Jakob_Mähren
Jakob Mähren, CEO of Mähren AG Jakob Mähren

In the recent past, the German real estate market was on a steady upward trajectory. Investors were able to rake in a lot of profits as the market continued to grow in an attempt to meet the ever-increasing demand. However, with the implementation of more and more regulations, this growth is now slowing down.

We interviewed the German real estate expert and entrepreneur Jakob Mähren to shine a light on some of the effects that real estate investors and entrepreneurs can expect to see in the coming years. Mähren has been active in the real estate sector for 19 years and is currently managing a portfolio that includes more than 2,000 residential units.

The federal elections are coming up in Germany, and it is becoming apparent that renovations will be subject to much more stringent energy efficiency requirements in the future. What does this mean for residential property owners?

Jakob Mähren (JM): There’s a lot in store for property owners. I see two major areas that they will have to work on. First off, expertise. Private owners will have to familiarize themselves with many new regulations. This doesn’t only apply to renovation measures but also to the replacement of equipment that is actually working perfectly well. Anyone who thinks that it will still be possible for a long time to heat an apartment building with oil will soon be surprised.

This is also the second point. Owners and landlords are going to face considerable additional costs in the next few years, which they didn’t anticipate. Additionally, interest rates are slowly rising again. We will see whether these investments can be financed without any struggles.

Some business models will no longer be profitable because of higher maintenance costs, but what would be the best way to profit from this situation in your opinion?

JM: As the owner of an apartment building, you will now have to calculate very precisely. I see dangers in properties that don’t yield more than 4 to 5% rental returns because these yields will continue to shrink in the coming years.

On the other hand, you should take a look at property values. Over the past twelve years, real estate has only moved in one direction: prices rose and rose. As a result of this alone, anyone who bought an apartment building or an apartment ten years ago experienced a considerable increase in value.

Since many banks will have to adjust their lending values because of the additional investment costs, some owners should consider whether it might be worth selling now.

You have been active in the real estate sector since 2002. Has there ever been a similar market situation in the past 19 years?

JM: The German real estate market has developed substantially in recent years. It was dormant for many years. The state was the biggest landlord, so there hardly was a market as such. However, since 2013, we’ve seen a steady increase in regulations.

Rent regulations, milieu protection areas, modernization levies, the failed Berlin rent cap, expropriation debates, and, now, the Building Land Mobilization Act - the direction is obvious. The state is getting involved and regulating, and this will not change in the coming years - on the contrary.

Of course, all of this has a significant effect on the market. You have to know more and more laws, which requires significant professionalization on the side of property owners. And then, you have to keep in mind that prices aren’t rising as much as they used to in recent years. The German real estate market is settling back into calmer waters.

At the moment, there are more than 2,000 residential units in your portfolio. Is it currently still worth investing in real estate in Germany?

JM: I can’t give a blanket answer to that. For some players, now is the right time to sell, for others, it might still be worth it to invest. It depends on several factors. First off, you have to be able to act professionally - we’ve already talked about that.

Secondly, you have to look at how high the rental yield is because reductions are to be expected in the coming years. And, last but not least, you have to look at how much equity you have available or invested. The higher the financing was, the more likely it is to be worth selling now. You can ride the wave and realize the appreciation gains. We will see for how long this window of opportunity will remain open.

As a Berlin real estate investor, you made your initial investments in Berlin, would you do the same today?

JM: There are worlds between the Berlin of today and the Berlin of 20 years ago. When I started out, Berlin was demolishing buildings and tearing down houses. The Senate assumed that the population would settle at around three million people.

Today, you can’t even imagine that anymore - Berlin is on its way to having a population of four million. So, the fundamental figures are completely different from what they were 20 years ago. Now, real estate prices are so high in many parts of Berlin that the properties are more like trophies.

This means that investors buy a house or an apartment just because they absolutely want to have a property in Berlin, not because it is a good investment per se. This has little to do with investing and provision. Whether and for whom investments are still worthwhile must be examined very carefully on a case-by-case basis.

Considering the current state of the German real estate market, what makes a good investment?

JM: Rents are generally still very low in Germany. For investors, this means that they have to put in a lot of work to leverage potentials - this isn’t always easy, especially in view of increasing regulation. So, I would advise private investors to look at what they want to do in the coming years.

If you want the property to be a self-runner, you have to have a lot of equity. And if you want to enter the market professionally, you need a lot of experience and patience. But that doesn't mean there are no good investments left.

I just assume that such investments are very long-term. If you’re planning to sell in the near future anyway, for example because the ten-year tax period has expired, you might want to do it sooner rather than later.

What is your opinion on the development of the German real estate market over the past two decades?

JM: In recent years, the German real estate market had a lot of tailwind and developed enormously. Now, the market is slowly running out of steam, and that’s understandable.

Prices have risen sharply. Interest rates, on the other hand, can’t fall any further. Additionally, the German state made it unmistakably clear that it will regulate even more. Private investors profited considerably in recent years, now the phase of consolidation is coming.

Do you have any advice for young entrepreneurs who want to follow in your footsteps?

JM: Just start. There isn’t a right or wrong moment to become an entrepreneur. An entrepreneur is someone who acts. If you want to work with real estate, you should have a good feel for developments and trends.

That means you have to read the news and keep your eyes open. You get the most important information by being curious and always asking yourself what people want and need. Then you have to do the math and see if a project is worthwhile.

In the last year, the U.S. dollar fell by about 10% against the Euro while real estate prices in Germany have been climbing steadily. So, is it currently worthwhile for an American investor to invest in German real estate?

JM: The U.S. continues to be the largest and most exciting real estate market in the world. As an investor, you experience a different dynamic and vastness there, simply due to the size of the country and the multitude of markets in it.

However, looking at exchange rates alone is far from enough, and I would advise against relying on it. It’s like any real estate investment: you have to take a look at and examine the properties individually and then put them in context with the micro-location, the macro-location, and other economic and demographic factors and developments. In this respect, the American market doesn’t differ from the German market.

Real estate prices are also rising in America. Are there parallels from which an investor can learn something?

JM: We have invested in the U.S. as well, especially in the Sun Belt, which is the southern part of the United States. What you can learn from the U.S. is the classic rules of supply and demand.

In the U.S., there is little regulation, which enables both the market and the people to actively and flexibly adjust their budgets and demands. We in Germany could definitely learn a thing or two from this.

Because one thing is clear: you can over-regulate markets, but you can’t ban entrepreneurs in a free society.

Thank you for the interview, Jakob Mähren.