated sharply in the years after the financial and eurozone crises in 2008-2009. In Q3 2018, however, London prices fell by 0.7% y-o-y to an average of £468,544 (US$ 605,406) in comparison to the 2.4% price increase on the broader market, based on the figures from Nationwide. The last year was a tumultuous one for the UK economy, with the pound tumbling, the base rate rising and Brexit looming on the horizon. But even with Brexit on the horizon, Prime Central London is one of the wealthiest areas in the UK. Locating in the center of the capital has the highest property prices in the UK. However, the prices in prime central London have been on a sharp downward trend, with double-digit falls in their value.With that same uncertainty following us into 2019, it’s no wonder homeowners are anxiously watching their property values, while buyers are looking for the right moment to strike.Buy-to-let investors are hemmed in by new regulations and taxes. The owner-occupiers are reconsidering high-risk property moves as interest rates start to rise and mortgage affordability rules remain tight.

Themonth-on-month fluctuations are to be expected, as property tends to be more in demand at some times of the year than others.Looking at the trends over the past few months, a number of experts consider house prices may grow more slowly over the coming year. Property surveyors’ association Rics warns that house prices are unlikely to move at all in 2019, while property consultancy JLL puts growth at just 0.5% for the coming year.

On the other hand, according to Hamptons International, rents in Great Britain are picking up, increasing by 1.6% during the year to September 2018, following a 1% y-o-y rental growth rate in the previous month. Rents in London rose, with a rent increase recorded in Inner London, for the first time in four months.Purchasing homes and renting them out is a great way to produce extra monthly cash flow.

RENTS ACROSS REGIONS
  Sept 2018 Aug 2018 Sept 2017 Sept 2018 y-o-y (%)
Greater London £1,714 £1,702 £1,712 0.1%
East of England £963 £957 £937 2.8%
South East £1,055 £1,052 £1,032 2.2%
South West £814 £807 £795 2.3%
Midlands £690 £689 £674 2.4%
North £650 £648 £637 2.0%
Scotland £660 £658 £655 0.8%
Wales £683 £683 £657 3.9%
Total £980 £975 £965 1.6%
Source: Hamptons International


Ireland’s house price growth is decelerating, as a consequence of the uncertainty regarding the Brexit. Residential property prices increased 5.81% during 2018, a slowdown from y-o-y rises of 11.68% in 2017, 8.97% in 2016, 7.04% in 2015 and 18.27% in 2014.

New dwelling completions surged by 25.4% to 18,072 units in 2018 from a year earlier. Likewise, dwelling permits rose by 8.4% y-o-y to 10,265 units last year.

In 2018, the number of sales in Dublin dropped 1.8% while sales value increased 2.4% over the same period. Dublin apartment costs are around €2,354 per sq. m.

Ireland: Economic growth despite an uncertain outlook

The Irish economy grew by about 6.8% in 2018, after GDP growth of 7.2% in 2017, 5.1% in 2016, 25.5% in 2014 (obviously a statistical artifact), 8.3% in 2014, and 1.1% in 2013, according to the European Commission.

Despite an uncertain economic outlook, many companies are attracted by the country’s very open economy and by its relatively low tax inversion rate of 12.5%.

Lisbon, a constant growth

Property prices in Portugal began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines. Property prices rose by 5.39% during 2018, up from annual increases of 3.03% in 2017, 3.85% in 2016, and 4.06% in 2015 and declines of 0.53% in 2014, 0.68% in 2013, and 6.91% in 2012. The Portuguese housing market is expected to remain buoyant this year, with Moody’s Investors Service predicting house price increases of between 7% and 8% every year until 2020. Yields are profitable in Lisbon, at around 5.45%, and Lisbon apartment costs around €3,830 per sq. m.

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