Real Estate Investments in Germany An Overview for

Real Estate Investments in Germany
An Overview for Chinese Investors
List of Abbreviations
CIT
Corporate Income Tax
CPI
Consumer Price Index
GDP
Gross Domestic Product
German PE
German Permanent Establishment
GIT
German Income Tax
G-REIT
German REIT
LT Land Tax
N Single Net Lease
NN
Double Net Lease
NNN
Triple Net Lease
RETT
Real Estate Transfer Tax
SME
Small- and Medium-Size Enterprise
TT Trade Tax
VAT
Value Added Tax
WHT
Withholding Tax
Disclaimer
Nothing in this Document should be construed as legal, tax, accounting or investment advice. We are not obliged to update or correct any
information set out in this Document. Neither we nor any of our shareholders, associates, affiliates, subsidiaries nor their respective directors, officers and employees accept any responsibility or liability for (and no representation or warranty or assurance of any kind, express
or implied, is or will be made as to or in relation to), the accuracy or completeness of the information used, or the comment or opinion
contained, in this Document, or any action taken or omitted by the addressee as a result of receiving it. The addressee should make his own
independent evaluation of any transaction and of the relevance and adequacy of the information in this Document and should make such
other investigations as he deems necessary to determine whether to participate in any transaction.
1. Investment Market Germany
Germany possesses a very strong economy, displaying the highest figures in Europe regarding
the GDP (€ 2.90bn in 2014) and the population size (80.8m). In addition to being one of the
three largest global exporters along with China and the US, Germany also offers a high degree
of economic diversity due to its large manufacturing and service sectors. The economy benefits
from the considerable share of successful small- and medium-size enterprises (SMEs) that employ approx. 60% of the country’s total workforce, one of the lowest unemployment rates on an
European and global scale, as well as highly educated and qualified labour.
Germany’s highly developed and stable political legislation in combination with the necessary
legal framework provides a secure environment for both national and international investment.
Due to its federal structure, the country has a large number of strong cities, including four cities
with more than 1 million and 70 cities with more than 100,000 inhabitants. From a real estate
perspective and with reference to the figure on page 2, Germany has seven A-class investment
markets (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich, and Stuttgart) as well as a
large variety of B-locations (e.g. Dresden, Hannover, Leipzig, or Nuremberg).
Germany
EU-28
Population
80.8m
507.4m
Population Growth
+3.2%
+3.4%
€ 34,200
€ 26,600
Economic Growth
+0.1%
+0.0%
Inflation Rate
+0.8%
+0.6%
Unemployment Rate (20-64 years)
5.3%
10.6%
Unemployment Rate (55-64 years)
7.9%
23.4%
GDP per Capita
Source: Statistisches Bundesamt, Data from 2013/2014
Investment Markets Germany
Sale in Frankfurt
Sale in Munich
2. Acquisition of German Real Estate
Forms of Investment
In order to invest in German real estate, both direct and indirect acquisition opportunities are
available to investors.
In addition to the direct acquisition of property (i.e. asset deal) and the purchase of shares in a
corporation holding such real estate (i.e. share deal), investors may employ other indirect investment vehicles such as open- and close-end funds or German REITS (G-REIT), which offer the
opportunity of pure financial investments without the responsibility for property management.
Ownership
In accordance with the German constitution, ownership is a fundamental right that grants the
legal right to possess, use, and dispose or bequeath assets, such as real estate. The right to own
real estate is applicable to any private individual and any legal entity with legal capacity, irrespective of its original citizenship.
In Germany, there are three different forms of ownership for real estate assets: (i) Full freehold ownership, (ii) condominium ownership (Wohneigentum), as well as (iii) hereditary building
rights (Erbbaurechte) and usufruct rights (Nießbrauch). Every ownership title is registered in the
land register (Grundbuch) along with important encumbrances related to the specific property
such as mortgages.
Sale in Leipzig
Sale in Frankfurt
Full freehold ownership (i) describes the ownership over a piece of land and, furthermore, all
property attached thereto, e.g. buildings. The full freehold ownership can be attributed with
mortgages for financing aspects as well as liens to grant or restrain certain utilization of the
respective land such as right of way.
Although also being rated as freehold ownership, condominium ownership (ii) is of lesser status
than full freehold ownership and indicates the ownership over individual units in a multi-unit
residential property. In contrast to commercial properties, which are almost exclusively subject
to full freehold ownership, condominium ownership is common for residential properties in Germany’s larger cities. Sub-divided into the ownership of a unit itself (Sondereigentum) and the
co-ownership of common areas of the building, such as staircases, along with the other condominium owners (Gemeinschaftseigentum), the latter is contractually settled to manage the
whole property and to divide costs accordingly.
In order to obtain the full freehold ownership over a property or condominium ownership over a
residential unit acquired, the ownership title is to be transferred from the seller to the buyer in
the land register through a registration of the ownership title. This registration of the ownership
title is subject to the conclusion of a sales and purchase agreement between the two parties,
which must be notarized by a certified notary. Under German law, an un-notarized sales agreement is void and a registration and, therefore, a transfer of ownership title is excluded.
Hereditary building rights and usufruct rights (iii) incorporate the third type of ownership and
are seen as quasi-ownership. They serve purpose in case that a full freehold owner is not willing
to abandon full ownership of land. Hereditary ownership rights are granted by the initial full
freehold owner of a plot of land in exchange for annual interest payments and entitle the corresponding beneficiary to temporarily use the land as full freehold, including the rights to build,
sell, bequeath, and so forth. The general maturity for hereditary building rights ranges between
30 and 99 years, after which full ownership is returned to the initiator, i.e. the original freeholder.
The terms of a hereditary building right are subject to an agreement between the full freehold
owner and the beneficiary and, inter alia, include duration, financial terms, and restoration arrangements (e.g. compensation for the buildings of the former beneficiary). Similar to the other
ownership titles, the hereditary building right has to be registered in the land register in order to
become legally binding. In this regard, the register provides an additional page to account for all
changes conducted during the right’s execution.
Taxation
In Germany, the direct acquisition of real estate through an asset deal as well as the indirect
acquisition through a share deal, i.e. the purchase of shares in a company that owns real estate,
is subject to German Real Estate Transfer Tax (RETT). The respective RETT rate depends on the
individual German Federal States and currently ranges from 3.5% to 6.5% of the transaction
volume. It is general practice, that the buyer bears the tax liability; however, the parties may
negotiate other arrangements as part of the sales and purchase agreement.
In a share deal, RETT applies if a single buyer directly or indirectly acquires 95% or more of the
shares of a respective entity or holds an economical participation of equal amount in the same.
In partnerships, RETT becomes due if at least 95% of the shares are transferred to a new partner
within a 5 year period.
In principle, the sale of leased German real estate or shares in a company that holds correspondent property is exempt from Value Added Tax (VAT), currently amounting to 19%. This is, if the
purchaser assumes the ongoing leasing business of the previous owner and, therefore, acquires
an ongoing business with a predetermined VAT position. However, opportunities to opt to VAT
might be available.
3. Management of Real Estate
Lease Agreements
As opposed to the Anglo-American legal principles, German leases are categorised as contracts
rather than estates and are, therefore, not included in the land register. The German Civil Code
governs basic rules of leases; however, deviating terms concerning single aspects of the contract
may be negotiated by the parties upon conclusion.
In Germany, one distinguishes between commercial and residential leases, which, in accordance
with their denomination, indicate a lease of premises that are used for business purposes and
a lease of premises that are used for reasons of accommodation respectively. Here, the latter is
subject to stricter legal regulations in order to protect the interests of the residential lessee.
German lease agreements generally include clear definitions of the (i) rentable premises, (ii) ma-
turity of the lease, (iii) terms of rental payments, (iv) responsibility for maintenance and repairs,
and (v) right to sublet.
(i) The rentable premise or area requires a clear definition in terms of location and space in order
to provide a basis for all subsequent agreements and to avoid any prospective disputes in respect
thereof.
(ii) In accordance with German law, the term of commercial leases is subject to an agreement
between the parties and may either be fixed or unspecified; the latter agreement can be terminated with 6-9 months’ notice. In case of a fixed term, the maturity of leases is commonly tied
to market standard, which in general counts 5-10 years for office space and 10-15 years for retail
space, and is, furthermore, often subject to renewal options that must be established by both
parties. Regardless of any contractual agreements, a commercial lease must not exceed a period
of 30 years and may be terminated with statutory period of notice by either party thereafter.
Lease agreements legally require written form, if they exceed a maturity of one year. The lease
terms of agreements with a duration of less than one year, may be concluded verbally.
(iii) In Germany, all common types of rent, such as fixed rents, turnover rents, and so forth, as
well as incentives (e.g. rent free periods, rental reduction, etc.) are available for commercial
leases. The parties are, furthermore, free to negotiate and set any rental level. Rent is usually
measured in € / m² / month and payable monthly in advance.
Sale in Berlin
Sale in Hamburg
The payable rent for the tenant generally reflects the actual reimbursement for the utilisation
of rental space as well as the prepayment of costs the landlord owes to third parties (e.g. water,
waste, ground tax, insurance, and so forth). Originally, the latter expenditures are to be borne by
the landlord, however, in practice they are frequently passed on to the tenant through explicit
provisions in the lease agreement (recoverable costs). Expenses that cannot be handed to the
tenant are referred to as non-recoverable costs (compare paragraph (iv)).
In practice, commercial lease agreements usually provide for an annual indexation of rent to
account for inflation. In this context, rent is adjusted in accordance to changes of a previously
determined index, most commonly the Consumer Price Index (CPI) (Verbraucherpreisindex, VPI).
This rental adjustment is commonly subject to a specified hurdle rate (e.g. a 5% increase/decrease in CPI) and is to be applied to the passing rent by a previously settled percentage that can
amount to up to 100%. Contrary to, for instance, the UK, an upward-only review of rents is not
admissible under German law; however, a predetermined rent step-up plan may be agreed upon
and incorporated.
(iv) The responsibility of cost coverage for maintenance and repairs initially lies with the landlord. In accordance with the negotiated terms of a lease agreement however, it is common
practice for the tenant to assume the financial position for certain rental area related maintenance and repair issues, whereas the landlords commit themselves to cover structural works
(Dach und Fach). Although rather uncommon, German law also allows for the landlord to render
the costs of these structural works to the lessee.
In German commercial leases there are three net leases which determine a tenant’s financial obligation beyond the basic rent payment: A single net lease (N) requires the tenant to additionally
cover the property taxes, the double net lease (NN) includes both property taxes and building
insurance, and the triple net lease (NNN) covers property taxes, building insurance, as well as
structural maintenance and repairs. NNN is usually applied to freestanding or single-tenant
properties only.
(v) German law generally allows for tenants to sublet their leased premises to third parties,
however, requires a correspondent and mutually agreed upon position in the lease agreement.
Should the parties fail to include such a provision, the landlord may, if applicable, give his written
consent at a later point in time.
Taxation
Whilst owning real estate in Germany, the respective corporations or individuals may be exposed
to the following taxes to different degrees:
(i)
Income Tax, subdivided into Corporate Income Tax (CIT) and German Income Tax (GIT)
(ii)
Withholding Tax (WHT)
(iii) Trade Tax (TT)
(iv)VAT
(v)
Land Tax (LT)
4. Sale of Real Estate
Legal Basis
Please refer to Section 2.2 as the same regulatory basis applies for sales and acquisitions.
Taxation
If the direct sale of German real estate (i.e. asset deal) generates capital gains for the seller, this
surplus is generally subject to CIT or GIT. Furthermore, if the capital gain is raised in association
with a German PE or a German permanent representative it is additionally subject to TT.
In case of the disposal of German property through a share deal, 95% of the respective capital
gains from the sale of the respective shares are exempt from CIT, if the seller is a corporation. For
individuals, on the other hand, capital gains are subject to a flat GIT of 26.275% (incl. solidarity
surcharge) if the shares are held privately. If the shares are held as business assets, there is a GIT
exemption for 40% of the capital gain, whereas the residual 60% are subject to the individual’s
correspondent income tax rate. Again, TT is applicable if the capital gains are related to a German PE.
For non-German residents double taxation treaties between Germany and the resident’s native
country may exist in which case the tax liability to the German authorities from capital gains
might be void.
5. Contact Information Angermann
Angermann Investment Advisory AG is represented with offices in Hamburg (headquarters), Berlin, Frankfurt, and
Stuttgart in Germany as well as with an overseas office in Stockholm (SE) and a China desk in Shanghai (CN). With
33 employees and its affiliated companies within the Angermann Group the company is able to provide a broad
range of services with regard to (i) real estate investments, (ii) office letting activities, (iii) valuation, (iv) retail
properties, and (v) real estate auctioning processes.
Frank Shao
Dr. Jens Noritz
Phone +49 (0)40-3 49 14-120
[email protected]
Phone +49 (0) 40- 3 49 14-135
[email protected]
ANGERMANN Investment Advisory AG
ANGERMANN Investment Advisory AG
Shanghai Office
1805A, 256 South Pudong RD.
Huaxia Bank Building
200120 Shanghai
Headquarter
ABC-Straße 35
20354 Hamburg
Germany
Phone +49 (0)40 349 14 0
Fax
+49 (0)40 349 14 148
[email protected]
www.angermann-immo.de