German GNIW's sale-leaseback model shines in growing equity-release sector

The concept of "equity release" is fairly new in Germany and only now beginning to take hold among property owners who, for one reason or another, would like to liquidate some of the hard-earned equity in their house or apartment, built up after many years.

Several business models have developed in Germany to enable elderly property owners to convert some, or all, of the value of their property asset into cash which they can use for their own purposes, whether for consumption, to help out family with educational expenses, or anything else.

The traditional model in Germany has been for elderly property owners to bequeath their property to family members in the form of an inheritance, and old habits die hard. A bequest is still the most likely destination for most private property - lived in by its elderly owners until handed on to the next generation. It's not always a simple solution, and of course can often lead to complications of a family or financial nature for the beneficiaries.

With 58% of Germany's over-70s living in their own house or apartment, these owners can at least breathe freely in that they are no longer burdened by a crushing monthly rent. But often they are strapped for cash, unable to enjoy the fruits of all the hard years of grafting to pay off the mortgage every month, as they sit in an appreciating asset - perhaps till the end of their days.

There are different forms of equity release, ranging from Rückmietverkauf (rent-back), Teilkauf (partial purchase), Leibrente (life annuity), Umkehrhypotheke (reverse mortgage) or so-called 'tilgungsfreie Darlehen' (grace loans) which are bank loans charging low interest rates but secured on the underlying property.

Over the course of the next months REFIRE will be looking at these instruments in greater detail. They all provide opportunities for third party and foreign investors to partner up with local providers to access emerging new markets in Germany for financing private real estate.

Rückmietverkauf

Among the different forms of equity release in Germany is the notion of Rückmietverkauf. REFIRE spoke recently to Dr. Henryk Seeger, the founder and CEO of one of the leading providers, Gesellschaft für Nachhaltige Immobilienwirtschaft (GNIW), about his company's business model.

Dr. Seeger's personal background is intriguing, and can be said to have led through a series of natural steps of socially-oriented start-ups and management positions, leading to his current occupation.

Early experience was gained as a founder of "Deutschland Rundet Auf", a non-profit operation whereby consumer shopping bills are rounded upwards at supermarket tills, and which has attracted support from leading national grocers and department stores such as Penny, Kaufland, Netto, perfumer Douglas and Peek & Cloppenburg.

Later stations on Dr. Seeger's CV involved founding a volunteer organisation, running a family office including acquisition and disposals of art and real estate, finding time to complete a doctorate on micro-payments, and somehow managing to play tennis at a globally competitive level. While dealing with family members who owned property, but lacked cash resources, Dr. Seeger says he saw the solution, and GNIW was born.

The business model is simple. Homeowners agree to sell their property to GNIW and in return sign a rental agreement giving them a life-long right to remain in the property. They can give notice to move out at any time, but GNIW cannot, for its part, give them notice. There are no charges for the homeowner, all of which are taken over by GNIW.

GNIW buys the property and pays cash to the owners, who can do with the cash whatever they want. They pay a market rent, plus the usual ancillary monthly charges, and can continue to live there as tenants for as long as they desire. They don't have to move house, or lose proximity to friends and neighbours, but suddenly have a bundle of cash on their account.

Having reached advanced years by faithfully paying off the mortgage monthly, many find that the injection of a large amount of cash means that they don't have any more worries, while they still retain a familiar roof over their heads, which they are likely to care for and maintain as they did when they were the actual owners.

This is an important point, stresses Dr. Seeger. The relationship between GNIW and its tenants could be a long one, and the shared history of the property creates a special kind of bond between landlord and tenant that is unusual.

Hence trust - at the beginning, during and after the sale has been consummated - is a critical element in the building up of the GNIW business, largely through word of mouth to date. The notion of gaining Planungssicherheit, or planning security for your future, while giving up ownership of your surrounding four walls in return for cash, is a concept that, in Germany at least, must require sensitive, supportive and empathetic sales advisors to handle negotiations, at the very least. Finding such people is a challenge, concedes Dr. Seeger.

The key ingredient in the business model is that all German properties can be valued, but there is a price differential of 25% between vacant properties and the same property with sitting tenants and protected tenancy. Accessing those properties at the 25% discounted price, with a view to selling the property at some point in the future when it is empty, is what will fuel GNIW's growth.

Dr. Seeger says it's working well, and GNIW has been building a solid reputation in its segment. The company, with about a dozen staff, has just hired a couple of new senior executives. It expects to invest about €80m in 2022 in buying properties, including making discretionary physical improvement to properties they've already bought.

With about one in three discussions with prospective sellers resulting in a concluded sale, it's clear that this is not a business where you can just throw mud at the wall and hope that a certain amount of it sticks. Given people's attachment to their properties, and their fears and uncertainty surrounding their future, it obviously takes a certain type of individual to create and maintain the trust and confidence to generate sufficient transactions. As Dr. Seeger points out, GNIW is in the business of SELLING properties - which means buying them at a fair price and selling them when they become empty, for whatever reason, later on.

Increasingly, GNIW is building up its network of brokers, insurance companies and banks across Germany, who are best positioned to know their customers' individual circumstances and whether the 'leaseback-purchase' or Rückmietverkauf option offered by GNIW would be suitable for them. Existing partners include the Hamburger Volksbank, the Berliner Sparkasse, bsk Immobilien and ImmoScout24, among others.

Expanding this network of advisers is clearly the path forward, given the trust that so many elderly Germans still have in their local bank branch. With Germany's real estate broker business also in a state of great interruption, with new regulations regarding commission payments causing thousands of independent brokers across the country to review the best structures in which to operate, there should be plenty of opportunities for investors to partner up with clever operators rolling out new business models.

GNIW's model is more of a slow-burn concept, but not that slow, we suspect. It's an idea whose time has come - for Germany - along with other ideas for helping elderly people release accumulated equity in their homes. In many respects, its approach of buying the assets 100%, and guaranteeing an unencumbered rent agreement to the sellers, has a clarity and simplicity about it that we like. We'll be keeping an eye on GNIW's business growth, and wish them well.