Germany with a population of more than 80 million and a nominal
GDP of over 2.7 trillion Euros is Europe's largest economy. The
inbound real estate market is characterized by decentralization
around the "Big Six" cities (Berlin, Cologne,
Düsseldorf, Frankfurt, Hamburg, and Munich) and had an
investment volume of approximately €37 billion Euros in
2012.
As an investment platform, the German open ended funds industry is
of particular importance. German open ended funds have presently
more than 120 billion Euros of real estate assets under management
– in Germany and all around the world. This article briefly
outlines the basic legal landscape for real estate investments in
Germany from a foreign perspective as well as some information
about open ended funds and recent tax developments. Please feel
free to contact our German real estate team if you want more
information.
1. Legal Landscape for Real Estate
Investments
The most common transaction structure to acquire German real
estate is a an asset deal through a vehicle chosen by the investor
based on its tax efficiency.
Title and Foreign Ownership
Title is usually confirmed by reviewing land register excerpts.
The title system is very reliable and errors are uncommon. Title
insurance is generally not used, although there have been a few
cases where remote risks relating to the title situation have been
insured by specialized insurance providers. The buyer of real
estate can trust on the content of the land register if acting in
good faith. This means that even in case of title errors, the buyer
will usually get full title in an asset deal. Nevertheless, all
purchase agreements usually have strong representations and
warranties about the title position so the buyer can take recourse
by asserting those. There are no general real estate specific
restrictions for foreign ownership of real estate.
Unusual Aspects from Foreign Perspective
Outlined below are a couple of aspects relating to German real
estate transactions, which are often perceived as being unusual
from foreign perspective:
- The timing of the closing of an asset deal cannot be exactly defined as it depends on registrations in the land register and obtaining waivers from public authorities, e.g. regarding statutory rights of first refusal. The possibility and/or likelihood of rights of first refusal being exercised is very low.
- The landlord and tenant law in Germany is very tenant friendly. Deviations made by standard terms are subject to a "fairness test", which can, e.g., make it impossible to agree a triple net lease by way of landlord imposed standard terms.
- For residential tenants, the mandatory legal protection is even stronger. It is very difficult to terminate residential leases other than for cause. Rent increases are subject to strict legal limitations and law makers even discuss stricter limitations at the moment. The upside of this is that many - even affluent - Germans do not own their home but rent it, which makes the market for home rentals big and liquid, in particular in the Big Six cities where the market has been booming in recent years.
- Commercial lease agreements are subject to peculiar written form requirements, which go way beyond the requirement to be on a signed piece of paper. Non-compliance with the written form does not void the lease but makes the fixed term unenforceable so that the lease can be terminated with the statutory notice period of six months to the end of each calendar quarter.
- In case of an acquisition of an asset in insolvency or foreclosure, the buyer has a special termination right with the same short notice period as in case of a written form problem. This presents opportunities to streamline tenant structures or for owner-occupiers buying distressed real estate.
2. German Open Ended Funds
German open-ended funds come in two highly regulated
varieties:
- public funds, which have many individual investors and are the Germany's equivalent to REITs as listed REITS are very unpopular (only four REITS existed at last count)
- special funds, which are tailored to institutional investors and are arguably the most favourite investment vehicle for German pension funds or insurance companies to invest in Germany and abroad
In particular special funds have been popular investment
vehicles recently and active in the United Kingdom and elsewhere
outside of Germany.
The legal framework for open ended funds has been changed as a
result of the AIFM directive and now provides one framework for
open-ended and closed-ended funds. Even though the corresponding
tax rules have not yet been amended to reflect these changes, the
draft legislation showed some cumbersome inconsistencies. However,
it is not expected that the popularity of German open ended funds
will suffer in the short or long term and they will remain the most
important German real estate investment platform.
3. Tax Developments
The German real estate transfer tax (in English sometimes referred
to as RETT or simply stamp duty) used to be at 3.5% of the purchase
price at a federal level for all of Germany. As a result of a
reform of the federal system in 2006 the states were given the
right to determine the RETT rate. This has resulted in varying tax
rates of up to 5.5% in various states and soon 6% in Berlin. Only
Bavaria and Saxonia kept the 3.5% rate.
In the past, RETT could be mitigated by share deal acquisition
structures called "RETT blockers". This has recently
become more difficult due to new tax legislation aimed at
abolishing these structures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.