by Ali Parsa
On July 1 the borders between West Germany and the former GDR (East Germany) were formally abolished and unification has opened up large parts of Germany for investment. The uncertainties of German unification are currently discouraging many British companies from operating and investing in what has been known as GDR, yet there is potentially ample opportunity for work and investment in that country.
The argument against investment in East Germany has so far been based on two factors: first, the uncertain future; second, the notion that all investment potential will be taken up by West German investors. It is clearly unwise to assume that there is no uncertainty and risk, because of the complicated nature of land and property ownership in the GDR, but British companies should not be put off by this. Investors waiting for future developments could lose out in what could become a very competitive market.
Unification and its implications
Political unification materialised on July 1 with the abolition of all border crossings. Monetary union also took place on the same date, and East Germans were offered one D mark for two GDR marks, but administrative unification will take longer to implement. Since the beginning of July, the banks have been the official channels which convert East German marks to D marks and thus have the ability to collect information on people’s savings and the amount of capital in circulation.
Land and property ownership laws
The events since November 1989 have had a dramatic impact on the legal framework of land and property. The gradual liberalisation of property law so far includes the sale of the freehold of land to people who had built their own homes on state land after the end of the second world war. This has obviously created an administrative nightmare for the local municipalities which deal with such applications. In Weimar, for example, a city of 65,000, there are already 900 such cases, far more than the group of lawyers who specialise in property related law can cope with. Such developments in land ownership laws have already produced a movement in the price of land. Not long after the introduction of this reform land prices in certain areas of Weimar saw an increase of over 90%, from some DM5 to DM8 per m2 for residential property.
The present GDR government did not allow any foreign ownership of land before the monetary union on July 1. The local governments were expected to announce the value of land in different locations for the purpose of sale of freeholds to applicants after July 2.
Future political development
The conditions affecting the type and amount of investment will very much depend on the political outcome of unification in Greater Germany as a whole. If the West German SPD gain power — and they might well gain considerable strength in West German local elections — there will most certainly be some limitations on West German investment in the GDR. The SPD leaders have already stated that they would protect the interests of the East German population from an invasion of West German investors.
No matter what happens at the elections to be held in the near future, however, it is certain that there will be a period of restrictions on foreign investment of between six and 12 months. Such measures, and with uncertainty about the future, do not appear to discourage potential speculators from placing advertisements in local newspapers searching for prime land or retail outlets.
Since November 1989 and the fall of the Berlin Wall there have been several investors entering the East German market through partnership with local government: retail and service industry in particular have seen some rapid movements. There are differences in regulations concerning residential, office or retail property ownership and investment, but it is envisaged that the retail and office markets will be more flexible.
Potential areas for investment
Hotel and leisure present opportunities for immediate investment, especially in the historic areas near the borders. These areas on both sides of the border will be at the centre of activity in the united Germany and offer great growth potential. Weimar, the birthplace of Goethe, which has received 2m tourists annually, is estimated to have been visited by the same number during the Whitsun holiday of 1990 alone. The existing hotel and catering industry — currently under the management of the state — is very efficient, but there is a need for expansion to cater for the envisaged influx of tourists. The state tourist organisation will be one of the first industries to be privatised.
The retail sector will undoubtedly be the fastest-growing industry post-unification, with opportunities in food, clothing and consumer goods. One of the leading West German retail food supermarkets has opened several outlets at prime locations in different East German cities in partnership with the public sector. Since November 1989 many privately owned restaurants and shops have also been set up.
Town planning laws
Many of the smaller towns, especially those of historic and tourist value, have strict city planning laws and are often conservation areas. Weimar and Gotha possess beautiful centres and are thus well protected against redevelopment and demolition of the older buildings. In cities like Weimar, renovation and conservation may be applied to the interior of buildings, but no alteration or modification is allowed externally.
Future outlook for investment
Years of neglect and disinvestment have caused great damage to the fabric of many cities. Infrastructure is in need of immediate attention, including the improvement of roads, water, electricity and gas networks. The telephone and communication systems need urgent improvements as this will be a major factor affecting economic development of East Germany within the Greater Germany.
There will be ample opportunity for reconstruction and renovation of existing buildings as there is an acute shortage of masons and other craftsmen. Most of the building industry and the design professionals in East Germany were trained according to panel construction principles, and many of the traditional building skills have almost disappeared. In smaller cities many older buildings of significant cultural value need upgrading and preservation.
In cases where new developments are not allowed, renovation is the only method of property investment and development. The six to 12 months’ period on limitation of foreign ownership and investment in property can be curtailed only if there is a marriage between East German and foreign nationals. British companies wishing to invest in property should perhaps ask their staff to make personal East German contacts with a view to beating the restrictions on property investment!
Conclusion
Despite many uncertainties, East Germany has a positive future, and its integration within a unified Germany could provide golden opportunities for foreign investment. Many British companies are waiting for the outcome of events to become clearer before making any moves towards investment in that country. While warning against hasty decision-making, they should perhaps not wait too long.
