German commercial real estate market attracts affluent Russian investors
German commercial real estate market attracts affluent Russian investors
In 2017, International real estate broker Tranio conducted a survey among property agents and representatives of realtors operating in Germany to understand the characteristics of investors from Russia and other CIS countries who bought German commercial property of above €1 million.
Germany is one of Tranio’s business priorities, and investors are becoming increasingly interested in this country. The country does not impose any restrictions on international property purchases and has been called "a magnet for core investors" in the Emerging Trends in Real Estate — Europe 2018 report by PwC and Urban Land Institute. In 2017, Tranio received about 1,600 purchase enquiries for German property, which is 1.5 times more than it received in 2016 and 3.3 times more than 2015.
Interest in Germany among investors is growing rapidly.
The survey involved 35 respondents, 20 of whom are immigrants from former Soviet republics, while the other 15 are local German realtors or natives of other countries. Notably, the answers of Russian-speaking respondents differ significantly from non-Russian-speaking respondents. It can be assumed that these two categories of realtors cater to different investor audiences and use different working principles. This report features the findings of Tranio analysts related to both the affluent Russian-speaking investors and the realtors in Germany.
1. The number of investors
Over a half of the respondents believe that the number of Russian-speaking investors buying German property above €1 million has increased over the past three years. However, there is a significant difference between the answers of Russian-speaking and non-Russian speaking realtors:
The growth in the number of investors corresponds with the results of Tranio’s previous surveys. For instance, in 2015, 56% of respondents noted the scarcity or absence of Russian-speaking investors in Germany, while in 2016, as little as 14% of them believed so.
"There is less money in Russia now," Tranio managing partner George Kachmazov said. "For this reason the overall demand for overseas commercial property is falling. However, we can observe growth in Germany, as the other investors mostly focus on this country. For example, they typically choose Germany over London, the largest European investment market before Brexit".
Many investors prefer Germany to the UK, which has fallen in popularity since Brexit.
The growing number of investors is cited by a higher percentage of Russian-speaking realtors compared to non-Russian-speaking ones (60% vs 50%). at the same time, more Russian-speaking survey participants (20%) observe a decline in the number of affluent investors from former Soviet republics compared to the non-Russian speaking ones (7%).
"For non-Russian-speaking realtors, Russian nationals are not the main clientele," Sophia Bulanova, Tranio sales manager for Germany, said. "This might be the reason why these realtors pay less attention to their dynamics. I also allow for the possibility of Russian-speaking agents losing more clients recently".
Russian-speaking investors in Germany are especially active in Berlin – 63% of respondents consider this city a priority. It is not surprising. in the aforementioned report, PwC and ULI deem Berlin "the most desirable city for investment and development in Europe" in 2017–2018. According to Wohnungs-Infobörse, residential property in Berlin is about 20% cheaper on average than in Germany’s "Big Seven" cities.
According to Russian-speaking realtors, Berlin’s popularity far eclipses second-placed Munich. "Historically, Munich is one of the most popular cities among Russian investors," Mr Kachmazov said. "Just like in Berlin, one of the important reasons for its attractiveness is its attractiveness as a tourist destination. Many Tranio clients believe that Munich is the wealthiest, the easiest to understand and the most pleasant city in Germany, so they only want to invest there". Throughout its history, Tranio has closed one-third of German property transactions in Berlin and one-quarter of transactions in Munich.
In turn, Frankfurt am Main is second among non-Russian-speaking investors. FDi Intelligence has recognised Frankfurt as the city with the highest development potential, leaving Munich in second place in its German Cities of the Future 2016/17 report.
Düsseldorf and Cologne, lying close behind, are of less interest to Russian investors. "These cities are smaller than Berlin, Munich and Frankfurt, and their federal state, North Rhine-Westphalia, has a weaker economy," Anna Kurianovich, Tranio sales manager for Germany, said.
Hamburg and Stuttgart lie at the bottom of the popularity table. "On one hand, Russian investors do not know much about Hamburg and Stuttgart, so they choose more popular locations," Ms Bulanova commented. "On the other hand, the markets of these cities are less open to international investment, but they are doing pretty well without it. Local realtors target either the domestic market or the biggest overseas investors."
Although the popularity of cities among Russian-speaking and non-Russian-speaking investors is almost identical, the rankings differ significantly in the number of votes cast for each city. This is due to the fact that Russian-speaking investors named particular locations, while one-third of the non-Russian-speaking ones just indicated "the big seven", an established term referring to Germany’s seven biggest cities.
According to 46% of respondents, the typical transaction involving Russian-speaking investors ranges from €1 million to €3 million.
The responses between the two groups of realtors again differ significantly in regard to the two remaining options. the €3 million – €7 million segment and the €1 million – €3 million segments were both chosen by 45% of Russian-speaking realtors, while only 10% chose €7 million – €20 million. Conversely, 27% of non-Russian-speaking realtors selected the two "expensive" categories.
"Russian realtors in Germany make more sales in the €3 million – €7 million segment than local ones," Ms Kurianovich said. "At the same time, local realtors close more transactions in the more expensive segment".
Most respondents agree that in order to buy property in Germany, Russian-speaking investors usually transfer money from Russia – an opinion shared by 75% of Russianspeaking realtors as well as 60% of non-Russian-speaking ones. "Unlike some other countries, Russia does not impose tangible restrictions on capital outflows and foreign asset purchases," Mr Kachmazov said.
The significant difference between the answers of Russian-speaking and non-Russian-speaking realtors can again be explained by their different audiences. "English-speaking realtors close more expensive transactions," Ms Bulanova explained. "And the larger the sum, the more likely the client would transfer it from a non-Russian account. The investors who are proficient in English and use this language for business administration purposes most probably keep their money in the UK, USA or Dubai".
When buying property in Germany, most Russian-speaking investors transfer money from Russia.
Germany also appeals to investors because of its foreign mortgage loan terms that are almost the same as for locals. The cost of borrowing money remains the lowest among the countries Russian-speaking investors show an interest in.
Russian-speaking realtors estimate the average share of investors taking out loans to buy property in Germany at 63%, while for non-Russian realtors, it is 30%.
"This difference can be explained by the fact that Russian realtors have established contacts with local banks and fuss over their clients and provide mortgage assistance," Ms Bulanova said. "And many English-speaking partners do not do that. if their clients need a loan, they have to get it themselves".
The responses of Russian-speaking realtors are similar to the results of Tranio’s 2016 survey, where 32% of German realtors said that more than a half of Russian investors took out loans and 48% mentioned that many but not most of them did so.
4. Commercial property types
Russian-speaking realtors believe that the most popular type of commercial property above €1 million is retail property (mentioned by 40% of respondents), while non-Russian-speaking realtors put commercial residential property in the first place (53%).
"Russian realtors focus on the types of property Russian buyers want to purchase with them, while the English-speaking ones sell what they are used to and sell to anyone, including locals," Ms Kurianovich said. "The Germans themselves buy commercial apartment buildings more actively. They might have lower yields compared to other property types, but this is offset by their high liquidity and ownership of an entire building means you do not have to discuss building matters with other owners".
The most popular investment property types are commercial residential and retail properties.
"Different property types are popular in different price ranges," Mr Kachmazov added. "For instance, hotels occupy an unassuming position in the overall ranking, but in the €10 million – €15 million price range, they are one of the most popular assets. And if we take properties below €1 million into account, rental apartments and detached houses would certainly be at the top".
In Tranio’s 2016 survey there were no budget limits, and respondents were able to select several options each:
Commercial residential property
Unlike other topics, the responses of both groups of respondents regarding rental business yield expectations coincide steadily. Over three-quarters of respondents mentioned that Russian-speaking investors expect annual yields of 4–8%. In the 2016 survey, this option was also the most popular, although the percentage of realtors who chose it was only around 60%.
"Investors are getting wiser", Mr Kachmazov commented. "Those previously expected 8–10% rental yields are more realistic now and have limited their appetites. Currently getting 7–8% yields in Germany is only possible with a loan, efficient tax structuring and optimistic sale in three to 10 years", he added.
The yield expectations of Russian-speaking investors are closer to market realities.
"Commercial apartment buildings account for a significant share of our Englishspeaking partners’ sales," Ms Kurianovich explained. "And they usually yield less than 4%", she added.
As for Value Added projects, most non-Russian speaking respondents (77%) mentioned that Russian-speaking investors expect yields not to exceed 10% per annum. In the case of Russian-speaking realtors, this option shares the first place with the "from 10% to 15%" option (41% each).
"I think this is related to a difference in the visions of Value Added projects," Ms Bulanova said. "Our Russian-speaking partners are more likely to invite clients to equity projects: you give us money, we build property together and share profits. At the same time, most non-Russian-speaking partners work under a mezzanine scheme: you lend money to a developer at a fixed rate and have a lower chance of receiving extra funds depending on the project’s success. There the yield is lower compared to equity but the risks are also lower", she added.
"Generally, a lot more Russian-speaking investors in Germany are putting their funds into German Value Added projects now, whilst there have been very few of them before," Mr Kachmazov said. In the 2016 Tranio survey, 65% of respondents answered that the proportion of such investors was less than 10% of all the Russian-speaking commercial property buyers.
6. Problems among investors
The predisposition among certain investors towards registering transactions to nominal owners does not differ between Russian-speaking or non-Russian-speaking realtors. Half of the respondents in both categories denote there are few or no such investors, while 44% believe their number to be significant but not predominant.
However, when explaining the reasons why Russian-speaking investors’ transactions fail through, both categories of respondents provided significantly different answers. Russian-speaking realtors indicate the issues related to money transfers as the least common, while non-Russian speaking realtors noted that they are the most common ones.
"Russian realtors have a better understanding of what precisely Russian clients need: they not only provide them with loan assistance but also facilitate money transfers and going through KYC and other procedures. And our English-speaking partners do not do that, as they are more used to working with non-Russian or German nationals," Ms Bulanova said.
"The property went to the other buyer" issue is the most common one identified by Russian-speaking realtors. According to Tranio’s previous surveys, a property can go to other buyers due to the slowness of Russian-speaking clients. "However, properties often go to other buyers when owners receive more beneficial offers from German or British agents," Ms Kurianovich added.
Unrealistic yield expectations are one of the most common reasons why transactions fail through.
This data differs from the 2016 Tranio survey in which respondents named the main difficulties encountered by Russian-speaking property buyers. According to 63% of German realtors, the biggest struggle was finding properties that fit the needs of their clients. Russian/CIS clients also struggle with obtaining loans (according to 23% of respondents) and structuring their transactions (20%). Finally, just like in the 2017 Russian-speaking realtors survey, money transfer issues were the least common problems, cited by only 7% of respondents.*
"Russian investors have matured greatly in the last two or three years. Apart from firsttime investors, there is a group of them who have been actively buying German property over the past five to seven years and continue investing in this country. Many of them are family office investors, and have professional consultants and bankers on their teams, and can act just as ably as local or other international investors. We expect about 50% of all big Russian-speaking real estate investors to focus on Germany in 2018, with an increasing proportion of them putting their funds into Value Added projects and different property-based financial products," Mr Kachmazov said.
Tranio analysts are unanimous in their opinion that the expertise of Russian-speaking investors interested in Germany will continue growing, which will lead them to contact agents who abide by global standards with increasing frequency. And times will get harder for the realtors who do not manage to keep up.
* Respondents were also able to select several options each in 2016, so the total figure exceeds 100%.
Rostislav Chebykin, editor at Tranio.com
George Kachmazov, managing partner at Tranio.com
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