Frankfurt For many average earners in Germany, the dream of owning a home is becoming ever more remote. But this is not only due to the prices for the real estate itself – one reason for this is the high property prices. Since 2010, the price of building land has risen on average from 130 euros per square meter to 190 euros, according to the building price index of the Federal Statistical Office. So it seems a tempting alternative to buying a property with land to buy apartments or houses that are on leasehold land. But under what circumstances is it worth it? And what are the risks? The following is an overview of the advantages and disadvantages of such a transaction.
Basically, the prospective owner buys the property without the land. This is rented for a long period of time, for an annual lease. As a rule, this amounts to around three to five percent of the standard land value per year, according to the German heritable building rights association, the last national average was 3.7 percent.
Real estate owners do not have to dig deep into their pockets when buying. But they pay rent every year to the leaseholders, mostly churches or municipalities, less often private individuals. Leaseholders do not sell the plots of land, they merely lend them out. Leasehold contracts are usual for 99 years, but there are also shorter terms. According to the German Heritable Building Rights Association, the average in Germany is currently 85 years.
When is a heritable building right contract worthwhile?
Whether the purchase of a property on leasehold land pays off in the long term depends on many factors. One of the most important is, of course, the interest rate. Some municipalities such as Hamburg or Cologne only charge 1.5 percent, others five percent. The interest rate can also increase over the years due to so-called value protection clauses. The ground rent is based on the so-called land value, which increases with inflation. However, the interest rate does not automatically increase. The leaseholder may only adjust it every three to ten years, depending on what is stipulated in the contract.
On the other hand, when borrowers buy land, they pay interest on their home loan instead. Here the calculation is more uncertain, at least if the purchase is not fully financed from the start, but follow-up financing becomes necessary at some point. It is also unclear to what extent a purchased plot of land will increase in value in the coming years. If it can later be resold at a profit, this also plays a role in the calculation – the specific effects are unclear, however.
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There is no general answer as to whether a leasehold property is a financially better deal than buying a property. Buyers must have this calculated individually by their financing broker or their bank. However, prospective buyers should always keep one thing in mind: while a purchased property is usually fully paid off after 20 to 30 years with the help of a loan, the costs of a leasehold building contract continue for the entire term. And: In the end, they don’t own anything, they just live on the property for rent.
Anyone who can afford it is often better off in the long term by buying a plot of land, especially with the currently low building interest rates. “For people with a lot of liquidity, full ownership is also an option,” confirms Matthias Nagel, Managing Director of the German Leasehold Association. On the other hand, it is now often the only way for people with lower incomes to own their own home – even if it is on leased land. So if you want to buy your own home but can’t afford it at current prices, a leasehold contract could be a suitable option. In some new development areas, local authorities also offer plots of land exclusively for lease.
Financing Disadvantages
However, buyers who are dependent on borrowed capital must reckon with disadvantages when it comes to financing. “Banks are skeptical about leasehold land,” says Peter Becker, notary at Denk & Dr. Becker in Schwaebisch Gmuend. “The valuation of hereditary building rights causes difficulties in banking practice.” The reason: The market value of a property on leasehold land is significantly lower than that of a comparable house with land.
Depending on the contract, the leaseholders also have special requirements for the property. Not least because of this, financing leasehold land is more expensive. If the determined value of the property is below the borrowing requirement, it can be difficult to get financing at all, notary Becker warns. Therefore, prospective buyers should bring more equity than usual with a leasehold property. Experts recommend at least 20 to 40 percent.
Pay attention to these pitfalls in the contract
An important factor is a sufficiently long term. If you buy a property with an existing leasehold contract, you take over the remaining term of the previous owner. “I advise against acquiring leasehold properties with a remaining term of less than 40 years,” says Nagel. With such short maturities, banks hardly accept loans anymore, making it difficult for the owner to resell the property. Ideally, interested parties should look for a property with a term that roughly corresponds to the average lifespan of a building, advises the expert. That’s about 80 years.
Prospective buyers should also read what will happen to the property afterwards. As a rule, the heritable building right expires and the property reverts to the leaseholder along with the property. In return, the homeowner is only entitled to compensation for the home. This should be at least two thirds of the market value. It is specified in the contract.
Churches and municipalities often agree to extend heritable building contracts. Owners should definitely clarify this with the leaseholder in good time – but no later than ten years before the contract expires. Owners should also pay attention to pre-emption rights and ideally negotiate them into the contract. If the hereditary builder wants to sell the property, you as a property owner would then have the opportunity to do so.
avoid relapsing
Last but not least, there are also obligations associated with the purchase of a property on a leasehold property. That’s why you should read the terms of the contract carefully – it is not uncommon for leaseholders to have more say than you think. On the one hand, as usual, owners must insure their property adequately against building and elementary damage. On the other hand, real estate owners need permission from the leaseholder if, for example, they want to add an extension to the house. It is also particularly important to pay the rent. If the leaseholder does not pay for a certain period of time, the so-called escheat occurs: the homeowner loses his leasehold and is no longer allowed to use the property. The house then also goes to the leaseholder for compensation.
More: “It won’t get any cheaper” – What investors can expect on the housing market in 2022