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Low Down on LeipzigWhere is it? Why Are We There?
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Low Down
on Leipzig
Where is it?
Why Are We There?
We get to meet and discuss investment
with a wide range o private and
institutional investors rom all around
the world. Many get in touch with
us as they have heard the storyo Germany as being a seriously
undervalued property market and want
to know more. Some come to us to
discuss how we can deliver sustainable
high-yielding investments and are less
interested in geographics. Very ew
investors come to us with the speciic
objective o buying in the city o
Leipzig, the area we do around 80% o
our current business within.
So why are we there?
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City Overview
Leipzig is the 12th largest city in
Germany, and the largest city in
the state o Free Saxony. Current
population is growing and stands at520,000. Leipzigs emergence o a city
o some standing in Germany come
about as much rom its geographical
position as anything else. Situated
between old and new Europe, the
city became o strategic importance
to traders rom around Europe, an
advantage that the city still enjoys
today.
Leipzig underwent a process o
rapid industrialisation during the
second hal o the 19th century. It
was mainly driven by the publishing,
textile and metalworking industries.
Its emergence as a major urban centre
is also mirrored in the unprecedented
population growth. In the last three
decades o the 19th century, the citys
population more than quadrupled rom 107,000 (1871) to 456,000
(1900). Most o the older housing
stock in German cities was constructed
during this period, in typically dense
our-to-fve storey apartment buildings
o a fne period quality.
The city continued to grow strongly, even through the inter-war
period, the growing manuacturing base being much o this story. The
population hit 750,000 in 1933 which made it the 4th largest city in
Germany.
During the GDR period ollowing the second world war, Leipzig suered
continued decline as its position in the middle o Europe was no longer
an advantage. The city now stood at the edge o the Warsaw Pact
countries. Much o the government and political unctions were sited inEast Berlin and the city waned in signifcance. The population statistics
during the GDR period and aterwards are shown below:
3
Sources: Statistiches Landesamt Sachsen; Stadt Leipzig (2006); Nuissl and Rink(2003).
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Whats
Happening Today?
The city is growing at one o the
astest rates now, as seen across
Germany as a whole. Reasons or
this are strong investment in the
area, and opening o the borders
to the eastern European countries
in 2011. In terms o growth up to
Dec 2010:
4
Source: Statistical Ofce othe Free State o Saxony
We see an accelerating rate o growth,
continuously over the last 10 years. With
German as a country suering rom a low
birth-rate, below replacement, Leipzigs story is
somewhat o a success.
Economically, the city is re-asserting its position in the region
and in Europe as a whole.
The city has an abundance o University aculties, some dating
back to the 13th Century. The student population stands
at 36,000 currently. The city is re-inding its past strengths
and putting these into the current political and economic
landscape, as the citys major points out:
Leipzig is the central economic region o
Central Germany. Plus points or maturing
investment decisions are the market
potential, proximity to important customers,
the presence o local suppliers, lexible
human resources, the perormance proile
o research in strategic directions and its
logistics inrastructure and location.
LogisticalhubforthemarketsofEurope
GatewaytothenewEUaccessioncountries
Highlevelofcompetenceinrelationto
Eastern Europe
EastCentralEuropeCentre:astrategic
platorm or the systematic exchange
between Germany, Western Europe and the
accession countries
Leipzig is the central economic region o Central Germany.
Plus points or maturing investment decisions are the market
potential, proximity to important customers, the presence o
local suppliers, lexible human resources, the perormance
proile o research in strategic directions and its logistics
inrastructure and location.
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Public SectorInvestment
Soon ater the re-unifcation, Leipzig
sought to re-assert its position in the
area both politically and economically.
Huge projects were planned with
government backing including a new
main railway station, a whole new
exhibition centre and redevelopment
o a regional airport. Most o these
projects have now been delivered
and the resulting inrastructure is
frst class. Ongoing projects include
a new railway system beneath the
city with new underground stations
and a new university building o the
Augustusplatz.
Private SectorInvestments
Funding rom the private sector was
a little slower, awaiting the needed
improvement in inrastructure beore
committing to projects. The story so
ar has been o a burgeoning logistics
base, centered around the autobahn
network, train line and heavy lit rom
the DHL European Hub in the city.
Companies such as Amazon, BMW,
Porsche and Dell have congregated to
the north o the city to take advantage
o the city transport system and
relative lower wage rates compared to
major cities in the west. Additionally,
around 30,000 jobs in the city depend
on the media sector, with national
television and press having major
presence in the city.
Leipzigs apparent Renaissance continues unabated, with the city being voted No 1 by the Financial Times as the uture city
or oreign direct investment and development out o 223 European cities in March 2010.
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Housing MarketO the investors we meet
that have heard o Leipzig
as a potential investment
area, many comment on
the apparent vacancy in the
town and the challenge in
inding tenants. Whilst this
view has some grounding,
much o the vacant stock
claimed by the town is
o unreurbished stock
which is not available to
the the tenant market.
Over the past 20 years, a
programme o development
o the stock has occurred
and in many areas this
programme is all but
complete. Some stock still
is let to reurbish, but this
lies mainly in pockets to the
east o the city. ProVenture
are careul when selecting
property, ensuring that
good tenant demand lies
within the area, and help
with the management o
units purchased.
The bar graph above shows the rate o vacant units across the city, by year
until 2009. The level o vacancy continues to all dramatically, with manyareas where we operate now having excess tenant demand and new build
projects under way.
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In terms o price levels, we oer the graph
above, showing prices or apartment houses,
by sqm:
The above graph shows price by year in A
locations [blue] B [red] and C [yellow], with
a prediction o pricing to 2015 based on
current rental level trends.
Between 1990 1996, when interest rate
policy was restrictive or investment across
most markets, a wave o speculation o the
real value o property in the ormer East took
hold. With the market in the East eectively
held under a social regime and property
ownership was not possible, the value o
the property was unknown. A common-
held view that the re-uniied country
would equalise in prices to a great extent
as the East caught up with the successul
development o the West during the period
o separation. Investments lowed into the
East rom domestic and oreign sources and
the appetite or investment was increased by
high bank lending values and government-
backed grants or development o historical
property.
7
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0
200
400
600
800
1000
1200
1400
1600
1800
Leipzig Apartment House Prices
Year
PricePerS
qm
What happened as a result is a amiliar story o
over-exuberance, albeit based on a unique event
o the all o the Berlin Wall. As investments
were made through the period to 1996 or so,
the perormance o those investments became
unsupportable. The expectation o rent levels
being similar to those in the developed West
were unrealistic, population ell in many cities
and towns due to the pull o the more aluent
West and the ability or ree travel and high
interest payments o the time began to bite. Many
investments ailed, or needed to be supported
rom external income to prevent oreclosure.
Think about it, just as the developed world
was gearing up or a decade in which property
values increased by 200-300% on the back on
low inlation and low interest rates, so Germany
dropped like a stone. Prices paid or property in
this time climbed to 1000 Eur per sqm or more,
and oten or unreurbished stock which needed
around another 800 Eur per sqm investment
to get in a condition or tenanting. It is not
uncommon to hear o over-exuberant investments
to all by 50-70% during this period. Despite the
prevailing low interest conditions, particularly
ater joining the Euro, the incentive or ability to
support these ailed investments waned. Only the
very toughest survived the markets o the East.
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What happened next?Germany went through a programme o iscal reorm and set a course or low-inlation and increased
productivity. Wage bargaining was tough, and output o the prized high-value German goods
increased. All parts o Germany stabilised and began the process o reorm. In terms o the property
market, equilibrium was ound in most areas between 2000-2005, with prices in Leipzig around 400-
800 Eur per sqm or apartment buildings in the various parts o the city.
So, what about the last 3 years?Well the story has been very interesting or investors in the area. During a period o alling property
prices in much o the developed world, the market in Leipzig has held up very well due to the ruits o
20 years o government investment in inrastructure, good capital values recognised by investors and
the business climate returning to decade high levels o optimism across Germany. In 2007, it would
be typical to conduct a search in the average locations in Leipzig or apartment houses in the price
range 450-600 Eur per sqm. Steady increases have been seen since then, with an increase in demand
rom local buyers with increasing access to bank inance. A typical search o the market today in the
same areas o Leipzig will be or property in the 550 700 Eur per sqm price bracket. In most cases,
property over the last 3 years has seen around a 20% increase in prices which is good going in this
climate. There are exceptions to this, depending on sub location. Some o the areas to the east o the
city such as Neustadt and Volksmardor and Sellerhausen have seen little or no capital appreciation,
the stock being characterised by inhabitants o working class or non-working people. Banks still ind
it more diicult to inance to any great degree in these areas. On the other side o the coin, property
prices in Schleussig and Plagwitz have really caught investor attention, with increases o between 30-
50% being seen.
So, whats ahead o us in terms o capitalappreciation?
This depends on a number o actors:
InvestorconfidenceInvestoraccesstofinanceRentalleveldevelopmentIncreasingowner-occupation
In turn, investor conidence will be the key to purchase prices increasing with all other actors being
equal. Right now, an investor eels rightly rewarded with a net yield o between 7-11%. With interest
rates or 5-10 year ixes at around 4%, there is still room or an increase in conidence pushing yields
urther down. Yields in a stable market would equate to around 2% over lending-rate, so around 6%.
Should yields drop due to this increased buyer conidence, then prices have the capacity to rise by
around 40%, should inance remain low.
Access to inance shows now real sign o abating, certainly or local buyers. It is not unusual or
projects to be inanced to 80% [or even higher] or German nationals, and 60- 80% or oreign
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buyers. These levels have remained reasonably intact through the inancial crisis, and should remain
or investments where rents cover inance payments by at least 125%, so called rental coverage.
Currently, rental coverage is oten 200% or more, so there seems no immediate threat to tightening
inancial conditions.
Increasing rent levels are the typical trigger or capital appreciation in the more mature markets inGermany. As rents creep up 5% or so per year, so the capital value increases by the same amount,
all other things being equal. The current rent levels in Leipzig are very low and have remained so or
the last 10 years or so.
The above graph demonstrates this point, with the yellow line tracking new build property, and
blue tracking pre-1948 stock. Whilst excess capacity has been worked through with the increase in
population or through demolition o unreurbished stock, some real anomalies remain to this day.
For example, rental levels across the city or proessional tenants lie in a thin range, usually between
4-6 Eur per sqm, a small deviation. As popular areas are developing, higher rents are now being
achieved. For example, in Sudvorstadt and Schleussig and Gohlis South, rents in excess o 7 Eur per
sqm are now not uncommon and on the rise. The development is having an eect across the city,
with pressures on areas in demand or well-presented units with beneits such as balconies. With
wages increasing, the proportion o take home pay used to service rents is now very low, around
20%, and shows capacity or rental increases to be absorbed. Finally, the eect base level or rents,
the amount the government pay or unemployed people had remained un-changed in 8 years until
June 2011. The old level o 3.85 Eur per sqm was the lowest in Germany, and is seen as very out o
sync with other smaller and less economically vibrant cities. For example, nearby Halle which is hal
the size o Leipzig has a social tenant rate o 4.35 Eur per sqm. Leipzig has started to catch up with
an increase o 10% granted across the board or social housing in June 2011. This will have a ripple
eect across the rent ranges and encourage all landlords to review their rents.
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Finally, and perhaps o greatest interest, is a airly unique eature o this market.
In 1989, all property was held by the state and beore the wall ell every
inhabitant o the city was eectively a council tenant. Since that time, owner-
occupation has risen steadily to around 15% today. Some may wonder why this
has not risen quicker, particularly with the low capital values o recent years.
An answer to this lies in the appetite and culture o those with suicient unds
to buy their own home in the last 20 years. Typically, it is those aged around 25
years old or more that aspire to home ownership. It has taken some time or the
lack o a housebuying culture to work through the older generation and arrive
in a new generation with unds to buy. For sure, many o todays 25-35 year
olds aspire to own their own place, much in the same proportion to the rest o
Germany where average owner occupation is just below 50%. Today, it is typical
or out o town suburbs with new build single amily houses or the very best
areas o town in apartment houses to support this growing sector. The real point
to note is the typical much higher price paid by an owneroccupier to an investor
o a complete apartment house. The property is not purchased on a yield-return
basis, more on the ability to pay and service the mortgage through income.
So, areas in Leipzig where owners occupiers are buying their own apartments
are typically paying rom 1.200 Eur as a very minimum to 3.000 Eur per sqm or
more. This is between 2-3 times investors buying apartment houses alongside
them are paying. Quite an odd situation!! So, as owner-occupation increases to
a more mature level towards 50%, so the average to good areas o the city will
see viability or investors to divide their apartment houses into individual units
and dispose o them, in a good reurbished state, to owner occupiers at a very
signiicant uplit to the original price paid. In some areas, this may take 3-10
years to be a viable option, in other areas such as Gohlis South, Sudvorstadt and
Schleussig this is an option to do right now.
We have introduced some 180 investors to Leipzig over the last 4 years,
primarily investors seeking a high rental yield on their investment. Typically
clients seek higher yields than those to be ound in cities in the west o the
country, or in the capital Berlin.
Owing to good contacts in the city, yield investors can ind property in the
very best areas o town providing yields o 8%, with medium risk areas to
the south and west o the city being the most attractive and producing yields
between 9-12% on delivery. With good management in place, these yields seem
to us to be mis-priced in terms o risk and reward. With capital values at thelowest levels seen or a decade, oten at prices starting around 500-600 Euro
per sqm or well-reurbished and tenanted property, the city demands urther
investigation.
Finally, a lowdown on each area o the city whichshould help in early research o the city
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City Inner Ring
Previously, the city centre was mainly home to centrally-based oice and
retail employees but over the past couple o years there has been signiicant
demand or city center property, resulting in extensive recent building work.
Shopping and dining acilities are in abundance, although only a very ew
apartments or living are situated here.
Gohlis - South
This is one o the most sought-ater, tranquil and consquently most in-
demand residential areas o the city. In the last ive years, more than
6,000 people have moved in to the areas and the population is orecast
to increase by up to 10% between 2006-2012 overall. Property near the
Rosenthal park commands the highest premuims. Very strong demand or
rentals with a typical 2 room, 50 Sqm apartment renting or 250-350 Eur
net per month. Typical yields or investors tend to range rom 4-8% net.
Gohlis Mitte
An average area o the city, having good links to the centre and also to
the ring road to the north o the city. Property around the Coppitz Platz
should be considered above average or the area, whilst property alongside
the Georg-Schumann Strasse is average in appeal. A typical 2 room, 50
Sqm apartment rents or 220-300 Eur net per month and typical yields or
investors tend to range rom 6-10% net.
Leutzsch
Leutzsch is located approximately our kilometers west o downtown
Leipzig. Property here is spacious and there is a wide variety o investment
opportunities. Condominiums are becoming increasingly popular. For a
detached house, some o the nearest to the city centre, you can expect
to pay rom between rom 200,000 to 400,000 euros. The rents range
between 4 and 7 euros per square meter, with a typical 2 room, 50 Sqm
apartment renting or 200-350 Eur net per month and typical yields or
investors tend to range rom 6-10% net. The highest rent levels are to beound to the north east o the region, approaching the woodland area.
Music Quarter
The lagship o the quarter is Ferdinand Lassalle-Strasse. Thanks to its
magniicent Stadt Palais it is one o the most beautiul streets in Germany.
Already an attractive area, it will be urther enhanced by a new city harbour
ront. It is anticipated that both ownership and rental rates will continue to
rise over the next couple o months. Rental levels are some o the highest
in the city, at around 350-500 Eur net per month or a typical 50 sqm
apartment. Yields rarely get above 6-7% in this location, due to strong
demand rom investors and owner-occupiers.
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Plagwitz
Plagwitz is predicted to be the next trendy neighborhood in Leipzig. The ormer
Industrial area is a prominent player on the city art scene. Lot apartments and
galleries are opening up along the Karl Heine canal, boosted by government
investment. Town houses can be bought rom 180.000 250.000, and there is an
increasing demand rom owner occupiers or such units. Rental levels are still low or
the city, at around 4.5 Euro per sqm but are on the increase. The rent o a typical 2
room, 50 Sqm apartment renting or 220-250 Eur net per month and typical yields or
investors tend to range rom 8-11% net. Population is set to increase by up to 10%
between 2006-2012.
Schleuig
Schleuig is or in demand by high-income amilies with children. There are good
amily- based acilities available on oot. The adjacent orest to the east o the Clara
Zetkin- Park is an idyllic beauty spot or the whole amily. Properties in this area areextremely sought-ater, where detached houses can cost in the region o 600,000.
Further west are good redeveloped Grnderzeitund Art Nouveau, with popular
condominiums or up to 2,300 Euros and rents to 7.50 per square meter. The last 5
years has seen a dramatic increase in population and also rental demand. Population
is set to increase by up to 15% between 2006-2012. The best property lies next to
the Clara-Zetkin Park. Yields have dropped rom around 10% net 2 years ago to 6-8%
now, due to capital value increases.
Sdvorstadt
With just over 22,000 residents, Sdvorstadt is the most populous district o Leipzig.
The area is very popular with amilies. The media industry is the most prominent
player in the economy, with many ilm and television producers living in the area.
Condominiums last year were particularly sought ater and now cost up to 2,400
euros per square meter. At the Paul-Gruner-Strasse, Shakespeare Street and Brand
Vorwerkstrae are the irst town houses o the Sdvorstadt, costing 200.000 to
300.000. This was one o the irst areas to enjoy gentriication in the city ater re-
uniication, and tenant demand continues to be very well-supported. Population is set
to increase by up to 15% between 2006-2012.
Lindenau
This is a large sub district o Leipzig which has been steadily growing over the past 15
years. Growing rom a low base, the region initially attracted price-sensitive tenants
to the area and vacancy in the apartment blocks began to decrease. Now, Lindenau
whilst still working class in its roots, supports rental demand well or renters who
like the proximity to the centre, its own commercial centre, theatre and cinemas and
also access to nearby parklands. The rent o a typical 2 room, 50 Sqm apartment
renting or 200-225 Eur net per month and typical yields or investors tend to range
rom 9-11% net. The population is set to increase by up to 15% between 2006-
2012, urther supporting tenancy in this area. The area is mixed in potential and the
best locations tend to be in parts o Alt Lindenau and also in the area which borders
Plagwitz to the south.
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Stotteritz
A stable and well-established part o Leipzig which boasts good inrastructure
including hospital and good schools. There are a mix o owner occupied houses and
town houses and multi-amily property mainly rom the classical building period o
1900s. The population has been very stable in the past 15 years and rental demand is
steady. The rent o a typical 2 room, 50 Sqm apartment renting or 220-250 Eur net
per month and typical yields or investors tend to range rom 8-10% net. Populationis set to increase by up to 5% between 2006-2012.
Kleinzschocher
The large region to the south west o the city was ormerly characterised by a large
railway depot used or cargo out o the ormer industrial heartland o Germany. There
railways are now long closed and the area is beginning to change its appearance
and establish itsel as an area which oers good value rents in some very attractive
classical style property. This area has proven very attractive to yield-driven investors
over the past 2 years, and this trend is set to continue. The rent o a typical 2 room,50 Sqm apartment renting or 200-225 Eur net per month and typical yields or
investors tend to range rom 9-11% net.
East o the City
A collection o the districts bordering the centre including Reudnitz-Thorberg, Anger-
Crottendor, Volkmarsdor, Schoeneeld and Neustadt. Suprising value can be ound
in these districts, particularly being in such close proximity in some cases to the city
centre. The reputation o some parts, in particular property on the main routes o
Eisenbahn Strasse and Wuzner Strasse has been characterised by an area o high
unemployment in the past. This eect can lower the loan-to-values oered by banks.
That said, some above average mico-areas and properties exist in this region and a
good demand by renters exists. Population is set to increase by up between 5-10%
between 2006-2012.
Conclusion
Leipzig, o all ormer east German cities, really has astory to tell in terms o renewal and redevelopment,a story that is unolding in ront o our eyes. Propertyyields in the city are truly rewarding and cashlowpositive and banks are lending to good levels tointernational investors. We would be proud to showyou the city as you make your research or your nextinvestment area.
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