Overseas property

Construction of a residential building in Berlin to yield 10% p.a. with moderate risks

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In 2021, Tranio helped its client to invest €1.7 million at an annual yield of 10% in a residential building in Berlin in the excavation phase with 75% of the apartments already being sold. The remaining risks were calculated and minimized by structuring the loan and additional guarantees from the developer.

In the final phase of the project, the developer needed an additional €1.7 million

In the summer of 2021, our partner, a German developer, was looking for additional investment in another project. He was building a 16-apartment building in the north-eastern Berlin district of Köpenick. The total area of the apartments on sale was 1,188 m². The project is already adequately financed with €5.2 million: the developer invested €0.7 million of his own capital, attracted €2.8 million through bank financing, and a further €1.7 million as a crowdfunding loan from an investment platform, which has to be repaid by September 2021. The project is scheduled to be completed in Q3 2022, during which time the developer needed to refinance the loan.

A building permit with an approved plan was obtained in 2019, and construction was in full swing: the old buildings on the site were demolished, a pit was excavated, and the foundations for the six-storey building were poured. 75% of the apartments had already been booked by buyers from the local community, and the developer had notarised the preliminary agreements of sale with them. All that remained was to erect the building, do the finishing work and sell the remaining four apartments. The profit of the project was expected to be €875,000.

Graph -Project Profit and Loss

Investor returns will increase if the pandemic does not stall construction

A regular Tranio client Max got interested in the project: he was just exiting a completed development project in Germany and was looking for reinvestment opportunities. In August 2021, Max lent €1.7 million at 10% per annum to the developer's project company. Although the completion and exit of the project were scheduled for the third quarter of 2022, the loan agreement stipulated a longer term of 20 months. The developer has thus hedged against the risk of increased construction time in the event of repeated lockdowns in Germany or delays in the sale of the remaining apartments by factoring in additional financing costs into the project.

If the project exit is done on time, i.e. after 12 months, the developer will charge the investor a profit of €283,000 for 20 months. In this case, Max's actual return will increase to 16.6% for the year.

The investment is secured by additional guarantees

Since 2020, Tranio's cooperation with this developer has become regular: not only have we attracted investments in several of its projects, but we have also taken care of negotiations, the legal processing of transactions and project exits. In return, the developer provides additional guarantees for our investors.

Profit distribution priority

Max's loan is only subordinated to the bank loan. This means that after the project is completed, the developer will first pay the money back to the bank, then pay the loan with interest to Max, and keep the rest of the profit. The investor's capital is protected by the developer's capital due to the order of priority in the distribution of profits.

Graph - Profit Distribution

The guarantor of the loan is a co-owner of the development company

The co-owner of the developer's holding company provided personal guarantees to Max to repay the loan with interest in full from his own assets in the event that the borrowing project company failed to meet its obligations. The guarantor has managed the holding company for more than 30 years and under his management the company has built more than 200,000 m² of residential and commercial property.

Personal guarantees are backed up by property and parallel projects: the developer is running 36 projects in Germany as of the beginning of 2022. If this project proves unsuccessful, Max's loan and profits will be repaid from the developer's profits in other projects.

Project vetted by key partners

The project was financed by a major German bank and an international crowdfunding investment platform. Banks lend at low interest rates, so it is important for them to invest only in low-risk projects that have passed technical, legal, economic and reputational checks. Crowdfunding investment platforms evaluate projects just as thoroughly since they themselves answer to dozens of investors. For Max, this is an indirect but weighty guarantee that attests to the quality of the project.

The remaining risks are minimized

There are two key stages left in the project on which the profitability of the project depends: sales of the remaining apartments and completion of the construction work. Let us assess the probability of project failure if the performance in these phases deteriorates.

The risk of not selling the apartments at the planned price is mitigated by the rising housing market in Köpenick.

Notably, the apartments with the highest price per m² were sold first in the project at €5,100–5,400 per m². The developer offered the remaining apartments on the lower floors for sale at €4,900–5,000 per m². This is the lowest price among similar properties in the vicinity, where prices for new housing start at €5,100 per m². 

Köpenick is usually chosen by local young families. It is a quiet green area in the city but has been expanding rapidly in recent years due to the technology park with its hundreds of production companies and the new Berlin-Brandenburg International Airport nearby. An influx of urban dwellers and new jobs are increasing the demand for housing. Prices in the area are rising faster than the city average: according to statistics from Guthmann, the price per m² of new housing in Köpenick has risen by 85% since 2018, compared with an average increase of 64% in Berlin. 

Risk of higher construction costs

The developer has fixed a price of €2,104 per m² for construction in a contract with a large Berlin construction company. If the contractor cannot meet his obligations, e.g. in the event of bankruptcy, the developer will have to look for a new one. Although much of the construction work has already been done, the costs of the remaining part could increase. Construction prices in Germany start at €2,500 per m² at the beginning of 2022.

Project model in case of realisation of risks

Let us evaluate the risks numerically: what happens to the profit of the project if the construction costs increase or if the remaining flats can only be sold at a discount, which will be less than the planned 1.8 million euros.

Graph - Relationship between the profit of the project and construction

The analysis shows that the project's profits will be enough to pay the interest on the loan (€283,000) even if the estimate goes up to €2,575 per m² at a fixed sales price or if the flats are sold at a 34% discount at a fixed construction price.

Investments in European development projects yield high returns in euros compared to other financial instruments because of the risks involved. However, partnerships with developers, experience in structuring transactions and careful evaluation of project performance allow these risks to be minimized for investors while preserving returns.

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