Risk-Return Ranking: Germany’s Class B Cities Outperform the Metropolises
The parameters for investments in residential real estate are often much more attractive in the so-called Class B cities of Germany than in the country’s leading metropolises. This is the upshot of the 2017 Risk-Return Ranking of altogether 110 German cities that Dr. Lübke & Kelber GmbH, a real estate investment service provider, published in late September. For the purposes of the ranking, the returns on equity to be expected in a given location were compared to the local risks.
Particularly noteworthy for investors are the top scores of this ranking. For existing real estate, the ranking is topped by the cities Osnabrück, Wolfsburg and Worms. The most attractive cities for investments in construction are Wolfsburg, Aschaffenburg and Fürth, and two East German metropolises – Dresden and Leipzig – ranked fourth and sixth. The rates of return earned here according to the Risk-Return Ranking far exceed the minimum rate of return that was determined in each case by taking the location risk into account.
Also important are the criteria on which the ranking was based. For the analysis, an equity ratio of 55 percent, a financing interest of 1.2 percent, and a fixed-interest period of ten years was assumed. In nearly all of the cities studied, the realised return on equity topped three percent, both in the segment of existing real estate and in the new-build segment.
Risk is Lowest in the Metropolises
The ranking identified the lowest risks in the metropolises Munich, Frankfurt am Main, Hamburg and Stuttgart. Striking to note is that the Grade B or medium-quality locations are most attractive in these and other Class A cities. The rates of return to be achieved in the good locations, by contrast, fall short of the identified minimum rate of return in some cases. It is therefore recommended to opt for the so-called ABBA strategy, which encourages investments in the Grade B locations in Class A cities, and inversely in Grade A locations in Class B cities.
The Risk-Return Ranking also determined the cities in which the acquisition of real estate is most preferable to renting. This list is topped by Class B cities like Göttingen, Würzburg and Jena, as well as Dresden and Leipzig in the new-build segment. As far as existing flats go, buying a condominium is more lucrative than renting in 87 out of the 110 cities that were surveyed. But when it comes to new-build flats, the same is true for only 21 cities.
Generally speaking, the ranking permits clear inferences regarding the question whether Germany’s residential real estate market is overheating. Due to the robust risk-return ratios, an excessive price inflation is not to be expected any time soon.