Which sounds the better bet?
Earlier this week, I mentioned that I was looking for better value real estate abroad.
For now, I’ve been looking at Germany, as I’ve heard that this is where the best deals are to be found. If you’re thinking about property investment, it’s worth considering...
Why property is such bad value in the UK
Last time, I argued that investors have been turning to BTL because most retirement plans end up with an annuity. The annuity can’t be passed on to the kids and offers pretty poor returns anyway.
One reader replies:
“Well OK I'm a silver haired buy to let investor buying at auction… I'm looking for capital improvement over a period to double the return from the rental and that's my basis for doing it, am I wrong?” JC
I’m sure JC isn’t alone. It seems to me BTL amounts to buying an expensive asset in the hope that it becomes even more expensive.
Now this can be a profitable strategy. Momentum investing uses this technique, often to good effect. Similarly, investing into a financial bubble can be extremely profitable if you can get out in time.
But bubble and momentum investing are short-term trading strategies. Retirement planning is not.
Evidence and instinct tell us that buying investments when they’re expensive is a bad idea. Investments tend to return to their long run average p/e. Right now UK property is trading on a p/e of 33 times, while in Germany you can get it for 14 times.
According to RICS, property coming on to the British market is outpacing the number of new buyers signing up with agents. And that’s for the third month in a row. In other words, supply is starting to outstrip demand. Agents are now talking about prices stabilising after the recent rise.
Contrast this with a report out from accountants PWC arguing that the best prospects for European property investment are in Germany.
Jim Mellon, chairman of Charlemagne Capital agrees. He’s been buying up German residential property for quite a while now and knows the market well. Jim’s noticed huge interest in BTL coming from savers eager to find a decent yield.
Luckily for us, Germany didn’t have a property boom like in the UK, so prices still offer value. Jim says that today, you can buy German property at half the cost of re-build and this ignores the value of the land itself!
So, let’s take a look…
Double your income on BTL
Location, location, location is the mantra for property. As in the UK, the German market comprises many regional markets. Though the country was re-unified over 20 years ago, there are still vast differences between the East and the West. And they definitely show up in rental yields.
BTL investors tend to prefer to invest in their home markets – locations they understand. So West Germans (those with the money) tend to buy property in the West. This drives yields down. Whereas in the East, lack of demand for property means depressed prices and higher yields, up to 10-15%.
Say you get a 12% gross yield, then you’ll end up with nearer 6%, or 7% after tax, maintenance and voids (the time it takes to find a tenant), which equates to a p/e of about 15 times.
A p/e of 15 times offer ‘reasonable value’.
Remember, East Germany still resembles an emerging market and offers the potential for growth. Consider too that its wealthier western cousins are committed to economic, as well as political union. I’d say 15 times earnings is starting to look pretty attractive.
I’ve been looking at property from €16k to €500k. In Saxony, €200k buys you a modernised, tenanted apartment block dating back to 1868. It’s got 9 apartments (all let out) and 2 commercial units and it brings in €29,500 a year. That’s a yield of 14.75%. That’s amazing, 9 apartments and 2 commercial units for less than £178k.
Risks and other issues
The transaction costs are extremely high by UK standards. We’re talking 10-15%. That’s about one year’s income. But this is a long-term investment that can be passed on to future generations. We’ll have to cope with a high ‘in-cost’.
There are local property taxes as well as income tax on your earnings. A double tax treaty with the UK means that you’ll not pay income tax twice, but you’ll need to take advice on taxes.
Foreign property comes with currency risk. The euro is trading relatively high against the pound just now, so if the pound strengthens, then rents will be worth a little less in sterling terms.
But even if the euro totally falls apart and Germany ends up back with its deutschmark, I’m not too concerned. If history is anything to go by, then the Germans will ultimately preside over a strong currency.
Tenancy contracts in Germany tend to be long-term. The culture is very much one of renting, rather than owning. This is great for investors, but the flipside is that the tenant does have more rights than in the UK.
The key to success lies in finding a good agent to find a suitable property and who can help with legal issues, tax, financing (if required) and manage the property in your absence.
Finding a great agent is the key to unlocking the potential of this investment. And I hear there are beautiful lakes and well-preserved historic towns in Saxony. Maybe it’s worth a visit?
Good investing,
Bengt Saelensminde
For The Right Side
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