How To Hedge Against Financial Repression .....

[LuckyOne]

God. Imagine living in Germany. Real jobs. A state that doesn't shit on it's people. Social cohesiveness between generations because the young aren't being sold down the river.

Can't imagine what it's like.

Add a sensible balance between the rights of tenants and landlords, social housing costs which are not so high that people in work are being driven out of the market, a logical planning regime that allows the housing stock to grow with the population's needs etc ....

[o2bsure]

We are talking about two different things. You are talking about consumer mortgages for owner occupiers. I am talking about commercial mortgages for investors.

A foreign owned German GmbH can get an 20 year fixed, 80% LTV commercial mortgage at 20 year mid swaps + 130bps secured against multi-family housing or mixed use (less than 20% commercial) buildings. The all-in rate as of Friday's close is 3.91%. This rate is from a large German commercial bank and not from a Landesbank.

I do agree that prices are rising in much of Germany. Luckily the bank surveyors have very strict valuation rules which results in quite a severe lag between market prices and the survey values upon which commercial mortgage LTVs are based.

Sorry, but you will have to show me a link to such a rate for me to believe it.

I am speaking from an investor perspective.

Plus, send a link to an 8% yielding property. You will not find 8% yeilding properties in large city centers. You will if its commercial real estate but this risks are much higher and so is the mortgage rate. So please clarify what you are referring to. Residential or commercial? Which city? Which bank? Do you self manage? How high were your commission costs 7% or 3.48%?

[LuckyOne]

What currency are your living costs in?

I have thought about that question before. Without being flippant, the honest answer is that I don't know.

My cost of living is measured in terms of the consumption of bushels of wheat / rice / corn / soy beans etc, tonnes of steel, ounces of uranium, barrels of oil, shelter costs, services that I consume, the cost of land, kilos of beef, fish, pork, chicken, pounds of potatoes and vegetables, gallons of milk etc.

I think of currency as merely being a shorthand way to express my cost of living which is really the consumption of things and my occupancy of land. Money is merely a promise and I am increasingly thinking in terms of things rather than promises.

[LuckyOne]

Sorry, but you will have to show me a link to such a rate for me to believe it.

I am speaking from an investor perspective.

Plus, send a link to an 8% yielding property. You will not find 8% yeilding properties in large city centers. You will if its commercial real estate but this risks are much higher and so is the mortgage rate. So please clarify what you are referring to. Residential or commercial? Which city? Which bank? Do you self manage? How high were your commission costs 7% or 3.48%?

You might want to talk with Deutsche Bank Privat- und Geschäftskunden AG and look at http://www.immobilienscout24.de/de/finden/anlage/index.jsp for residential buildings (some with commercial space on the ground floor only) in places like Leipzig and Chemnitz.

Edited April 28, 2012 by LuckyOne

[bmf]

Add a sensible balance between the rights of tenants and landlords, social housing costs which are not so high that people in work are being driven out of the market, a logical planning regime that allows the housing stock to grow with the population's needs etc ....

And a population that votes sensibly to achieve this, including keeping an eye on wages to remain competitive. Instead of all signing up to a short-term debt cluster-******.

[Bland Unsight]

Add a sensible balance between the rights of tenants and landlords, social housing costs which are not so high that people in work are being driven out of the market, a logical planning regime that allows the housing stock to grow with the population's needs etc ....

And a population that votes sensibly to achieve this, including keeping an eye on wages to remain competitive. Instead of all signing up to a short-term debt cluster-******.

Indeed, we plucky Brits are working our way back to the Stone Age with dumb mortgages on a crap houses. Bizarre.

[bmf]

Indeed, we plucky Brits are working our way back to the Stone Age with dumb mortgages on a crap houses. Bizarre.

It's not irrational behaviour. It's just that they are dumb. Those who saw their house price rise rapidly over the past 15 years want the status quo to remain. They could not care less what happens to the next generation. Unfortunately they have over-egged the situation. Unfunded pensions and absurd asset price rises coupled with international problems are going to see it blow up well before they check out. If they thought it would turn into Iraq 5 minutes after they die that would be ideal for them as they would have got the last bit of blood out of the stone.

[Panda]

Another side effect of financial repression : http://www.telegraph.co.uk/finance/personalfinance/pensions/9232364/QE-quadruples-FTSE-350-pensions-deficit-in-one-year.html

A pretty accurate description of QE i would say, a comment from the Telegraph article......

"Gilt yields have reached historically low levels because the Government bought a third of the gilt market through QE, he said."

There's a rather important inaccuracy in saying "the Government bought a third of the gilt market through QE".

It was the Bank of England - publicly owned but notionally not part of the Government - which created new money and bought previously issued gilts from private investors, while the Treasury's Debt Management Office - definitely part of the Government - sold new gilts to much the same set of private investors at much the same rate.

The primary purpose of the exercise being to prop up or rig the gilts market so that the Treasury could continue to borrow and the Government would not run out of money to pay its bills, especially during the year leading up to the general election.

It would be much simpler if the Bank just lent new money direct to the Treasury, rather than passing it to the Treasury indirectly through the gilts market, with transmission losses; but that would be illegal under the EU treaties, as well as being too transparent and so making it more difficult to disguise the true purpose of what was being done.

[Democorruptcy]

I have thought about that question before. Without being flippant, the honest answer is that I don't know.

My cost of living is measured in terms of the consumption of bushels of wheat / rice / corn / soy beans etc, tonnes of steel, ounces of uranium, barrels of oil, shelter costs, services that I consume, the cost of land, kilos of beef, fish, pork, chicken, pounds of potatoes and vegetables, gallons of milk etc.

I think of currency as merely being a shorthand way to express my cost of living which is really the consumption of things and my occupancy of land. Money is merely a promise and I am increasingly thinking in terms of things rather than promises.

You need to know though don't you to decide if it is viable?

You are going for Germany because of the yield and fixed rate mortgage so you say it's get you 4%.

I'm not predicting whether your currency is going to do good or bad against the Euro but isn't it crucial in deciding what your real p/l is and so how much you are repressed?

[LuckyOne]

You need to know though don't you to decide if it is viable?

You are going for Germany because of the yield and fixed rate mortgage so you say it's get you 4%.

I'm not predicting whether your currency is going to do good or bad against the Euro but isn't it crucial in deciding what your real p/l is and so how much you are repressed?

I am very much of a portfolio / asset allocation / rebalancing kind of a guy with some minima in quantities (that I learned about on this site) rather than currency values for some assets (commodities and face amount of bonds for example). Within my framework, I have always tried to buy shares in companies which make up part of my consumption where the dividends appear to be correlated to my expenses which reduces currency effects to an extent.

For the first time, I am leveraging some income producing assets, especially where the correlation seems to be the right way around, again within the context of my overall asset allocation. With respect to German property, I see one of three things happening :

- The weak members leave the Euro and the Euro strengthens as the weakest members are shaken out.

- German leaves the Euro and the Euro weakens. The value of the buildings in Euros would rise relative to the debt which remain in Euros.

- The Euro muddles along.

I maintain my currency allocation as 25% EUR, 25% USD, 25% GBP and 25% of all the rest because I don't actually know my "true" currency exposure so I keep it reasonably diversified given that we live here some of the time, in the US some of the time and spend a lot of time on the Continent. The things that I am doing in Germany are within my EUR allocation.

[Democorruptcy]

I am very much of a portfolio / asset allocation / rebalancing kind of a guy with some minima in quantities (that I learned about on this site) rather than currency values for some assets (commodities and face amount of bonds for example). Within my framework, I have always tried to buy shares in companies which make up part of my consumption where the dividends appear to be correlated to my expenses which reduces currency effects to an extent.

For the first time, I am leveraging some income producing assets, especially where the correlation seems to be the right way around, again within the context of my overall asset allocation. With respect to German property, I see one of three things happening :

- The weak members leave the Euro and the Euro strengthens as the weakest members are shaken out.

- German leaves the Euro and the Euro weakens. The value of the buildings in Euros would rise relative to the debt which remain in Euros.

- The Euro muddles along.

I maintain my currency allocation as 25% EUR, 25% USD, 25% GBP and 25% of all the rest because I don't actually know my "true" currency exposure so I keep it reasonably diversified given that we live here some of the time, in the US some of the time and spend a lot of time on the Continent. The things that I am doing in Germany are within my EUR allocation.

Ah... it wasn't clear from your earlier posts that this Euro project was just a small part of what you were trying to stop being repressed. It just reminded me of a Moneyweek article where one of their eggsperts talked about buying Japanese shares without mentioning Yen fluctuations.

I'm not sure about the implications of Germany and the EU. They seem to have done well as manufacturers within the Euro.

[o2bsure]

- German leaves the Euro and the Euro weakens. The value of the buildings in Euros would rise relative to the debt which remain in Euros.

_________

This won't happen. I've talked to Deutsche Bank about this to get the low down on what would happen should Germany go back to the Dmark. They said all euro loans made on Germany property would be reconverted back to Dmark ...in other words there would be no advantage.

As to using a GmbH to borrow and invest in property. That can of course be done but it means you would have to either create a GmbH yourself (require 25,000Euro start up capital) and run it , that means creating a company balance sheet each year and the huge amount of burocracy that goes with it. Or you could buy an existing GmbH.

Generally banks aren't too happy about loaning to GmbH's unless they have 6 years of tax history (that show a profit) because they have less security (they will probably want 100% Grundschuld). The cost of running a GmbH is also not minimal. An accountant will take about £5,000 a to do the daily book keeping without the balance sheet preparation.

Add to that the costs of having the building managed for you, plus the cost of having the tenants managed for you and the 8% yield will quickly become 4-5%. Buying in Germany also involves 10% initial costs (notar, tax, commission).

I wouldn't buy a commercial/residential property that only yields 8% because you can find that for a pure residential building that presents far less risk. I have one and the business tenants are a pain in the ****.

[LuckyOne]

Ah... it wasn't clear from your earlier posts that this Euro project was just a small part of what you were trying to stop being repressed. It just reminded me of a Moneyweek article where one of their eggsperts talked about buying Japanese shares without mentioning Yen fluctuations.

I'm not sure about the implications of Germany and the EU. They seem to have done well as manufacturers within the Euro.

I certainly try to diversify as much as possible.

I also look at as many scenarios as possible and try to see what will happen to me under my best guess as to conditions under each scenario and to pick an asset mix that doesn't kill me under as many outcomes as possible while still generating some returns.

The risk of financial repression and massively manipulated very long term interest rates have left me in a position where I am using very long term, self extinguishing, fixed rate debt as a hedge against some outcomes to reduce their impact.

It has never been my style to manage everything against an expected outcome : mostly because I am much better at predicting outliers which sometimes happen than I am at consistently predicting the actual outcomes.

[LuckyOne]

- German leaves the Euro and the Euro weakens. The value of the buildings in Euros would rise relative to the debt which remain in Euros.

_________

This won't happen. I've talked to Deutsche Bank about this to get the low down on what would happen should Germany go back to the Dmark. They said all euro loans made on Germany property would be reconverted back to Dmark ...in other words there would be no advantage.

As to using a GmbH to borrow and invest in property. That can of course be done but it means you would have to either create a GmbH yourself (require 25,000Euro start up capital) and run it , that means creating a company balance sheet each year and the huge amount of burocracy that goes with it. Or you could buy an existing GmbH.

Generally banks aren't too happy about loaning to GmbH's unless they have 6 years of tax history (that show a profit) because they have less security (they will probably want 100% Grundschuld). The cost of running a GmbH is also not minimal. An accountant will take about £5,000 a to do the daily book keeping without the balance sheet preparation.

Add to that the costs of having the building managed for you, plus the cost of having the tenants managed for you and the 8% yield will quickly become 4-5%. Buying in Germany also involves 10% initial costs (notar, tax, commission).

I wouldn't buy a commercial/residential property that only yields 8% because you can find that for a pure residential building that presents far less risk. I have one and the business tenants are a pain in the ****.

The truth of the matter is that no-one knows what will happen if Germany were to leave the Euro. Of course, DB's position would be that the loans convert from EUR to DEM immediately. The loan documents simply state that the loans are in EUR and make no mention of the "national currency of Germany". By the time that the issue is resolved in the courts if Germany were to leave the EZ (a very small but non-zero risk), the DEM would probably already have appreciated by 30%+ compared to its EUR entry level.

I fully understand all of the costs of doing business in Germany as well as the constraints and compliance issues. In my opinion they are lower than those in the US or the UK. When you add in the very low corporate tax rate on passive income in Germany relative to other jurisdictions, it suddenly becomes very attractive if the intention is wealth generation and preservation rather than as a source of income. Sourcing professional services in eastern Germany rather than western Germany helps the arithmetic. There are also economies of scale. It is much more efficient to buy 5 buildings than it is to buy 1.

I think that by being very selective about buildings and choosing ones that were poorly managed in the past, it is possible to build a portfolio that yields in excess of 9% on a fully costed basis after 18 months of careful management (so after commissions, notary fees, tax and accounting fees, allowances for voids building refurbishment reserves of 5% of rents per year etc).

[o2bsure]

Basically I've concluded as you have that the best ting to do is to leverage in EUR to buy well located German properties with high yields. I started buying at the beginning of last year and I've just concluded my final buys last week. My average yield is now 8.5% financied with 10yr 3.5% fixed with 1.5% tilgung. I plan to make sonder tilgung payments each year to substantially reduce the principal by year 10. I will only make extra payments towards the principal while savings rates are lower than my 3.5% mortgage rate. The units and building I have bought were all 20% under the current market prices for similar properties. In some cases I missed out because I believed Germans themselves are in general asleep to the under valuation, only to find I was out bid.

Its been an interesting experience and somewhat like finding nuggets of gold amongst large mounds of tailings. Sometimes you simply can't believe whats on offer at the price its being offered... but you need to react quickly when such opportunities present themselves.

Overall, I invest cash in the US and use leverage in Euro to invest in Germany (only). Last month I bought two ocean view condo units in Fort Lauderdale that are cash flow positive (5%) and proving to be very attractive from a capital gain perspective too. I don't know if you are aware of how hot the Fort Lauderdale and Miami beach markets have become. Trying to buy high floor units with views in selected buildings is like watching a shark attack.

[bmf]

Should Germans be worried about people coming in on BTL and ruining their lives just like the UK?

[Democorruptcy]

Basically I've concluded as you have that the best ting to do is to leverage in EUR to buy well located German properties with high yields. I started buying at the beginning of last year and I've just concluded my final buys last week. My average yield is now 8.5% financied with 10yr 3.5% fixed with 1.5% tilgung. I plan to make sonder tilgung payments each year to substantially reduce the principal by year 10. I will only make extra payments towards the principal while savings rates are lower than my 3.5% mortgage rate. The units and building I have bought were all 20% under the current market prices for similar properties. In some cases I missed out because I believed Germans themselves are in general asleep to the under valuation, only to find I was out bid.

Its been an interesting experience and somewhat like finding nuggets of gold amongst large mounds of tailings. Sometimes you simply can't believe whats on offer at the price its being offered... but you need to react quickly when such opportunities present themselves.

Overall, I invest cash in the US and use leverage in Euro to invest in Germany (only). Last month I bought two ocean view condo units in Fort Lauderdale that are cash flow positive (5%) and proving to be very attractive from a capital gain perspective too. I don't know if you are aware of how hot the Fort Lauderdale and Miami beach markets have become. Trying to buy high floor units with views in selected buildings is like watching a shark attack.

Is there no shadow inventory in Fort Lauderdale and Miami?

[o2bsure]

Should Germans be worried about people coming in on BTL and ruining their lives just like the UK?

Well certainly not from me. The rents I charge are dead in line with the Mietspiegel (Rentmirror). In other words, the state issues an official document that renters can use to calculate the correct rent for a particular unit based on size, location, age, fittings, heating type, extras. If the landlord tries to charge over that calculated level, the tenant can challenge it. I think thats quite correct and fair. I appreciate the system in German as it stands because it promotes stability and fairness.

I hope a bubble does not appear in prices. I'm not interested in speculation, I'm interested in income and stability.

As to Florida, well its always been a wild place to invest in real estate. It has a very long colourful history.

[o2bsure]

Is there no shadow inventory in Fort Lauderdale and Miami?

Yes there is, plenty. Thats why I qualified my statement to -

1. Miami beach + Fort Lauderdale

2. Ocean view

3. High floor

4. Cash Flow positive

There is a jetset and wealthier class that will always frequent those locations. Russians, Canadians, Latinos, Europeans and better off Americans all appreciate

and are attracted to particular locations in South Florida (and I also mean particular buildings).

I wouldn't touch Miami downtown for instance.

[LuckyOne]

Should Germans be worried about people coming in on BTL and ruining their lives just like the UK?

I have thought about this as it did bother me.

My conclusion is that the answer is no.

In Germany, tenants and landlords have roughly equal rights with tenants marginally enjoying the balance of power.

The requirements in Germany mean that landlords have to act professionally and continually reinvest a material part of the rents that they receive into their buildings which is not exactly a hallmark of the way that the BTL brigade behave in this country.

In my part of Germany, the owner occupancy rate is around 15% because Germans prefer to spend their money on things other than shelter. Shelter costs in the eastern part of Germany are in the order of 20% of after tax income rather than 40%+ as they are in the UK.

Social rents in Germany are set at a rate that does not drive up privately funded rents and the planning regime means that new housing can be built when demand exceeds supply.

Finally, returns in Germany are mostly based on income expectations rather than the anticipation of capital gains so successful investors take a very long term view.

[Democorruptcy]

Yes there is, plenty. Thats why I qualified my statement to -

1. Miami beach + Fort Lauderdale

2. Ocean view

3. High floor

4. Cash Flow positive

There is a jetset and wealthier class that will always frequent those locations. Russians, Canadians, Latinos, Europeans and better off Americans all appreciate

and are attracted to particular locations in South Florida (and I also mean particular buildings).

I wouldn't touch Miami downtown for instance.

Right, so you are aiming for the top end who have plenty of money.

I only asked because I'd just been reading a thing about US real estate. I've posted a thread about it.

[LuckyOne]

Basically I've concluded as you have that the best ting to do is to leverage in EUR to buy well located German properties with high yields. I started buying at the beginning of last year and I've just concluded my final buys last week. My average yield is now 8.5% financied with 10yr 3.5% fixed with 1.5% tilgung. I plan to make sonder tilgung payments each year to substantially reduce the principal by year 10. I will only make extra payments towards the principal while savings rates are lower than my 3.5% mortgage rate. The units and building I have bought were all 20% under the current market prices for similar properties. In some cases I missed out because I believed Germans themselves are in general asleep to the under valuation, only to find I was out bid.

Its been an interesting experience and somewhat like finding nuggets of gold amongst large mounds of tailings. Sometimes you simply can't believe whats on offer at the price its being offered... but you need to react quickly when such opportunities present themselves.

Overall, I invest cash in the US and use leverage in Euro to invest in Germany (only). Last month I bought two ocean view condo units in Fort Lauderdale that are cash flow positive (5%) and proving to be very attractive from a capital gain perspective too. I don't know if you are aware of how hot the Fort Lauderdale and Miami beach markets have become. Trying to buy high floor units with views in selected buildings is like watching a shark attack.

So we seem to be on the roughly the same page after all. The only apparent difference is that I only take on self extinguishing debt and don't want to deal with any rollover risk, even if it is 10 years in the future.

I have been involved in Germany for a bit longer than you and I am struggling to uncover new "nuggets" at the moment although it is not impossible even now. Fortunately, I have built up a reasonable network over the last few years which helps reveal the last few remaining "nuggets".

As far as residential in the US goes, I agree that cash buys are best, especially on the "broken condo" deals. Besides Florida places like Ohio and Texas and very selective parts of California, Nevada and Arizona are interesting.

Buying out loans against commercial properties all over the US is also very interesting at the moment.

[o2bsure]

Right, so you are aiming for the top end who have plenty of money.

I only asked because I'd just been reading a thing about US real estate. I've posted a thread about it.

I would categorise it as 'bottom top end'.

I'm going to start monitoring the Hawaii market starting July 1 as thats when the moritorium on foreclosures will end. I expect that will lead to lower prices but it will take time to manifest (and may not). By the middle of 2013, I will start to look at the Sydney market. Its a tough nut to crack and to squeeze a good deal from an ozzie is like prying a gun from Charlton Hestons cold dead hands.

[LuckyOne]

Well certainly not from me. The rents I charge are dead in line with the Mietspiegel (Rentmirror). In other words, the state issues an official document that renters can use to calculate the correct rent for a particular unit based on size, location, age, fittings, heating type, extras. If the landlord tries to charge over that calculated level, the tenant can challenge it. I think thats quite correct and fair. I appreciate the system in German as it stands because it promotes stability and fairness.

I hope a bubble does not appear in prices. I'm not interested in speculation, I'm interested in income and stability.

As to Florida, well its always been a wild place to invest in real estate. It has a very long colourful history.

I agree completely with your assessment about the way that things work in Germany.

You can become poor very quickly if you are hoping for, or relying upon, capital gains.

You can do well in the very long run if you have a very long term view and understand that things are very transparent in Germany and that your tenants are effectively your business partners rather than adversaries.

One of the reasons that there is still a reasonable supply of investment properties in Germany at reasonable yields is that a lot of British and Irish speculators in Germany have had to liquidate because of their domestic troubles. Additionally, a lot of western German investors failed to understand the link between eastern German wages and eastern German property prices. They looked at western German prices per m^2 compared to eastern German prices per m^2 without thinking about relative wages and made some poor investment decisions.

This shadow inventory is almost exhausted which will eventually result in a new equilibrium which will probably shut people like me out of the market.

[LuckyOne]

I would categorise it as 'bottom top end'.

I'm going to start monitoring the Hawaii market starting July 1 as thats when the moritorium on foreclosures will end. I expect that will lead to lower prices but it will take time to manifest (and may not). By the middle of 2013, I will start to look at the Sydney market. Its a tough nut to crack and to squeeze a good deal from an ozzie is like prying a gun from Charlton Hestons cold dead hands.

There has also been some massive over building along the lake in Toronto.

Keeping a bit of powder dry to spend there in the next three to five years if it all goes horribly wrong on a price basis for early investors and all goes beautifully right on a yield basis might make sense.