In the second of our blogs looking at how the UK’s decision to exit the EU is impacting key real estate locations, our experts shine a light on some of the challenges facing German real estate investors, as well as the potential for greater breadth and depth of real estate opportunities going forward.
Berlin: Strong trading links likely to underpin property market
By Andreas Lichel
German clients that have UK property exposure are taking a ‘watch and wait’ approach in the run up to the Brexit negotiations. In particular, uncertainty over the application of the EU subsidiary directive which allows EU holding companies to distribute profits free of withholding tax and to avoid withholding tax on interest payments would affect many property investors both in Germany and the UK. However, there is cautious optimism that due to the importance of trading links between Germany and the UK, then strong strong relationships will be maintained either between the two countries or, preferably, with the EU as a whole. Indeed, looser relations with the EU does not necessarily mean that preferable regulations will be abolished completely. Countries outside the EU, such as Switzerland, have preferable tax regulations that are in many aspects comparable to those enjoyed by EU-member states with each other. So while there may be some technical issues to consider in respect of VAT, for example, the UK’s future relationship with the EU is likely to be more a question of adjustment. Plus, if the UK economy did slow down substantially post-Brexit, clients may even see a relaxation of certain UK regulations in order to attract investors and real estate could be a beneficiary of such a move. In terms of challenges, the outlook for interest rates will certainly have an impact. This tends to be the real driver of real estate prices as investors look for opportunities that offer the potential for yields higher than interest rates. For example, with prime property prices in major German cities already subject to rapid rises, we have seen a flight to smaller cities and a focus on real estate sectors such as retail, logistics and the hotel sector which are all performing strongly and attracting capital inflows.
I think Brexit concerns can only add to this general trend. When looking at specific German locations, Berlin is already considered one of the hotspots for tech start-ups behind London. While Berlin real estate prices have risen substantially over the last four year, they are still roughly half the price of London, plus state-of-the-art living and working space in Berlin is increasingly attractive. With the pros and cons for both cities as a start-up location in the balance, Brexit may tip the scales in favour of Berlin.
Frankfurt: Breadth of real estate opportunities is key
By Stefan Kirchmann
Following the initial shock of the UK referendum to leave the EU, we saw real estate brokers in Frankfurt talk the city up as a major beneficiary of London’s financial services sector institutions relocating in order to retain their EU single passport to sell financial products and services across Europe. However, we are beginning to see a period of cautious reflection from clients on what the impact of Brexit is for real estate in both the UK and Germany. While there will undoubtedly be some banks and financial services institutions that may downsize their London presence, particularly those of European origin where having an English language base may not be critical, it is unlikely to be on the scale initially thought, due to the fact that London will continue to be a major gateway for global finance where most major institutions will want to retain a presence. In addition, factor in that players, including a large German bank, have recently closed offices in Germany and the net impact is likely to be minimal.
It’s also important to distinguish between the residential and commercial real estate sectors. As far as commercial property in Frankfurt is concerned, while we still have a lot of vacancies, one of the main advantages that Germany has over the UK and other European cities is that prime real estate opportunities are not centralised in one major city. We have seven “A Class” cities including Frankfurt, Berlin, Hamburg and Munich, which have the potential to offer real estate investors greater breadth and depth of opportunities. This element of choice is likely to be-come more attractive the longer post-Brexit uncertainty in the UK continues. On the residential side, we have already seen the current lack of reasonable living space in German cities cause some overheating in the market. If we do see an influx of German nationals looking to move back home or relocate with work, then we may see prime residential price rises. But again, the figures are unlikely to be huge, so such a scenario may be short-lived. In terms of the currency impact, there is less of a differential between the euro and sterling compared with other international currencies. But what we are finding is that clients already have strategies in place to mitigate currency fluctuation through maintaining separate real estate portfolios or hedging with a currency overlay.