Pay as you grow

Germany’s property market may have been one of Europe’s poorest performers in recent years, but now could be the right time to invest.

One of the crucial factors to be considered when defining a property investment strategy is the underlying economic and social trends in the country of investment. Instant Access Properties (IAP), the UK’s largest membership-based property services group, conducts rigorous on-going analysis of the potential of different markets to generate medium and long-term growth. Recent analysis has shown that the time might be right to invest in Germany, which has had one of Europe’s worst-performing residential property markets for much of the past decade.

For a start, Germany’s economic recovery continued through last year. The official forecast for growth at the start of the year was 1.6 per cent, but by the end of the third quarter, the figure was running at 2.3 per cent. Inflation also rose more quickly than expected towards the end of the year – November’s figure was up to 1.5 per cent from 1.1 per cent the previous month, largely due to high commodity prices affecting all countries. Unemployment was down for the fifth time in a row to 6.9 per cent, or 3.5 million.

Increases in VAT and national insurance charges, due to come into force during 2007, are expected to squeeze growth and increase inflation, but these should be strictly short-term  effects. House prices are still close to the levels of the 1990s, however, and foreigners from elsewhere in the European Union have been taking advantage of these historically low prices to buy into the housing market: during 2004, foreign private equity investors bought about 300,000 German flats and apartments, and this trend has been continuing.

Bad weather at the start of the year hampered the construction industry, but during the second quarter of 2006, the sector grew by 5.8 per cent. It could not sustain that increase and fell back to a rise of 0.8 per cent in the following three months, but still ended 2006 with a year-on-year growth of over 10 per cent.

However, the combination of a large and mature long term rental market, cheap mortgages and a relatively low rate of new-build activity means that the landlords may still be able to enjoy good returns. Yields are estimated at 5-10 per cent.