Lowdown on Leipzig - What makes this city interesting for property investors

8/6/2019 Lowdown on Leipzig - What makes this city interesting for property investors

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Low Down on LeipzigWhere is it? Why Are We There?


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Low Down

on Leipzig

Where is it?

Why Are We There?

We get to meet and discuss investment

with a wide range o private and

institutional investors rom all around

the world. Many get in touch with

us as they have heard the storyo Germany as being a seriously

undervalued property market and want

to know more. Some come to us to

discuss how we can deliver sustainable

high-yielding investments and are less

interested in geographics. Very ew

investors come to us with the speciic

objective o buying in the city o

Leipzig, the area we do around 80% o

our current business within.

So why are we there?


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City Overview

Leipzig is the 12th largest city in

Germany, and the largest city in

the state o Free Saxony. Current

population is growing and stands at520,000. Leipzigs emergence o a city

o some standing in Germany come

about as much rom its geographical

position as anything else. Situated

between old and new Europe, the

city became o strategic importance

to traders rom around Europe, an

advantage that the city still enjoys

today.

Leipzig underwent a process o

rapid industrialisation during the

second hal o the 19th century. It

was mainly driven by the publishing,

textile and metalworking industries.

Its emergence as a major urban centre

is also mirrored in the unprecedented

population growth. In the last three

decades o the 19th century, the citys

population more than quadrupled rom 107,000 (1871) to 456,000

(1900). Most o the older housing

stock in German cities was constructed

during this period, in typically dense

our-to-fve storey apartment buildings

o a fne period quality.

The city continued to grow strongly, even through the inter-war

period, the growing manuacturing base being much o this story. The

population hit 750,000 in 1933 which made it the 4th largest city in

Germany.

During the GDR period ollowing the second world war, Leipzig suered

continued decline as its position in the middle o Europe was no longer

an advantage. The city now stood at the edge o the Warsaw Pact

countries. Much o the government and political unctions were sited inEast Berlin and the city waned in signifcance. The population statistics

during the GDR period and aterwards are shown below:

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Sources: Statistiches Landesamt Sachsen; Stadt Leipzig (2006); Nuissl and Rink(2003).


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Whats

Happening Today?

The city is growing at one o the

astest rates now, as seen across

Germany as a whole. Reasons or

this are strong investment in the

area, and opening o the borders

to the eastern European countries

in 2011. In terms o growth up to

Dec 2010:

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Source: Statistical Ofce othe Free State o Saxony

We see an accelerating rate o growth,

continuously over the last 10 years. With

German as a country suering rom a low

birth-rate, below replacement, Leipzigs story is

somewhat o a success.

Economically, the city is re-asserting its position in the region

and in Europe as a whole.

The city has an abundance o University aculties, some dating

back to the 13th Century. The student population stands

at 36,000 currently. The city is re-inding its past strengths

and putting these into the current political and economic

landscape, as the citys major points out:

Leipzig is the central economic region o

Central Germany. Plus points or maturing

investment decisions are the market

potential, proximity to important customers,

the presence o local suppliers, lexible

human resources, the perormance proile

o research in strategic directions and its

logistics inrastructure and location.

LogisticalhubforthemarketsofEurope

GatewaytothenewEUaccessioncountries

Highlevelofcompetenceinrelationto

Eastern Europe

EastCentralEuropeCentre:astrategic

platorm or the systematic exchange

between Germany, Western Europe and the

accession countries

Leipzig is the central economic region o Central Germany.

Plus points or maturing investment decisions are the market

potential, proximity to important customers, the presence o

local suppliers, lexible human resources, the perormance

proile o research in strategic directions and its logistics

inrastructure and location.


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Public SectorInvestment

Soon ater the re-unifcation, Leipzig

sought to re-assert its position in the

area both politically and economically.

Huge projects were planned with

government backing including a new

main railway station, a whole new

exhibition centre and redevelopment

o a regional airport. Most o these

projects have now been delivered

and the resulting inrastructure is

frst class. Ongoing projects include

a new railway system beneath the

city with new underground stations

and a new university building o the

Augustusplatz.

Private SectorInvestments

Funding rom the private sector was

a little slower, awaiting the needed

improvement in inrastructure beore

committing to projects. The story so

ar has been o a burgeoning logistics

base, centered around the autobahn

network, train line and heavy lit rom

the DHL European Hub in the city.

Companies such as Amazon, BMW,

Porsche and Dell have congregated to

the north o the city to take advantage

o the city transport system and

relative lower wage rates compared to

major cities in the west. Additionally,

around 30,000 jobs in the city depend

on the media sector, with national

television and press having major

presence in the city.

Leipzigs apparent Renaissance continues unabated, with the city being voted No 1 by the Financial Times as the uture city

or oreign direct investment and development out o 223 European cities in March 2010.


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Housing MarketO the investors we meet

that have heard o Leipzig

as a potential investment

area, many comment on

the apparent vacancy in the

town and the challenge in

inding tenants. Whilst this

view has some grounding,

much o the vacant stock

claimed by the town is

o unreurbished stock

which is not available to

the the tenant market.

Over the past 20 years, a

programme o development

o the stock has occurred

and in many areas this

programme is all but

complete. Some stock still

is let to reurbish, but this

lies mainly in pockets to the

east o the city. ProVenture

are careul when selecting

property, ensuring that

good tenant demand lies

within the area, and help

with the management o

units purchased.

The bar graph above shows the rate o vacant units across the city, by year

until 2009. The level o vacancy continues to all dramatically, with manyareas where we operate now having excess tenant demand and new build

projects under way.


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In terms o price levels, we oer the graph

above, showing prices or apartment houses,

by sqm:

The above graph shows price by year in A

locations [blue] B [red] and C [yellow], with

a prediction o pricing to 2015 based on

current rental level trends.

Between 1990 1996, when interest rate

policy was restrictive or investment across

most markets, a wave o speculation o the

real value o property in the ormer East took

hold. With the market in the East eectively

held under a social regime and property

ownership was not possible, the value o

the property was unknown. A common-

held view that the re-uniied country

would equalise in prices to a great extent

as the East caught up with the successul

development o the West during the period

o separation. Investments lowed into the

East rom domestic and oreign sources and

the appetite or investment was increased by

high bank lending values and government-

backed grants or development o historical

property.

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90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

0

200

400

600

800

1000

1200

1400

1600

1800

Leipzig Apartment House Prices

Year

PricePerS

qm

What happened as a result is a amiliar story o

over-exuberance, albeit based on a unique event

o the all o the Berlin Wall. As investments

were made through the period to 1996 or so,

the perormance o those investments became

unsupportable. The expectation o rent levels

being similar to those in the developed West

were unrealistic, population ell in many cities

and towns due to the pull o the more aluent

West and the ability or ree travel and high

interest payments o the time began to bite. Many

investments ailed, or needed to be supported

rom external income to prevent oreclosure.

Think about it, just as the developed world

was gearing up or a decade in which property

values increased by 200-300% on the back on

low inlation and low interest rates, so Germany

dropped like a stone. Prices paid or property in

this time climbed to 1000 Eur per sqm or more,

and oten or unreurbished stock which needed

around another 800 Eur per sqm investment

to get in a condition or tenanting. It is not

uncommon to hear o over-exuberant investments

to all by 50-70% during this period. Despite the

prevailing low interest conditions, particularly

ater joining the Euro, the incentive or ability to

support these ailed investments waned. Only the

very toughest survived the markets o the East.


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What happened next?Germany went through a programme o iscal reorm and set a course or low-inlation and increased

productivity. Wage bargaining was tough, and output o the prized high-value German goods

increased. All parts o Germany stabilised and began the process o reorm. In terms o the property

market, equilibrium was ound in most areas between 2000-2005, with prices in Leipzig around 400-

800 Eur per sqm or apartment buildings in the various parts o the city.

So, what about the last 3 years?Well the story has been very interesting or investors in the area. During a period o alling property

prices in much o the developed world, the market in Leipzig has held up very well due to the ruits o

20 years o government investment in inrastructure, good capital values recognised by investors and

the business climate returning to decade high levels o optimism across Germany. In 2007, it would

be typical to conduct a search in the average locations in Leipzig or apartment houses in the price

range 450-600 Eur per sqm. Steady increases have been seen since then, with an increase in demand

rom local buyers with increasing access to bank inance. A typical search o the market today in the

same areas o Leipzig will be or property in the 550 700 Eur per sqm price bracket. In most cases,

property over the last 3 years has seen around a 20% increase in prices which is good going in this

climate. There are exceptions to this, depending on sub location. Some o the areas to the east o the

city such as Neustadt and Volksmardor and Sellerhausen have seen little or no capital appreciation,

the stock being characterised by inhabitants o working class or non-working people. Banks still ind

it more diicult to inance to any great degree in these areas. On the other side o the coin, property

prices in Schleussig and Plagwitz have really caught investor attention, with increases o between 30-

50% being seen.

So, whats ahead o us in terms o capitalappreciation?

This depends on a number o actors:

InvestorconfidenceInvestoraccesstofinanceRentalleveldevelopmentIncreasingowner-occupation

In turn, investor conidence will be the key to purchase prices increasing with all other actors being

equal. Right now, an investor eels rightly rewarded with a net yield o between 7-11%. With interest

rates or 5-10 year ixes at around 4%, there is still room or an increase in conidence pushing yields

urther down. Yields in a stable market would equate to around 2% over lending-rate, so around 6%.

Should yields drop due to this increased buyer conidence, then prices have the capacity to rise by

around 40%, should inance remain low.

Access to inance shows now real sign o abating, certainly or local buyers. It is not unusual or

projects to be inanced to 80% [or even higher] or German nationals, and 60- 80% or oreign


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buyers. These levels have remained reasonably intact through the inancial crisis, and should remain

or investments where rents cover inance payments by at least 125%, so called rental coverage.

Currently, rental coverage is oten 200% or more, so there seems no immediate threat to tightening

inancial conditions.

Increasing rent levels are the typical trigger or capital appreciation in the more mature markets inGermany. As rents creep up 5% or so per year, so the capital value increases by the same amount,

all other things being equal. The current rent levels in Leipzig are very low and have remained so or

the last 10 years or so.

The above graph demonstrates this point, with the yellow line tracking new build property, and

blue tracking pre-1948 stock. Whilst excess capacity has been worked through with the increase in

population or through demolition o unreurbished stock, some real anomalies remain to this day.

For example, rental levels across the city or proessional tenants lie in a thin range, usually between

4-6 Eur per sqm, a small deviation. As popular areas are developing, higher rents are now being

achieved. For example, in Sudvorstadt and Schleussig and Gohlis South, rents in excess o 7 Eur per

sqm are now not uncommon and on the rise. The development is having an eect across the city,

with pressures on areas in demand or well-presented units with beneits such as balconies. With

wages increasing, the proportion o take home pay used to service rents is now very low, around

20%, and shows capacity or rental increases to be absorbed. Finally, the eect base level or rents,

the amount the government pay or unemployed people had remained un-changed in 8 years until

June 2011. The old level o 3.85 Eur per sqm was the lowest in Germany, and is seen as very out o

sync with other smaller and less economically vibrant cities. For example, nearby Halle which is hal

the size o Leipzig has a social tenant rate o 4.35 Eur per sqm. Leipzig has started to catch up with

an increase o 10% granted across the board or social housing in June 2011. This will have a ripple

eect across the rent ranges and encourage all landlords to review their rents.


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Finally, and perhaps o greatest interest, is a airly unique eature o this market.

In 1989, all property was held by the state and beore the wall ell every

inhabitant o the city was eectively a council tenant. Since that time, owner-

occupation has risen steadily to around 15% today. Some may wonder why this

has not risen quicker, particularly with the low capital values o recent years.

An answer to this lies in the appetite and culture o those with suicient unds

to buy their own home in the last 20 years. Typically, it is those aged around 25

years old or more that aspire to home ownership. It has taken some time or the

lack o a housebuying culture to work through the older generation and arrive

in a new generation with unds to buy. For sure, many o todays 25-35 year

olds aspire to own their own place, much in the same proportion to the rest o

Germany where average owner occupation is just below 50%. Today, it is typical

or out o town suburbs with new build single amily houses or the very best

areas o town in apartment houses to support this growing sector. The real point

to note is the typical much higher price paid by an owneroccupier to an investor

o a complete apartment house. The property is not purchased on a yield-return

basis, more on the ability to pay and service the mortgage through income.

So, areas in Leipzig where owners occupiers are buying their own apartments

are typically paying rom 1.200 Eur as a very minimum to 3.000 Eur per sqm or

more. This is between 2-3 times investors buying apartment houses alongside

them are paying. Quite an odd situation!! So, as owner-occupation increases to

a more mature level towards 50%, so the average to good areas o the city will

see viability or investors to divide their apartment houses into individual units

and dispose o them, in a good reurbished state, to owner occupiers at a very

signiicant uplit to the original price paid. In some areas, this may take 3-10

years to be a viable option, in other areas such as Gohlis South, Sudvorstadt and

Schleussig this is an option to do right now.

We have introduced some 180 investors to Leipzig over the last 4 years,

primarily investors seeking a high rental yield on their investment. Typically

clients seek higher yields than those to be ound in cities in the west o the

country, or in the capital Berlin.

Owing to good contacts in the city, yield investors can ind property in the

very best areas o town providing yields o 8%, with medium risk areas to

the south and west o the city being the most attractive and producing yields

between 9-12% on delivery. With good management in place, these yields seem

to us to be mis-priced in terms o risk and reward. With capital values at thelowest levels seen or a decade, oten at prices starting around 500-600 Euro

per sqm or well-reurbished and tenanted property, the city demands urther

investigation.

Finally, a lowdown on each area o the city whichshould help in early research o the city


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City Inner Ring

Previously, the city centre was mainly home to centrally-based oice and

retail employees but over the past couple o years there has been signiicant

demand or city center property, resulting in extensive recent building work.

Shopping and dining acilities are in abundance, although only a very ew

apartments or living are situated here.

Gohlis - South

This is one o the most sought-ater, tranquil and consquently most in-

demand residential areas o the city. In the last ive years, more than

6,000 people have moved in to the areas and the population is orecast

to increase by up to 10% between 2006-2012 overall. Property near the

Rosenthal park commands the highest premuims. Very strong demand or

rentals with a typical 2 room, 50 Sqm apartment renting or 250-350 Eur

net per month. Typical yields or investors tend to range rom 4-8% net.

Gohlis Mitte

An average area o the city, having good links to the centre and also to

the ring road to the north o the city. Property around the Coppitz Platz

should be considered above average or the area, whilst property alongside

the Georg-Schumann Strasse is average in appeal. A typical 2 room, 50

Sqm apartment rents or 220-300 Eur net per month and typical yields or

investors tend to range rom 6-10% net.

Leutzsch

Leutzsch is located approximately our kilometers west o downtown

Leipzig. Property here is spacious and there is a wide variety o investment

opportunities. Condominiums are becoming increasingly popular. For a

detached house, some o the nearest to the city centre, you can expect

to pay rom between rom 200,000 to 400,000 euros. The rents range

between 4 and 7 euros per square meter, with a typical 2 room, 50 Sqm

apartment renting or 200-350 Eur net per month and typical yields or

investors tend to range rom 6-10% net. The highest rent levels are to beound to the north east o the region, approaching the woodland area.

Music Quarter

The lagship o the quarter is Ferdinand Lassalle-Strasse. Thanks to its

magniicent Stadt Palais it is one o the most beautiul streets in Germany.

Already an attractive area, it will be urther enhanced by a new city harbour

ront. It is anticipated that both ownership and rental rates will continue to

rise over the next couple o months. Rental levels are some o the highest

in the city, at around 350-500 Eur net per month or a typical 50 sqm

apartment. Yields rarely get above 6-7% in this location, due to strong

demand rom investors and owner-occupiers.

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Plagwitz

Plagwitz is predicted to be the next trendy neighborhood in Leipzig. The ormer

Industrial area is a prominent player on the city art scene. Lot apartments and

galleries are opening up along the Karl Heine canal, boosted by government

investment. Town houses can be bought rom 180.000 250.000, and there is an

increasing demand rom owner occupiers or such units. Rental levels are still low or

the city, at around 4.5 Euro per sqm but are on the increase. The rent o a typical 2

room, 50 Sqm apartment renting or 220-250 Eur net per month and typical yields or

investors tend to range rom 8-11% net. Population is set to increase by up to 10%

between 2006-2012.

Schleuig

Schleuig is or in demand by high-income amilies with children. There are good

amily- based acilities available on oot. The adjacent orest to the east o the Clara

Zetkin- Park is an idyllic beauty spot or the whole amily. Properties in this area areextremely sought-ater, where detached houses can cost in the region o 600,000.

Further west are good redeveloped Grnderzeitund Art Nouveau, with popular

condominiums or up to 2,300 Euros and rents to 7.50 per square meter. The last 5

years has seen a dramatic increase in population and also rental demand. Population

is set to increase by up to 15% between 2006-2012. The best property lies next to

the Clara-Zetkin Park. Yields have dropped rom around 10% net 2 years ago to 6-8%

now, due to capital value increases.

Sdvorstadt

With just over 22,000 residents, Sdvorstadt is the most populous district o Leipzig.

The area is very popular with amilies. The media industry is the most prominent

player in the economy, with many ilm and television producers living in the area.

Condominiums last year were particularly sought ater and now cost up to 2,400

euros per square meter. At the Paul-Gruner-Strasse, Shakespeare Street and Brand

Vorwerkstrae are the irst town houses o the Sdvorstadt, costing 200.000 to

300.000. This was one o the irst areas to enjoy gentriication in the city ater re-

uniication, and tenant demand continues to be very well-supported. Population is set

to increase by up to 15% between 2006-2012.

Lindenau

This is a large sub district o Leipzig which has been steadily growing over the past 15

years. Growing rom a low base, the region initially attracted price-sensitive tenants

to the area and vacancy in the apartment blocks began to decrease. Now, Lindenau

whilst still working class in its roots, supports rental demand well or renters who

like the proximity to the centre, its own commercial centre, theatre and cinemas and

also access to nearby parklands. The rent o a typical 2 room, 50 Sqm apartment

renting or 200-225 Eur net per month and typical yields or investors tend to range

rom 9-11% net. The population is set to increase by up to 15% between 2006-

2012, urther supporting tenancy in this area. The area is mixed in potential and the

best locations tend to be in parts o Alt Lindenau and also in the area which borders

Plagwitz to the south.

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Stotteritz

A stable and well-established part o Leipzig which boasts good inrastructure

including hospital and good schools. There are a mix o owner occupied houses and

town houses and multi-amily property mainly rom the classical building period o

1900s. The population has been very stable in the past 15 years and rental demand is

steady. The rent o a typical 2 room, 50 Sqm apartment renting or 220-250 Eur net

per month and typical yields or investors tend to range rom 8-10% net. Populationis set to increase by up to 5% between 2006-2012.

Kleinzschocher

The large region to the south west o the city was ormerly characterised by a large

railway depot used or cargo out o the ormer industrial heartland o Germany. There

railways are now long closed and the area is beginning to change its appearance

and establish itsel as an area which oers good value rents in some very attractive

classical style property. This area has proven very attractive to yield-driven investors

over the past 2 years, and this trend is set to continue. The rent o a typical 2 room,50 Sqm apartment renting or 200-225 Eur net per month and typical yields or

investors tend to range rom 9-11% net.

East o the City

A collection o the districts bordering the centre including Reudnitz-Thorberg, Anger-

Crottendor, Volkmarsdor, Schoeneeld and Neustadt. Suprising value can be ound

in these districts, particularly being in such close proximity in some cases to the city

centre. The reputation o some parts, in particular property on the main routes o

Eisenbahn Strasse and Wuzner Strasse has been characterised by an area o high

unemployment in the past. This eect can lower the loan-to-values oered by banks.

That said, some above average mico-areas and properties exist in this region and a

good demand by renters exists. Population is set to increase by up between 5-10%

between 2006-2012.

Conclusion

Leipzig, o all ormer east German cities, really has astory to tell in terms o renewal and redevelopment,a story that is unolding in ront o our eyes. Propertyyields in the city are truly rewarding and cashlowpositive and banks are lending to good levels tointernational investors. We would be proud to showyou the city as you make your research or your nextinvestment area.

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Lowdown on Leipzig - What makes this city interesting for property investors