The long-established Frankfurt-based asset manager and broker Dr. Lübke & Kelber has just published its influential annual Risk-Reward Ranking List 2020, which scrutinises 111 German urban locations, including the Top 7 cities. We have reported on this study for years at REFIRE, among the many studies we keep an eye on, as it invariably throws up some surprises.
The ranking uses proprietary analytical tools to rank German cities on their attractiveness for attainable return on equity in the light of an associated locational risk factor. The Risk-Return study works on the assumption that the investor has 55% equity capital and pays a fixed interest rate of 0.74% on borrowings for ten years, to make the ranking comparable to an investment in government bonds.
This year the towns of Landshut, Pforzheim and Bamberg rank at the top, the so-called ‘hidden champions’ which, while a bit off the beaten track, represent the best value, measured by the Dr. Lübke & Kelber yardstick. Berlin, by contrast, receives a poor rating as long as the rental cap remains in place.
With the prices of apartments and housing continuing to rise, the latest ranking list shows how renting housing is now actually cheaper than buying in most German cities. Prices for existing apartments have risen by almost 10% this year despite the COVID-19 pandemic, while new-build apartment prices have gone up by 7% - making this the biggest annual increase seen since 2015. Rents, by contrast, have barely risen but are trending sideways, skewing the ratio of purchase prices to rents so that it is making ever less financial sense to buy rather than rent, especially in the biggest cities.
In only 35 of the 111 cities analysed did the researchers find that it is now cheaper in the long run to buy and finance your own apartment rather than rent it. By comparison, and using the same methodology, in 2017 buying was more profitable than renting in 87 of the then 110 cities surveyed.
It is even more extreme when looking at new-build properties. For new-builds, it’s only cheaper to buy a new apartment than to rent it in five cities in Germany – Cottbus, Dessau-Roßlau, Frankfurt an der Oder, Wolfsburg and Bremerhaven. For the other 106 cities, the calculations do not merit buying over renting.
The B-cities are looking increasingly attractive, particularly with the new trends in working from home. Here’s where it makes sense to buy, say the researchers: Pforzheim, Kaiserslautern, Lüneberg, Bamberg and Flensberg, which top the list. Landshut, Fürth and Kempten im Allgäu also scored well for buying new-build apartments.
While in big cities like Frankfurt, Cologne, Düsseldorf and Berlin the prices are so high and achievable yields so low that they barely qualify as minimum yields any more, the risks are still low, say the researchers. Despite the differences, and the fact that every year the achievable yields on housing get lower and low, even in this year 2020 there is no city in Germany that merited an overall negative score.
