What does the future hold in store for property owners?

Newsletter Posts / Contributions

Jakob Mähren, CEO of Mähren AG

[Mähren Interview ibtimes.com]

An interview with Jakob Mähren, CEO of Mähren AG

Question 1: Federal elections are coming up in Germany and it is becoming apparent that refurbishments will be subject to far more stringent energy efficiency requirements in the future. What does this mean for residential property owners?

There’s certainly a lot in store for property owners. I see two major areas that they will have to work on. Firstly, expertise. Private owners will have to familiarise themselves with a host of new regulations. And these won’t only apply to refurbishments but also to the replacement of equipment that is actually in perfect working order. Anyone who thinks that they will be able to carry on heating an apartment building with oil for much longer is in for a big surprise. Which brings me to the second point: Owners and landlords are going to face considerable additional costs over the next few years, costs that simply haven’t been on their radar. Additionally, interest rates are starting to gradually rise again. We will see whether property investments will remain quite so easy to finance.

Question 2: Some business models will no longer be profitable because of higher maintenance costs, but what would be the best way to profit from this situation in your opinion?

Owners apartment buildings will definitely have to make sure they get their sums right from now on. I see real risks in terms of properties that don’t generate more than 4% to 5% rental returns because yields will continue to shrink over the next few years. At the same time, you also need to keep an eye on property prices. Over the past twelve years, real estate prices have only moved in one direction: they have skyrocketed. As a result of this alone, anyone who bought an apartment or an apartment building ten years ago has experienced a significant increase in value. Since many banks will have to adjust their lending values because of the additional investment costs, some owners should think about whether now might not be the right time to sell after all.

Question 3: You have been active in the real estate sector since 2002. Has there ever been a similar market situation in the past 19 years?

The German real estate market has changed substantially over the last few years. And before that, it had been slumbering for years. The state was the biggest landlord, so there was hardly any residential market to speak of. However, since 2013, we’ve seen a steady increase in regulations. Two rental price brakes, other rent regulations, neighbourhood protection areas, modernisation levies, the failed Berlin rent cap, expropriation debates, and now the Building Land Mobilization Act – it is clear where we are headed. The state is constantly sticking its oar, and that’s not going to change anytime soon – on the contrary. Of course, all of this has a significant effect on the market. You have to comply with more and more laws, which requires significant professionalisation on the side of property owners. And then you have to keep in mind that prices have stopped rising as fast as in recent years. The German real estate market is settling back into calmer waters.

Question 4: At the moment, there are more than 2,000 residential units in your portfolio. Is it currently still worth investing in real estate in Germany?

That’s a question I can’t really give a blanket answer to. For some owners, now will be the right time to sell. For others, it might still be worth pursuing new investment opportunities. It depends on several factors. First off, you have to be able to act professionally – we’ve already talked about that. Secondly, you have to look at how high the rental yield is because yields look like they will continue to fall for a little while yet. And, last but not least, you have to look at how much equity you have available or invested. The higher your LTV ratios, the more likely it is that it will make sense to sell now. You can ride the wave and take the asset price gains. We will see how long this window of opportunity stays open.

Question 5: As a Berlin real estate investor, you started your investment career in Berlin. Would you do the same today?

There are worlds between the Berlin of today and the Berlin of 20 years ago. When I started out, Berlin was demolishing buildings and tearing down houses. The Senate assumed that the population would stabilise at around three million. Today, you can’t even imagine that anymore – Berlin is well on its way to having a population of four million. So, the fundamentals are completely different now compared to 20 years ago. Today, real estate prices are so high in many parts of Berlin that properties are more like trophies. Some investors have bought buildings or apartments just because they absolutely had to have a property in Berlin, not because it was a good investment per se. This has little to do with investing and profitability. Whether and for whom investments are still worthwhile is a question that needs to be examined very carefully on a case-by-case basis.

Question 6: Considering the current state of the German real estate market, what makes a good investment?

Rents are generally still very low in Germany. For investors, this means that they have to put in a lot of work to leverage potentials, which isn’t always easy, especially in view of increasing regulation. So, I would advise private investors to look at what they want to achieve over the next few years. If they want the property to take care of itself, they need a lot of equity. And if they want to enter the market professionally, they need a lot of experience and patience. But that doesn’t mean there are no good investment opportunities out there. I just assume that the best investments are now all very long-term. If you’re planning to sell in the near future anyway, for example because the ten-year tax period has expired, you might want to do it sooner rather than later.

Question 7: What is your opinion on the development of the German real estate market over the past two decades?

In recent years, the German real estate market had a lot of tailwind and made massive gains. Now, the market is slowly running out of steam, and that’s understandable. Prices have risen sharply. Interest rates, on the other hand, can’t fall any further. Additionally, the German and state governments have made it unmistakably clear that they are going to ramp up the regulations that govern the market. Private investors have made sizeable profits in recent years, now we are entering a phase of consolidation.

Question 8: Do you have any advice for young entrepreneurs who want to follow in your footsteps?

Just do it. There isn’t a right or wrong moment to start a business. An entrepreneur is someone who acts. If you want to work with real estate, you need to have a good sense for the latest developments and trends. That means you have to read the news and keep your eyes open. You get the most important information by being curious and always asking yourself what people want and need. Then you have to do the math and see if a project is worthwhile.

Question 9: Over the last year, the U.S. dollar has lost about 10% against the Euro while real estate prices in Germany have been climbing steadily. Does that make it more worthwhile for American investors to buy real estate in Germany?

The United States is still by far the largest and most exciting real estate market in the world. As an investor, you experience a different dynamic and scope there, simply due to the size of the country and the multitude of markets across the country. However, looking at exchange rates alone is nowhere near enough and I would strongly advise against relying on it. It’s like any real estate investment: you have to examine the properties individually and then put them in context with the microlocation, the macrolocation and other economic and demographic factors and trends. In this respect, the American market is no different from the German market. Question 10: Real estate prices are also rising in America. Are there parallels from which an investor can learn something?

We are actually invested in the U.S., mainly in the Sun Belt, which is the southern part of the United States. What you can learn from the U.S. is the classic rules of supply and demand. In the U.S., there is little regulation, which enables both the market and the people to actively and flexibly adjust their budgets and requirements. Back here in Germany, we could definitely learn a thing or two from the U.S, including that it’s easy to over-regulate a market, but there’s no way you can ban entrepreneurs in a free society.

Refurbishment and new construction project: listed building in Magdeburg
Real Estate Offerings, Real Estate Offerings, Real Estate Offerings
Plot size: approx. 2,000 sqm Price: €1,100,000 plus 7.14% commission (incl. VAT)Read More...
Read more

2. December 2022
Subdivided modern building from 1982 in a prime location in Berlin-Wilmersdorf
Price: €5,000,000 plus 7.14% commission (incl. VAT) Lettable space: 1,231 sqm Net annual rent: €110,813 Read More...
Read more

2. December 2022
Well-maintained multi-family apartment building with converted loft space in central Berlin residential neighbourhood
Price: €6,950,000 plus 7.14% commission (incl. VAT) Lettable space:  2,330 sqm Net annual rent: €247,990Read More...
Read more

2. December 2022