‘Little gems’ in Eastern Germany entice investors

Eastern German cities have come a long way in the past four years. Once best known for the exodus of people leaving in droves, they are now becoming better known for something less predictable: population growth.

As a result, investor interest has been piqued and it is not only the larger cities, such as Dresden, that have got their attention. German investor TAG Immobilien is targeting mid-size cities in the region, such as Chemnitz, the company’s CFO, Martin Thiel, told REFIRE.

‘Since 2013, the exodus to Western Germany has stopped and the population is growing again in Eastern Germany as people from Western Germany move there,’ he said. ‘Residential rents in many cities there are around €5 per sqm, compared to €15 somewhere like Munich. Also, 'Warmmiete' (rent + charges) is typically only 20% of your salary in many Eastern German cities, compared to between 30% and 45% in Berlin.’

Around 75% of TAG Immobilien’s portfolio is in Eastern Germany. Of the 4,500 units it acquired this year for €150m, 90% of them were in Eastern Germany. ‘That figure might increase,’ said Thiel. ‘Next year, we'd like to do a similar volume of deals if we can.’

Rents are also on the up. Thiel expects rents in his company’s portfolio to increase by around 2% next year.

'We like cities like Chemnitz because it's developed well over the last three-to-five years, so we're happy to buy there,’ he explained. ‘However, we are starting to see more competition from other investors compared to a few years ago. We bought the properties this year at a gross yield of 8%, down from 10% two years ago. I think yields could fall to 7% next year.'

Chemnitz has benefited from the region’s general economic upswing, according to a report published this autumn by TAG Immobilien in partnership with Wüest Partner titled ‘Housing Market Report Eastern Germany 2017’. According to the report, by 2015, more than 6,000 people had moved to the southwest of Saxony, pushing the city’s population back up towards the 250,000 threshold. It’s not only the Technical University that has boosted growth but also the automotive and supply industries. In addition, small and medium-sized businesses, which are the backbone of the region, have created an innovation-friendly environment, contributing to the region’s classification as an ‘Innovation Leader’. According to the European Commission’s Innovation Scoreboard for 2016, southwest Saxony is one of the top 36 innovation leaders in Europe, out of a total of 214 regions.

This goes to show that investors should be giving Eastern Germany a closer look, and not just Berlin. As TAG Immobilien says in the report: ‘We are convinced that investors would be well-advised to cast their nets beyond the population centres where residential property has been in very short supply and demand has been high for some time now – such as Berlin, Potsdam, Leipzig or Dresden. On the contrary, the little gems of Eastern Germany have enormous potential. It’s certainly worth risking a second look.’