Risk-Return ranking list highlights Germany’s hidden champions

A new study, the Risk-Return-Ranking 2014, has just been published by Frankfurt-based property adviser Dr. Lübke & Kelber, the company which brought together the venerable brokerage house of Dr. Lübke with the nationwide residential acquisition and privatisation skills of industry veteran Jürgen Kelber last year.

The study analyses a total of 50 German cities including the Top 7, using a variety of proprietary measurement tools based on the respective population and social economical environment, local residential market structures, current rents and purchase prices as well as the local dynamics of demand and supply.

From this the researchers attributed certain scores to each city based on risk, and compared each to a risk-free investment such as German government bonds. According to Ulrich Jacke, long-time managing director of the old - and now new - Dr. Lubke & Kelber, “The aim was to identify and clarify the risk for investors adequately. We then answered the question, what return needs to be generated to compensate for the investment risk?” Cities would then be granted an A++, A+, A or A- rating.

Two cities which outperformed with net initial yields well above the required minimum return (both with a risk score of A+) were, somewhat surprisingly, Lüneburg and Wolfsburg. (Lüneburg, of course, is small and possibly illiquid, and would not be suitable for an investor looking to spend €100m, for example).

Two cities which had the lowest risk profile were Munich and Frankfurt, which the. Dr. Lübke & Kelber researchers determined had risk premiums of 0.6% and 0.8 % respectively. (i.e. you need 0.6% of a premium above the risk-free return on a Bund). “However, you need to be careful, as the competition in these cities is extremely strong and prices are currently being paid that don’t make sense on a risk-adjusted basis” said Jacke.

Ingolstadt and Regensburg rank 3rd and 4th and top the list of the so-called B-cities. Here, the risk premiums attributed are 0.9% and 1.0 % respectively, closely followed by Potsdam and Freiburg (both on 1.1 %-points). However, as Jacke says, “These four cities are now no longer an insider tip. Therefore investors have to look very closely at the net initial yield”.

Jacke also warns agains excessive exuberance on the Berlin residential market, where the the risk-return-analysis is now showing excessive purchase prices. “The net intitial yields based on our analysis demonstrate that investments in Berlin have to be scrutinised thoroughly“, he said. It is true that there is currently a strong demographic development and lots of demand but the socio-economic dynamic of the capital requires taking a cautious approach. The GDP of Berlin per capita was €30,000 in 2011 and therefore significantly lower than the average of the 50 cities analysed.” The researchers recommend a risk premium for Berlin of 2.3 %-points, i.e. 2.3% premium over the German Bund.

Concluding, Jacke says that, in general, he sees worthwhile residential investments in all the cities analysed in the company’s study, but “Risk-oriented investors should also focus on investment locations outside the “mainstream“ and strictly stick to risk-adjusted pricing“