Independent mortgage broker Baufi24 has just published a useful study on the development of rental yields in the German residential sector throughout the COVID pandemic so far.
Rental yields across the country have increased by an average of one percentage point in 2021, compared to 2020. The average rental yield was 3.89%.
As is to be expected, the lowest yields are in Germany's BIG 7 cities - Berlin, Munich, Hamburg, Frankfurt am Main, Cologne and Düsseldorf - which, at 3%, are below the national average. The lowest rental yields were in Munich and Hamburg, with Munich at 2.49%, Hamburg at 2.73% and Düsseldorf at 2.94%.Stuttgart had the highest yield at 3.39%, followed by Cologne at 3.39% and Frankfurt am Main at 3.07%.
Baufi24's CEO Tomas Peeters commented: "There's nothing new about low rental yields in the biggest urban centres. Since the risk of vacancy is much lower there and the price appreciation fairly secure, the big metropolises are still viewed as profitable investments."
Of Germany's 100 cities with a population of 100,000 or more, Gera in Thuringia offered the most attractive rental yield in the pandemic year 2021 at 6.65%. Real estate investments in Salzgitter (5.02%) and Herne (4.82%) also stood out in the study. On the other hand, anyone renting a property in Lübeck (2.96%) or Ulm (2.84%), both in western Germany, must currently reckon with lower profitability.
"Rising purchase prices are a challenge for real estate investors. Overall, investors in B-locations can factor in rental yields of up to 6%," says Peeters. "For investments in A-locations and metropolises, around 3% is realistic."
In the current climate, investors should only be buying property if the achievable annual rent and the purchase price bear a healthy relationship to each other. The purchase price should not exceed 25 times the annual (cold) rent. New investors should also consider the ancillary acquisition costs, the management costs and any relevant maintenance reserves when estimating the rental yield.
Sebastian Hein, residential property expert at Value AG in Berlin, rightly points to local market analysis to determine whether a region or town is likely to gain or lose population over the coming years. And given Germany's transaction costs of 12-15% on property purchases, buying only makes sense if the price rises beyond that.
He cites rental yields of above 6% in Pirmasens in southern Baden-Württemberg, for example. But the city is likely to lose 5% of its population by 2030, and is surrounded by a structurally weak region. In Frankfurt am Main, by contrast, the city is expecting to gain more than 5% population, hence the low yields of about 3%.
