Investment properties A Place in the Sun

With record low interest rates and turbulent stock markets, more and more Germans are investing in foreign real estate to take advantage of rising prices, rental incomes and a better lifestyle. But it's not all fun in the sun.
More and more Germans are investing in pension plans with a roof.

It was a job that brought Jürgen Schrempp to South Africa, but a love of the country is what made him stay. The former boss of the German carmaker Daimler spent a good decade in South Africa in the 1970s and 1980s, and remained fond of the country.

The 70-year-old, who has an honorary doctorate from Stellenbosch University near Cape Town, owns a farm together with a business associate near Kruger National Park, a huge wildlife reservation in the east of the country. He also owns a villa on one of the most beautiful beaches around Cape Town.

Mr. Schrempp says his life is based somewhere between Munich and the Austrian mountain resort of Kitzbühel, but that he calls South Africa his second home.

Other German executives have found a place abroad where their soul feels at home. For Werner Seifter, the former chief executive of the Deutsche Börse stock exchange, that place is Cork, Ireland.

Having a property abroad can be a nice way of combining wanderlust and home, and for more and more Germans it is also becoming an investment and pension tool.

For Reinhold Würth, who made his billions selling screws, it is his villa in Salzburg. Liz Mohn, the owner of the media group Bertelsmann, has her second home on the bay of Alcúdia on the Spanish island of Majorca.

Having a property abroad can be a nice way of combining wanderlust and home, and for more and more Germans it is also becoming an investment and pension tool.

At times of historically low interest rates, there are few better places to put your money. For example, a ten-year government bond only yields 0.18 percent in returns at present.

Investment advisers everywhere are recommending putting money in tangible assets, and interest in overseas vacation properties has increased considerably since the financial crisis in 2008.

“The demand in higher price ranges is increasing continuously,” said Kai Enders, board member of Engel & Völkers, which specializes in luxury real estate. “Especially in the prime locations, top properties will remain a scarce commodity in the future, despite increasing construction,” he added.

With the boom in low-cost flights adding another incentive, many people are taking the plunge, most often at the height of their careers. Most have largely paid off their own homes, and vacation properties can be an anchor in times of mobile careers. Holiday homes are also sometimes people's first real estate investment.

Annett Falke, a tax advisor, invested €125,000 ($135,000) in an 80-square-meter apartment in Cala d’Or on the southeastern coast of Majorca. It was “not least because of the bad weather in Germany,” the 47-year-old said. She now flies there every three weeks, with the journey taking five hours door-to-door.

“The weather, the sun, the ambiance, the great food — for me it's a totally different lifestyle,” she said. “I can imagine living there longer, going there full-time. But I first have to work seven or eight years.”

Capital investment is another benefit. It involves the owner using the property for vacations and weekends while working elsewhere, then at the end of the investor’s career using it for a longer period, maybe even as a permanent retirement residence.

Those who want to earn money by renting out a vacation property should take care not to buy a property in a ghost town. Tobias Wann, Chief, Fewo Direkt property broker

The number of German retirees receiving their state pensions abroad is growing. At almost 222,000 people, it is currently about one percent of all retirees. Switzerland and the United States top the list of favorite retirement destinations. Many more people have their pensions paid into German accounts as they spend only a few months per year abroad.

However, the days of finding a bargain home in Tuscany or the Costa Brava on the back of the weak lira or peseta have ended in the era of the euro. Those buying real estate in the E.U. cannot now hope to find a true bargain outside of Croatia or Sweden.

The vacation property broker Fewo Direkt, together with Engel & Völkers, took a survey of 3,600 of their clients, asking them about their buying criteria. The results of the not-yet published survey in 2015 show that capital investment and providing for retirement are the key motives of recent buyers. Emotions play less of a role.

“Vacation properties will no longer be chosen for romantic considerations, but rather for tangible location and building features,” said Mr. Enders. He advises clients to buy properties in the good to very good locations, because they have the best chance at being rented and at increasing in value.

Fewo Direkt boss Tobias Wann warns: “Those who want to earn money by renting out a vacation property should take care not to buy a property in a ghost town filled with only half-completed houses.”

Nice, on the Cote d'Azur in southern France, is a popular spot for investment homes.

 

Transport connections are also important, especially for frequent travelers. That was a reason why Hans Mahr, former editor-in-chief at TV company RTL, decided to build his dream villa in Cannes on the Cote d’Azur. “There are more than 20 flights per day from Nice to Germany,” he said. The former journalist travels there every six weeks.

But he does not just vacation in Cannes, he works there, too. “My vacation property is my second office,” said Mr. Mahr, now a media manager and management consultant. “I can be more creative here than I can at home in Cologne.”

But it’s an expensive luxury. “I rent out my house to recoup part of the costs,” Mr. Mahr said. He takes paying guests during the summer season, as the family prefers to stay away when Cannes is bustling.

Word has got around that the tax authorities are not easily duped.

Many buyers consider a combination of personal use and renting as optimal. But it is often less attractive than it might seem. The money paid for a dream house can only be written off against an owner’s tax bill if they do not use the property themselves. A rental contract must be submitted to prove this, and if rental levels fall 25 percent short of the local norms, then the Federal Finance Court questions whether it is aimed at making a profit.

Word has got around that the tax authorities are not easily duped. The Fewo Direkt survey showed that more purchasers than before said they bought their property “exclusively for renting.” For many, renting is an important component for financing, said Mr. Wann.

But not infrequently, buyers are making calculated capital investments of a part-time residence that then becomes a retirement residence. German buyers are better off than in the past, observes Mario Breglia, president of the Italian real estate institute Scenari Immobiliari. “They want to spend their retirement here or to live here, and not just vacation anymore,” he said.

He added that it is no longer just VIPs who are looking for vacation and retirement properties in Italy, but more and more managers and industrialists are now investing. He tells the story of one German entrepreneur who just bought an entire hill in Italy’s Maremma region.

Overall, the demand for vacation properties has pushed up prices in Europe.

Back in Germany, the high prices on the Baltic and North Sea coasts are driving buyers away. With an average price of €2,800 per square meter, properties on the Bay of Lübeck and in the seaside resort of St. Peter-Ording seem a bargain in comparison with properties in the celebrity haunt of Sylt. Properties on the island, according to numbers from the real estate association IVD Nord, often cost €7,500 per square meter.

Greece is inexpensive in comparison. Those who do not want to live on the popular islands of Mykonos, Corfu or Rhodes can find a place for considerably less than €2,000-per-square-meter.

Houses in crisis-stricken Spain are more expensive. On average, they cost €100 more per square meter than in Germany. The market there has stabilized after the real estate bubble burst a few years ago. In the last three months of 2014, the house price index rose by 1.8 percent.

Overall, the demand for vacation properties has pushed up prices in Europe. “It looks as if they have increased again considerably, especially in comparison with the previous year,” said Mr. Wann.

Real estate prices in popular German resorts such as Sankt Peter-Ording have become increasingly expensive.

 

But investments can still have many pitfalls. Missing land registration led to a property in Spain being sold three times, for example and Fewo Direkt strongly advises potential investors not to make purchases over the Internet.

It also recommends checking pension payments and nursing care insurance obligations before buying an overseas property. Having an experienced international tax adviser is also recommended.

But a move to sunny southern Europe can be lucrative in the retirement years because the cost of living is lower than in Germany. State and most private pensions are also paid out with no strings attached. However, the heavily subsidized private “Riester pensions” are only paid in full within the E.U.

Germans also cannot escape their country’s tax obligations. Those who spend at least 183 days in Germany are still obligated to pay taxes in Germany on all of their income earned anywhere in the world. Those who move permanently are also not totally free of the tax authorities: Payments made by the German pension insurance fund have limited tax liability, as do company pension payments and rental income from properties in Germany.

Limited tax liability does not, however, mean that the tax authorities require lower tax payments - on the contrary. Numerous personal and family discounts are not recognized during the assessment of a limited tax liability. But if at least 90 percent of one’s worldwide income comes from Germany over a calendar year, then one can apply to have unlimited tax liability.

In countries that do not have a dual agreement, property investors could be facing double taxation.

Many countries have dual tax agreements with Germany, which regulate if and how much tax is paid in Germany or in the new home country. In countries that do not have a dual agreement, property investors could be facing double taxation. Brazil, for example, requires foreign residents to pay taxes there.

This leads to double taxation on income, such as the German state pension. Health insurance can also be complicated abroad. But there is the axiom, at least in countries in the European Union or those that have social security agreements with it, that people who are covered by public health insurance in Germany are also covered there. He or she continues to pay the amounts as they had before.

But public health insurance coverage abroad only extends to those doctors who bill through their patients’ respective government social insurance. “Those looking for one of the numerous German doctors on Majorca usually end up at a private doctor,” warned Dagmar Horlitzki, who works for the AOK health insurance company in Palma de Majorca.

Video: Spain's Costa Brava is a popular area for real estate investment.

 

As a result, patients would have only a small portion of their bill covered. Germans who spend only a few months of the year abroad might want to consider purchasing additional travel health insurance for that time period.

Despite such pitfalls, stock market guru Marc Faber decided to purchase property in an exotic location. In 2000, shortly after the crisis in Asia, the Swiss fund manager purchased an 8,000 square meter property by a river in Chiang Mai, Thailand. He could not afford such a property in many other beautiful places, he said.

The estate is not an investment for retirement purposes, but is an investment in quality of life. Mr. Faber, who maintains an office in Hong Kong, has already signed it over to his daughter, and secured his right to live there for his lifetime. It is his paradise for his final years. “I will die here,” he said.

 

Nicole Bastian, Wolfgang Drechsler, Katharina Kort, Reiner Reichel, Hans-Peter Siebenhaar and Benjamin Wagener are editors and foreign correspondents at Handelsblatt. Frederic Spohr is a freelance journalist based in Bangkok. To contact the authors: [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected]