A fundamental criterion to differentiate real estate investments is whether they are listed, i.e. traded on the stock market, or not:
The most important listed investment options include: public companies or the tax-exempted so-called REITS (Real Estate Investment Trusts) and listed real estate bonds
The most common investment opportunities that are not listed on traditional stock exchanges: Open and closed-end real estate funds as well as the modern digital securities
Regardless of the vehicle, most Germans have invested a large proportion of their assets in real estate. But what makes a real estate investment successful? The real estate mantra - the three most important factors are location, location and location - should be considered obsolete. In case of direct investments and funds in particular, the precise assessment of all relevant property factors is crucial. These include:
The purchase price factor
The type of use
Existing rental agreements
Correspondingly, however, specialist knowledge from a wide variety of topics is required for the individual assessment of an investment object. In order to give you an overview, we have explained the individual assessment factors for investments in real estate in more detail below.
Nevertheless: location, location, location. The value of a property is of course particularly dependent on the location
One of the main characteristics of real estate: it is immobile. Therefore, its location is particularly important. But what exactly is a very good location? Important criteria for assessing the macro situation can include:
Inhabitants: How has the number of inhabitants developed? Is there an influx of people
Traffic: situation of the property connection to local public transport
Infrastructure: Living space, hospitals, educational and cultural institutions, scenic location, surroundings
Image: Cities and city districts have different positive and negative images
(Source. Fraunhofer MOEZ: Identifikation und Bewertung Von Investorenquellmärkten und Branchen - Determinanten der Standortwahl)
You will most certainly agree that Munich-Altstadt or Hamburg-Winterhude are excellent locations for your condominium. But what about Baunatal, Bad Hersfeld or Muggensturm? Sounds a lot less attractive. However, this only applies to residential real estate - the locations are very good for logistics: They provide an excellent transport connection, are strategically well located, have a low population density and are still close to metropolitan areas. That is why there are currently three of the largest logistics centres in Europe.
However, the attractiveness of a real estate investment is not as easy to assess in all locations as in the direct centres of one of the top 5 cities in Germany. Why, for example, is the Grafische Quartier in Leipzig a premium location for office properties? Because the demand for modern office space is higher than the supply and the development suggests a further increase in demand. However, this assessment requires a detailed analysis and expertise in the valuation of office properties.
The value of a property does not always correspond to the price of a property
In order to decide whether a property is suitable for an investment, you considered various aspects: The location is central, the demand is high, the population grows continuously, the condition of the property is good - but is the price appropriate? Is there an existing rental agreement? This is not ideal if you want to buy the apartment for your own use. If you buy them as a pure real estate investment in order to generate the highest possible return, a long-term, reliable tenant is a big plus. And: Is the current rent above or below what a new tenant would be willing to pay - so is the current rent sustainable?
The purchase price factor: the ratio of purchase price to income
To find out, if the apartment is cheap or expensive, the so-called purchase price factor might help. It indicates the relationship between the investment and the expected income. Simplified: How many years of rent does the purchase price correspond to? (Purchase price / net cold rent per year = purchase price factor) So the result is always a number. For a 60 square meter apartment, the average purchase price factor for the 20 largest cities in 2020 was around 26.58.
Overview of the purchase price factor of a 60 sqm apartment in the German top 5 cities
Top 5 Cities
Source: Wohnungsbörse.net, own calculations.
The purchase price factor for direct investments: When purchase prices rise significantly faster than rents
The purchase price factor provides information about the attractiveness of a real estate investment. But it can only be an indicator, not the only criterion. To do this, you need to have analysed the above factors; eg the condition of the property, the demand, the price development and much more. Nevertheless, the purchase price factor is an important point of reference. Up to what value is an investment in the property worthwhile? That varies. Buying a condominium for your own use can be a good decision, even if the purchase price factor is higher. Especially in popular residential areas, the demand exceeds the supply so clearly that the purchase prices - as the experts say - have now decoupled from the rental prices. This means that the purchase prices have risen significantly faster than the rental prices in recent years and the purchase price factor for A-locations in large cities is therefore significantly higher (see table above). If you want to let the apartment, you have to let it much longer until you have earned a sum that equals the purchase price. This increases your risk and reduces your return. That is why professional investors such as insurance companies and pension funds are investing less and less in A-cities in A-locations. With these properties, they are often unable to generate the minimum return they have set. If they invest in those properties, they often aim on preserving capital and avoiding negative interest rates. There are often better options for capital investors to generate a positive return and at the same time have a high level of security in the investment.
Return on investment: which vehicle is best for me?
The aspects described above are always relevant for real estate investments because the possible return depends on them - regardless whether you invest directly in a property or indirectly via a closed-end or open-end fund or a digital security. In addition, it is also crucial that the respective vehicle for your real estate investment suits you. Because they all have advantages and disadvantages. A condominium is great, but the purchase is only possible with the appropriate equity and the purchase price is often a multiple of the available income or assets. And you've probably heard "don't put all your eggs in one basket" before. In order to keep the risks as low as possible, you should invest your assets in a diversified way, i.e. spread them over different investments. Therefore, a direct investment is not right for everyone - stocks, open-ended funds or digital securities, for example, can be acquired with significantly less capital and still allow you to invest in real estate. However, stocks are often much more volatile than real estate itself – which means, that their value fluctuates more than the underlying real estate itself. And with stocks as well as with open-ended real estate funds, you usually invest in a portfolio - so at least you cannot influence the exact target investment, often you don't even know it or it is so large that a real assessment is impossible.
Advantages and disadvantages of different real estate investments
It all sounds a bit confusing. Therefore, we have put together the most important characteristics of the different investment vehicles for you below:
Advantages and disadvantages of different asset classes
Digital securities - the advantages of different investments in one vehicle
As you can see, the classic vehicles for investing in real estate differ significantly. And e greatest advantages of a vehicle come along with major disadvantages. The possibility of investing in real estate via Digital Securities is relatively new. We are totally convinced of the new vehicle, because it allows us to combine the advantages of the previously different vehicles into one investment.