Deutsche Teilkauf targeting €1bn of assets over next 12 months

By Sarah Seddon Kilbinger, Senior Reporter, REFIRE

German equity release start-up Deutsche Teilkauf (DTK) only launched two years ago but plans to double its investment in Germany’s home equity release market this year, according to the company’s CEO Sabine Nass.

‘In two years, we’ve acquired 1,000 homes and we’d like to double that in the next year from €500 million to €1 billion of AUM,’ she told REFIRE. ‘Our properties are scattered across Germany but we have our own A.I., for which we just won a PropTech award, to help us select the right properties. We have a tendency to be in the suburbs close to big cities like Hamburg. Demand is quite high but we’ve built our platform in such a way that it’s easy to scale up.’

Typically, DTK acquires up to 50% of somebody’s home. In doing so, the owners can continue to live in their home and benefit from the property as a financial investment that retains its value: ‘It’s a real estate transaction, that’s the differentiator,’ Nass emphasized. ‘Our product falls more into the German customer comfort zone because they don’t like to be in debt. We feel it’s very transparent. We become joint owners in the land registry, buying the property at market value. Our customer then pays a yearly fee that equates at the moment to 5% of the sold amount of the property, on average €500 to €800 a month.’

More and more property owners in Germany are selling a stake in their home to enable them to pay off other loans or to fund other dreams, particularly in retirement, according to partial sales portal, Wertfaktor. The typical owner seeking to do this is around 65 years old, comes from northern Germany and is debt-free, according to Wertfaktor, which says that between the first half-year 2021 and the first half-year 2022, inquiries regarding such sales increased nearly tenfold, with clients typically seeking a payout of €193,210, according to Wertfaktor’s managing director Christoph Neuhaus. The reasons for wanting more liquidity vary considerably, from the dream of buying a mobile home or a holiday home, to wanting to fund other plans. Today, rising inflation and energy prices are also contributing towards people wanting – or needing – to access the capital in their home.

DTK eyeing UK and other European countries for expansion

This applies to other European countries as well and DTK is now eyeing international expansion: ‘I think looking at the European market, there are other countries that could be receptive to our product, countries where there is already a high level of ownership among elderly people, such as Spain, Portugal and Italy,’ Nass said. ‘Spain, from a partial ownership perspective, has the right pre-conditions. Expansion in Europe is something we’re looking at. We have not yet expanded our product in the UK but we are talking to UK investors and certainly looking at the market to see whether we should go into it. We are currently offering institutional investors a range of different opportunities to invest in our model. The most common opportunity will be debt structures.’

It is easy to see why they are looking at the UK market: 2022 saw record activity with 93,421 new and returning customers choosing to access their property wealth via equity release products, up 23% y-o-y – the highest rate of growth since 2018, according to the Equity Release Council. Nearly 50,000 homeowners took out new plans, up 20% on 2021, with all new plans since 28 March 2022 guaranteeing customers the right to make voluntary penalty-free partial repayments to reduce interest costs.

‘We saw a glimpse of the equity release market’s potential in 2022 as it returned to its previous growth path with a growing customer base making use of improved products and added protections,’ said David Burrowes, chairman of the Equity Release Council. ‘In a climate where retirement incomes have to stretch further for longer, property wealth is as important to many people’s financial wellbeing as their pension.’

Over in Germany, Nass estimates that the German equity release market is worth around €308 billion, or €380 billion if you include Austria and the German part of Switzerland: ‘The energy crisis and inflation are adding additional pressure to the pension gap,’ she said. ‘We’re targeting the baby boomers going into retirement now with 70% of their net value tied up in their home.’

In addition to DTK, Wertfaktor and the Volksbanken, other private providers offering this form of real estate annuity include Heimkapital, Engel & Völkers LiquidHome and WIR WohnImmobilienRente. Engel & Völkers LiquidHome had about 7,500 customer enquiries in the first half of 2022, up from 2,800 in the same period last year, a spokewoman told REFIRE. This resulted in 235 partial purchases totalling €59 million, more than double the 109 partial purchases with a volume of €26 million in the same period last year.

Germany lags behind UK and US

Germany still has some catching up to do. In other countries, such as the US and the UK, the concept of turning the capital tied up in your home into money in old age and still staying there is more established. And the German market can be a tough one to crack, not least because the home ownership rate is only around 51.7%, compared to 64.3% in the UK (down from 70.6% in 2000) and 75.1% in Spain, according to Statista. In addition, the market for single-family homes is quite fragmented and historically dominated by single households owning at most one home, according to DTK.

German politicians to date have been reluctant to enable institutional investors access to the country’s housing market and, in particular, the single-family homes segment. A complicated rental law and the management effort of a single home portfolio makes for a rather different investment landscape to that in the UK or US. ‘We are offering investment structures which will enable access to the very resilient and attractive German residential market at low risk, while offering a transparent, customer friendly product to our clients,’ Nass said. In a broader sense, the German residential market has typically provided an excellent risk-return profile, demonstrated in the rise of the giant multi-family landlords, such as Vonovia and Deutsche Wohnen which has been driven by capital market investors looking to invest in Germany’s housing sector.

Still, equity release is not always transparent and there can be sizeable, inherent risks, according to real estate expert Peter Burk of the Institut für Bauen und Wohnen, who notes that many contracts are based on a property going up in value. In some instances, when a property is sold (when the owner moves to a nursing home or dies), the loan provider receives their share of the sale price, which can sometimes be contractually expected to provide a 17% increase in value. If the value of the property has not increased to that extent, the owner must make up the difference. Moreover, it is unclear what happens in individual cases if the company to which someone has sold part of their property becomes insolvent, for example.

Adding to the lack of transparency in some cases, the monthly rent or fee paid to the equity release provider can end up being more expensive than the interest on a loan. Some providers also only fix the fee for a few years or not at all and then raise it. In some cases, sellers are expected to pay for maintenance and repairs after moving out.

So what other options do homeowners have if they want to access some of the capital in their home? One option is a so-called “reverse mortgage” whereby homeowners regularly receive money from the bank and their debt level increases in return, typically at an interest rate of around 6% annually, according to Finanztest. They are particularly suitable for seniors who appreciate regular cash inflows. Another option is a repayment-free loan, which the bank pays out in full immediately, but borrowers only pay the interest on the loan. These are typically cheaper than reverse mortgages at 4% to 5% interest. However, interest accrues immediately on the total amount instead of only on the part that has been paid out so far, making them particularly suitable for retirees who need a lot of money in the short term.

Nass, for her part, remains confident that the only way for the equity release market in Germany is up: ‘We need to fulfil the lifecycle of the property, this is why our product is so relevant,’ she said. ‘I think more people will look at doing this given the macroeconomic situation. There’s a growing feeling that “part of my pension is my home but it has to give me more than just somewhere to live”.’