In recent years, the German residential market has been characterised by a steep upward trend. Even the Covid-19 pandemic from 2020 onwards did not slow housing demand – neither on the tenant nor on the investor side. But with the combination of the war in Ukraine, an energy crisis, inflation and rising interest rates, the tide turned in 2022: Investors and developers slowed the implementation of projects, transactions declined, the prime yield rose – to 3.4 percent at the end of the 1st quarter of 2023, according to the international real estate consultancy firm Cushman & Wakefield (C&W) in its new report “Residential Market Germany 2023”.
Facts & figures
The figures underline the importance of the residential letting market in Germany. Of the 43 million apartments throughout the country, 51 percent are owner-occupied and 49 percent are rented. In the rest of Europe, by contrast, home ownership averages 69 percent. The low importance of home ownership in Germany is partly due to social housing construction since the Second World War, and partly to tenancy law and the associated application of comparative rents. On average, there are 1.94 people per household in Germany, with a downward trend, which leads to an increasing demand for housing in structurally strong regions. Another factor: Europe-wide, 28 percent of households feel overburdened by housing costs, in Germany only 18 percent. Conclusion: Germany is a nation of renters, and demand is rising steadily.
Rent levels vary greatly in regions and major cities
Rent levels in Germany vary regionally and are highest in the top-7 cities (Berlin, Munich, Hamburg, Frankfurt, Düsseldorf, Stuttgart and Cologne). Average rents are rising everywhere and regardless of the age of the building – most strongly in the German top-7 cities and the associated conurbations. Since 2011, prime rents have risen by 49 to 69 percent. Due to a lack of supply in the metropolitan regions and low levels of new housing construction, demand is increasingly shifting to the suburbs of the major cities. The population forecast until 2035 also shows clear differences between the regions. The federal states of Thuringia, Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania are struggling with declining population.
Fewer housing completions
Overall, the housing stock in Germany is increasing. However, higher construction and consumer prices are slowing the completion of already approved projects. However, higher construction and consumer prices are slowing the completion of already approved projects. This is why demand is not being met in many places. In Berlin, for example, around 158,000 building permits were issued in the period 2011 to 2021, but there were only 91,000 completions. The housing demand, especially in the top-7 cities, is still not being met. Germany’s decentralised structure means that the population and households are growing at different rates, and the forecasts for housing demand vary accordingly – depending on the city, state and region. Overall, Germany’s special feature within Europe, its decentralisation, with numerous economically strong metropolitan areas, enables risk diversification in portfolio structuring.
Declining transaction volume
With a transaction volume of around EUR 50 billion, 2021 was an absolute record year for the residential property market in Germany. The residential prime yield reached a new low of just under 2.3 percent at the end of the year. However, the geopolitical influences of the Ukraine war, rising interest rates, the energy crisis, high inflation and the associated uncertainties, are slowing the investment market. In 2022, the transaction volume amounted to only about EUR 10 billion, with a rise in the prime yield to 2.75 percent. In Q1 2023, the transaction volume was EUR 1.5 billion, with the prime yield rising again to 3.4 percent.
ESG programmes in implementation
Since the publication of the EU action plan “Financing Sustainable Growth”, ESG’s importance in real estate companies’ risk management has been steadily increasing. The German real estate industry has long since reached the implementation phase, which includes reporting requirements, changes in planning and management. There are several government programmes that support energy-efficient construction and the refurbishment of existing buildings. Examples include the KfW promotional programmes for the construction of energy-efficient houses and apartments, Housing Loan 261 providing a loan of up to EUR 120,000 per dwelling unit and the new KfW Promotional Loan 297/298 “Climate-friendly new construction – residential buildings”.
Germany – Europe’s safe haven
The risk ratings of countries within Europe vary significantly. Thanks to its broad-based, forward-looking economy and low debt, Germany achieves a comparatively very low investment risk rating, at 2.30 (figures from 2021). The economic consequences of the Covid-19 pandemic and the macroeconomic influences of the Ukraine war, rising interest rates and high inflation are also affecting European countries to varying degrees. A risk rating of 3.50 is still assessed for Spain, 3.20 for France, 2.70 for the UK. Germany thus remains Europe’s safe haven for residential investment.
Read the full report here.
