B Locations – why secondary locations offer better returns

Every property professional knows that higher returns can be achieved in B-grade locations than in the ‘Top Seven’. But just how big is this difference in reality? On average, investors can expect returns here to be 80 to 95 per cent higher than in major cities such as Munich, Hamburg or Berlin.

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Many people will argue at this point that higher returns always mean higher risk. But is that really true? Let’s take a look at the opportunities offered by secondary markets, the risks involved and how you, as an investor, can proceed step by step.

What exactly are B-location properties?

By ‘B-tier locations’, we mean cities that are not among the seven largest metropolitan areas, but which nevertheless have their own economic vitality and offer a high quality of life. These are mostly regional centres with populations of between 100,000 and 400,000.

Examples include:

• Kassel – conveniently situated in the centre of Germany, with good links to motorways and the ICE high-speed rail network.

• Kiel – a port city, state capital and university town, with a strong mix of residential and commercial demand.

• Trier – a university city with strong tourist appeal and proximity to Luxembourg, recording almost 1 million overnight stays annually despite having a population of just 110,000.

This is precisely where the appeal lies: these markets are not the focus of major international investors and are therefore often overlooked.

Why secondary locations are more lucrative

The main reason is the ratio of purchase price to rent.

Example:

• Munich: average purchase price €8,545 per m², rent €23.90 per m².

• Leipzig: average purchase price €2,998 per m², rent €11.80 per m².

This means that, whilst the rent in Munich is only twice as high, the purchase price is almost three times as high. As a result, the return on investment falls dramatically.

What’s more, institutional investors tend to focus on the major markets with high transaction volumes. Smaller transactions ranging from €1 million to €20 million are often overlooked. Too large for private investors, too small for funds – this is precisely where a niche arises for flexible investors.

Further advantages of B-class locations

1. Less competition – better negotiating position, lower entry prices.

2. Upgrading through infrastructure – new ports, business developments or campus expansions have a much greater impact on the market in smaller towns than in major cities, which are hardly making any significant leaps forward.

3. Sustainable growth – rent fluctuations have historically been lower in many B cities; demand is stable and less susceptible to economic cycles.

Examples include markets such as Bonn and Dortmund, which have shown very consistent rent trends over many years.

Risks to bear in mind

Of course, there are also drawbacks. The most important point is the potential for exit. In ‘B’ cities, the pool of buyers is smaller, which means longer holding periods. Anyone buying today should therefore not speculate on a quick sale, but instead focus on a long-term cash flow model.

Furthermore, due diligence is essential. Population trends, the labour market, vacancy rates, demand trends and infrastructure projects must be scrutinised closely. Not every secondary location is automatically attractive.

Step by step: How to invest in B-class locations

1. Selecting locations
   Focus on one or two markets in your vicinity. Proximity fosters an understanding of the market and makes it easier to build a network. For example, if you are active in Frankfurt, you could consider Giessen, Aschaffenburg or Fulda.

2. Carry out due diligence
   Use tools such as Empirica RegioData, Wüest Partner or ImmobilienScout24 price maps. Analyse demographics, rent trends and vacancy rates. Also check local council websites for construction projects and infrastructure plans.

3. Build a local network
   Get in touch with estate agents, property managers, facility managers and local notaries. A personal presence pays off in the long term.

4. Adjust your search criteria
   Keep your purchase criteria flexible. Even properties that don’t seem suitable at first glance can become attractive through repurposing or conversion.

5. Contact owners directly
   Direct owner marketing via adverts, leaflets or online campaigns opens up additional off-market opportunities.

6. Develop a long-term strategy
   Allow for longer holding periods. Plan cash-flow-based investments rather than short-term exit strategies.

Conclusion

Investments in B-tier locations are not just an alternative, but the better choice for many investors. Returns are, on average, almost twice as high as in major cities. The markets are stable, less volatile and offer enormous potential for appreciation thanks to infrastructure projects.

The main risk lies in lower liquidity when selling. However, those who plan for longer holding periods and carry out thorough analyses can build attractive, sustainable portfolios here.

The message is this: B-class locations are not a stopgap, but a genuine opportunity for forward-thinking investors.