Analysts at global real estate advisor Knight Frank, found that ultra-high-net-worth investors are increasingly interested in cities such as Berlin and Munich, which have seen a marked increase in activity in the last year.
While continents such as the Americas have seen real estate growth across the board, individual European markets are travelling at different speed, with Germany, the UK but also some countries in the Euro periphery in the lead, and others trailing much further behind.
“Europe is the most mixed of all the world regions in terms of [real estate] performance,” says Liam Bailey, Global Head of Residential Research at Knight Frank, who today published a comprehensive study on wealth and real estate, TheWealth Report 2015. “Some areas are doing really well while others are much slower.”
Germany had long been tipped as the rising star of European real estate and now seems to have finally come into its own. “European investors, particularly those from Southern Europe, are still drawn to London but are also turning to Germany: if you are looking for a safe haven in the event of a Eurozone dissolution, London and Germany play a similar role,” notes Bailey. “A lot of money is flowing into the German market and we had not seen this historically.”
But why have investors waited until now to head to Germany? The reason for their sudden spike in interest is simple. “Over the last 12 to 24 months, the German economy became much stronger compared to the rest of Europe,” Bailey explains. This initially drew a number of real estate investment pioneers, who have since then been followed by several others. “Buying property overseas is a big decision and buyers like to see a trend established before they commit,” says Bailey. “If they have peers who have done it, this will encourage them.”
At the same time, he adds, the local markets are reacting to this increase in demand by developing new properties that are attractive to foreign investors: “Suddenly, the trend becomes established and [real estate] products are being sourced and marketed.”
Business can become an additional driver for Germany-bound buyers. “This already happens in London and could potentially happen in Berlin and Munich: many overseas buyers either work there or are considering moving one of their businesses there,” advises Bailey. For example, he continues, “A lot of Russian buyers are actually affluent entrepreneurs, rather than super-rich oligarchs. They feel that they can’t really grow their business in Russia any further so are looking at London or Berlin as a possible base, and weighing it against maybe New York or Los Angeles.”
Although a greater number of ultra-high-net-worth individuals live in Frankfurt than elsewhere in Germany, and although the city matters more to the world’s wealthy than any other in the country, foreign real investors are showing a greater appetite for Munich and Berlin. The German capital in particular saw a 9% increase in luxury real estate values according to the Knight Frank Prime International Residential Index, PIRI, which tracks annual changes in the price of prime residential property in a hundred cities and second-home locations. Munich followed with an 8% rise, while Frankfurt was in third place at 7.5%.
Bailey sees the German cities as potentially stepping up to compete against London for international real estate investments. “This is very interesting. Five years ago, London’s competition would have been Paris, but that’s no longer the case.”
The market in Paris—where prime property prices are down 3.5%—and those in traditional second home destinations across France and Italy are the counterpoint to Germany’s success story. “The Eurozone crisis and concerns about taxation have weighed on demand, especially in France,” says Bailey. “Paris, in particular, is a beautiful and hugely interesting city but some statements of policy that were made there caused uncertainty, which in turn put off investors. Volumes are lower and the market is much more domestic than it previously was.”
By contrast, other troubled Eurozone countries have seen a real estate renaissance to rival Germany’s, according to Bailey. “Places like Dublin, Madrid and Barcelona are doing well. There is an element of rebound but also economic improvements, particularly in Ireland, that give people confidence to invest in those markets.”
In particular, some of these countries are benefitting from the Golden Visa policy of granting a resident permit to investors who buy real estate above a specific value threshold. Immigration specialist Fragomen found a significant uptake in programmes linked to real estate purchases, particularly in Spain, Portugal and Latvia.
“It’s interesting that in the UK and some other European countries, the debate is all about the impact that overseas buyers will have on the local markets, whereas in parts of Southern Europe, because of overbuilding and because of the state of the economy, governments are quite keen to attract foreigners,” says Bailey. “It’s another reason different European markets go at different speeds.”