Cushman & Wakefield, one of the world’s leading real estate consultancies, has published the report ‘Micro apartments 2024: An asset class comes of age’. This builds on its predecessor from 2021 and analyses the current trends, drivers and opportunities in the German market for micro-apartments. One result of the current study is that demand for micro-living is continuing to rise and project developments are becoming larger. The projects identified had an average of 158 residential units each; three years ago, there were only around 100 units per project with a slightly different composition including serviced flats.
‘Larger flat blocks are generally more efficient to operate and cheaper to build per residential unit. In the current environment of high financing interest rates and increased construction costs, this is one way of maintaining profitability,’ says Jan Bastian Knod, Head of Residential Investment Germany & Head of Healthcare Advisory at Cushman & Wakefield, explaining this development.
Demographic developments are fuelling the trend towards micro-living
Germany recorded a record high population of around 84.7 million people in 2023, mainly driven by high immigration figures. The age cohort of 18 to 39-year-olds in particular, who are looking for work and education in large cities, is driving demand for micro apartments. According to the report, the proportion of international students rose from 11.3 per cent in 2012 to 15.7 per cent in 2022, with international first-year students even recording an increase from 19.3 per cent to 27.3 per cent.
At the same time, the proportion of older people who, like students and young professionals, are living alone more frequently and are also looking for small flats is growing. In the top cities, this high demand is coming up against an extremely tight supply and a tense rental market, especially since the lifting of pandemic restrictions. Declining approvals and completions are exacerbating the situation and driving up rents further.
This creates excellent conditions for the young micro-living asset class. The market has developed noticeably since the last survey by Cushman & Wakefield in 2021 and has become much more differentiated with sub-segments such as student living, business flats, serviced flats and senior living/assisted living. Many operators have expanded their offering and provide a flexible range for different lengths of stay, needs and budgets. Accordingly, the asset class is also attracting increasing attention from national and international investors, who are currently faced with a very limited supply.
Completions are declining
In 2021, around 500 micro-living projects including serviced flats with around 50,000 residential units were under development, construction or planning. Some of these projects were completed in 2022/2023, for others the planning changed before construction began or they were delayed due to longer planning and construction phases. Some projects were abandoned completely. In 2022, around 100 projects were still under construction, which were intended to create over 15,000 residential units. Of these, over 40 projects with around 5,000 residential units were completed last year or are scheduled for completion this year. A further 25 projects with around 4,200 residential units are scheduled for completion by 2025. The majority of the projects are being built in major cities and university towns, with the regional focus on Berlin and the former West German states.
High demand drives up rents
Due to their time-limited rental agreements and all-in rents, micro-apartments have so far been unaffected by regulations on rent levels, leading to higher prices per square metre. Since 2012, both average and prime rents for small flats in Germany have risen continuously, but particularly sharply in A-cities: While asking rents in the traditional housing market for the 90 percent percentile for one-bedroom flats of up to 30 square metres increased by 54 percent for Germany as a whole, the figure was 84 per cent in A-cities. Last year, net cold rents per square metre were therefore EUR 20.00 for Germany and EUR 29.50 for the A-cities.
Operators of micro apartment complexes also expect moderate to optimistic increases in rents in the coming years. A survey of 14 operators revealed that around half expect an increase of two to four per cent per year. Six others expected an increase of more than four per cent, with two of them even expecting an increase of ten to twelve per cent.
Increased demand for senior-friendly micro-apartments
Demographic change is leading to an increasing demand for senior-friendly forms of housing. Micro apartments offer older people a comfortable living solution. They are often designed to be barrier-free and offer additional services such as medical care and nursing services. ‘The demand for these types of housing will continue to rise in the coming years. Successful operators focus on central locations with good public transport connections, offer comprehensive service packages and use targeted marketing measures to reach their target groups effectively,’ says Jan Bastian Knod, Head of Residential Investment Germany & Head of Healthcare Advisory at Cushman & Wakefield, with conviction.
‘The asset class has evolved and professionalised significantly since 2021, which is reflected in a broader range of offerings and growing interest from both operators and investors. In view of the robust demand and limited supply, further positive development can be expected in the coming years,’ summarises Helge Zahrnt, Head of Research & Insight Germany at Cushman & Wakefield.
National and international sources of capital show great interest
In the past, the micro-living asset class was primarily favoured by opportunistic and private capital sources. However, this has changed, not least because the micro-living segment has successfully overcome the stress test of the Covid-19 pandemic. ‘The previous reticence has given way to interest in investment opportunities. This is reflected, among other things, in the fact that the previous yield premium over traditional residential property has fallen from around 80 to 115 basis points to 50 basis points since 2023. This reflects investors' assessment that the risks of the “micro-apartments” asset class are weighted less heavily relative to the opportunities. However, higher returns can still be achieved with an investment than with traditional residential property,’ says Simon Jeschioro, Head of Capital Markets Germany & Investment Advisory at Cushman & Wakefield, describing the current market situation.
Access the full report here: Micro apartments 2024
