German property: Ready for take off if you can get a foothold
Low prices and record high yields have made Germany the best property buy in Europe for over a year. But high transaction costs and dealing with tenants 600 miles away are reasons to think again for the UK buyer.
Also, the bureaucracy is very restrictive, especially with the language barrier when dealing with contracts and legal correspondence. While private equity firms and other large investors have benefited greatly by buying German council estates en masse, unless you have the backing to buy hundreds, or even thousands, of flats, these deals are closed to you.
So the canny investor has to find another way into this market. Property shares would be a good option but Germany never developed a sophisticated market for property shares. The market capitalisation of all German property companies amounts to just €7 billion, compared to the €85 billion that Europe's 50 largest property companies are worth. To find any worthwhile investments then, investors will have to check out the German small and mid-capitalisation sector.
Buying property directly is no easy solution either. Average transaction costs amount to 10%-12%, and while that doesn't mean your investment won't pay off in the long term (your capital gains should cover it), when transaction costs immediately take up more than a tenth of your invested capital, you may begin to look for a better way in. The good news is that there is.
BHW
German property buyers currently have to deal with a hugely restrictive lending system. Once mortgages become easier to get, as they will following the impending liberalisation of the German mortgage market, additional liquidity will rush into the market and lift property prices.
The same arguments that hold true for German property investments also hold true for German mortgage lenders. Their market is set to expand hugely because of the expansion of the property market as a whole thanks to new products aimed at potential clients who were unable to take out mortgages in the past.
But the best value is usually found in the least obvious places. Such was the case with BHW, Germany's second-largest mortgage lender, at a time of EU legislation to liberalise the German mortgage market; product innovation and the resulting market growth is merely a question of time.
BHW's extensive, country-wide network for mortgages was well-placed. So when the majority shareholder was putting their shares up for sale, all those who remembered Britain in the 1970s took a closer look. There are now more than 10 bidders in the market and the shares are up 60%.
Safe bet
Hamborner, formerly a coal mining company, has been relaunched as a manager of part of the fortune of the mega-wealthy Thyssen family. The billionaire family's stewardship makes this a company that remains largely untouched by short-term financial pressures that other companies have to deal with. This has enabled Hamborner to pick up top-quality retail and commercial property whenever it comes across an opportunity. It appears to be a recession-proof portfolio from which flows a substantial cash flow; consequently it has never taken on much debt. The portfolio is gradually expanding and there has always been a steady series of dividend payments.
With German property prices now at 1975 level in real terms, Hamborner's portfolio could yield ample profits in years to come. In the meantime, you will have little risk with an investment in Hamborner.
From Balkans to Germany
Jim Mellon controlled around 65% of the Speymill Group's fully diluted share capital of about 50 million shares in September 2005. Mellon set up Charlemagne Capital, a boutique investment firm that after only five years gained a reputation for being an astute manager of emerging market funds.
The firm's assets under management have already surpassed the $3billion mark. Charlemagne made headlines when one of its private equity funds returned 250% in just three years through a series of well-timed anti-cyclical investments into banks in the Balkan region.
The Speymill Group looks like following in the footsteps of Charlemagne Capital by focusing on looking after other people's money, in exchange for management and performance fees. Asset management doesn't require a lot of capital so if performance fees mount up, the earnings per share could rise dramatically. As Charlemagne focused on Balkan investments, Speymill has also focused on a particular investment story - to commit resources to managing German property investments, and has linked up with a Berlin-based property entrepreneur.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The overall cost for comparison is 7.1% APR. The actual rate available will depend upon your circumstances. Ask for a personalised illustration. There may be a fee for the mortgage advice. The precise amount will depend on your circumstances, but we estimate it will be 1.5% of the loan amount with a minimum fee of £500 added on to the loan.
Mayfair Consulting Limited is an Appointed Representative of The Mortgage Times Group Limited, 279 Tottenham Court Road, London , W1T 7RJ , which is authorised and regulated by the Financial Services Authority no. 303007.
