Germany

Germany has the third largest economy, in terms of GDP, in the world – but some of the lowest property prices in the European Union.

While these two factors initially seem at odds it is important to consider the country has only been unified for just over 15 years. As a result its property market is still in its infancy.

Following unification the west of the country experience rapidly rising prices - largely driven by the arrival of migrants from the east. However, this growth proved unsustainable and was followed by a dramatic slump.

As a result Germany has not experienced the sustained boom in property prices seen across large sections of western Europe, including in the UK, where prices have been increasing consistently for the previous decade.

Indeed prices actually fell in 2006 according to the European Housing Review, carried out by the Royal Institution of Chartered Surveyors (Rics) – the only European country to do so.

Market trends

The configuration of the German property market is also substantially different.

The country has one of the lowest home ownership rates in the industrialised world – just 44 per cent, according to Merrill Lynch - compared to a level of around 70 per cent in the UK.

A large number of properties are owned by corporations and regional and central government. However, with pressure mounting to cut costs, these organisations have started to dissipate their holdings in recent years.

However, it is now the tenants who have been buying with large scale foreign investors including Nomura, Fortress and Morgan Stanley moving in to take up the slack – each buying tens of thousands of properties in recent years.

Property prices in the former East German states are also often lower than those in the more developed former West, while some 75 per cent of all homes have been built since 1945.

So why buy?

"German housing affordability has improved more than in any other industrialised country," according to MoneyWeek.com, following a decade of prices stagnating or falling in many areas.

Coupled to this, there are signs the slump could finally be coming to an end.

The election of the free-market Christian Democratic Union (CDU), led by Angela Merkel, has begun the process of liberalisation, with the economy growing faster than the US and UK during late 2006.

Low levels of homeownership also mean there is a constant demand for rented property.

While the country as a whole is not a tourist draw for British visitors, other cities are attractive to tourists, including Frankfurt, Stuttgart and Hamburg – making these potential locations for investors, along with ever-popular Berlin.

Berlin

The centre of the property market is Berlin.

A creative centre since the reunification of the country, Berlin is home to world-class artists who have been priced out of more expensive cities – bolstering its attraction as a holiday and investment destination.

A high quality city centre apartment starts at around £50k - £120k (€75k - €168k) in the city, according to Berlin Real Estate Centre, and Berlin is rapidly becoming one of the world's property investment hotspots.

Yields of six to eight per cent are not uncommon with borrowing costs often lower than this – making property in the city cheap in real terms.

Immaturity

However, Germany's strong economic position within the European Union belies the immaturity of its property market.

Transaction levels are still relatively low when compared to developed areas of Europe, meaning prices can be volatile and subject to rapid change.

Costs can also be high. Brokerage fees are usually between three and six per cent, although this cost is split between the buyer and seller, while stamp duty of 3.5 per cent and notary fees of 1.5 per cent must also be considered.

These fees can add up to seven per cent of the cost of a property, creating a large barrier to entry for some.

However, any investor holding onto a property for ten years can sell it without incurring capital gains tax (tax is 15 per cent if a property is owned for a shorter period), and rental income is not subject to a withholding tax.