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Shortage of residentials expected
Market Letter #2 '07
Bavaria’s Vice Prime Minster, Günther Beckstein, recently expressed his concerns about a lack of new residential completions: "Especially in a prosperous economic environment, we need new residential properties in order not to run out of living space again." This is true, not only for Bavaria, but the whole of Germany.
In comparison to 1995, when around 540,000 new residential developments were completed, this number decreased to around 224,000 in 2006. Against a background of planning permission being granted for an estimated 200,000 units in 2007, the situation does appear to be getting worse. According to research, completions should be between 300,000 – 350,000 units p.a.
The unavoidable consequence of this supply gap will be rent increases, particularly in economically prosperous regions. A limited number of residentials will be available in the face of increasing demand.
The rational behind the diminishing number of residentials could be that one section of demand has abated – the German investor section.
There are usually two parties interested in buying residential property: Investors, who buy property to let and homeowners, who buy to occupy.
Germans are very tax-sensitive and primarily look for options to reduce their tax burden, for example by depreciation.
Whereas in 1994 a degressive depreciation of 7 % over a period of 40 years for residential investments could be applied, this was reduced step by step to a straight line depreciation of 2 % over a period of 50 years resulting in a relatively small tax advantage.
| Effective Date Applicable for residential buildings |
Degressive Depreciation |
Years |
|---|---|---|
|
completed in
|
in % | |
| 1989-1995 | 7 5 2 1.25 |
1.-4. 5.-10. 11.-16. 17.-40. |
| 1996-2003 | 5 2.5 1.25 |
1.-8. 9.-14. 15.-50. |
| 2004-2005 | 4 2.5 1.25 |
1.-10. 11.-18. 19.-50. |
| From 2006 | Linear 2% p.a. | 1.-50. |
Example: If you bought a 3 bedroom apartment in 1994 for € 500,000 you would have reduced your taxable income by € 35,000 p.a. (€500,000 x 7 %) for the first 4 years 1. Thereafter a depreciation of 5 % for the years 5 – 10 or € 25,000 applied (see table - depreciation rates). If you bought the same apartment in 2006 the reduction would only have been € 10,000 p.a. for 50 years.
As has already been said, the appeal for Germans of investment in newly constructed property depends a lot on the opportunity to ´save´ tax by depreciation. New developments yield around 3 – 4 %, which is quite low. By applying depreciation an investment is much more viable.
The result? Few German investors are looking at real estate. Therefore one pillar of the demand has virtually been removed.
Too few rentals come on the market and the demand for them has increased. Again with an increasing demand for apartments, there is only one way out: Rents go up!
Same thing with property prices. A small supply for a growing demand. Recent research conducted by renowned institutions expects a spiralling of asking prices in the years to come.
As Mr. Beckstein said, there is only a limited supply of residential developments. One way to bring investors in again is to offer incentives such as tax advantages or higher depreciation. As politicians start to understand the need for new developments, we’re confident this will only be a matter of time.
How to take advantage:
International investors generally focus on existing (used) buildings, which yield far higher than new developments. For those investors the situation couldn’t look brighter. A shortage in residentials would mean the chance to increase rents and prices. So luck is now on their side.
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1 regardless differentiation of shares property land - building