The Best of European Property Market — Deutschland
Aided by immigration, pandemic stimulus, European market growth, low interest rates, and pandemic housing shifts, the German housing market has surged in 2020/2021. And the forecast is positive for even more growth.
The German housing market is heating up with more investment pouring in during the last 5 months. As you’ll see in the data and charts below, it’s a notable trend. The promise of investing in German real estate is bolstered by constrained supply of rental apartments. Construction costs and land availability are a barrier.
As the European and German economic recovery proceeds, we can predict higher rent prices in the major cities of Berlin, Munich, Frankfurt, and Stuttgart.
The city of Berlin saw its municipal rent control legislation overturned which is a positive for rental property investors. The Berlin rent control overturn is likely the key driver of new investment. Investors may see it as a national trend.
The German market is a unique yet challenging one for all real estate investors here.
As the central hub of the European Trade region, it may be best positioned for growth beginning in 2022. Some industry advisors are very positive on rental housing in Germany and note strong price gains will draw investment and new rental property construction.
Is It a Good Market for Deutsche Hausverwalters?
But is this a healthy market for German Hausverwaltungs, Vermieters and immobilien managers (rental property managers)? Are old fashioned property management practices going to crimp profits? A closer look at the German rental housing market is absolutely called for.
Fundamentals? Supply in the cities is low and prices are rising. Investment was slow in the first half, but as you’ll see below, it has rocketed back in the second half. 2021 could be the record year.
Is Germany the Best Real Estate Market?
Some real estate companies believe Germany is the market to invest within Europe. PWC named 4 German cities as best performing in Europe. In this post, we take a closer look at the pros and cons, and learn more about what is driving the German rental market.
Germany’s total housing stock is about 40 million homes, and more than half are renters. This makes it seem like a desirable location for rental housing investors. 55 % of homes in Germany (22 million houses and apartments) are rental housing. 90% of rentals are in multifamily buildings.
There is much diversity in the rental markets, in different cities and regions and between urban and rural markets. Urban markets such as Berlin are driven by younger Millennial and Gen Z aged renters highly involved in that city’s thriving tech industry. They enjoy the convenience in the city. Rental stock in the major cities is at a premium which drives higher prices and apartment rental rates.
Chancellor Olaf Scholz and the Immigration Country
Incoming Chancellor Olaf Scholz has named Germany the “immigration country” which could mean an influx of new residents who then must rent an apartment. Landlords and investors will be reassured of intense demand for their units. His commitment to reducing climate change means added costs and restrictions for rental housing owners. Unwise German tenant laws put Hausverwalters between a rock and hard place.
All these pressures and regulations will be difficult for landlords to achieve, meaning they’ll be looking to automation to do more of the management.
With home prices rocketing this year, pressure on the Berlin rental housing market in particular will mount.
Challenges Ahead for Vermieters
Unfortunately, much of Germany’s private rental housing stock is aging. Vermieters will be challenged. Aging properties will require constant upkeep and maintenance to meet government rental standards along with achieving government-mandated energy efficiency regulations.
According to RentalCal.eu, 40 % of the rental housing stock in Germany is owned by individual private landlords. Another 25% is owned quarter is held by condominium associations (WEGs). Public entities or privately owned housing companies own less than 25% of rental dwellings.
Gross rent yields according to Numbeo are are only about 3.5.% in Berlin.
Vermietung Hausverwalters as they’re known will be disadvantaged by poor economies of scale, regulations, rising energy costs, CO2 taxes, high risk aversion for investors, a lack of real estate knowledge, and challenging capital constraints in comparison with other real estate investor groups. The best route for these millions of small business hausverwalters is to leverage the efficiencies of the best digitale hausverwaltung practices and hausverwaltungssoftware. Technology will be a deciding factor for profitability.
Institutional and government policies add to difficulties in Germany’s rental market too. Current policies make home buying unattractive such that only the wealthy can afford the cost of the transaction. The transfer fees, taxes, and deutscher immobilienmakler fees are expensive. Mortgage interest can only be deducted from taxes when the property is rented out. Proposed tax changes would hurt renters, thus it’s unlikely politicians would support initiatives that would grow investment in housing.
Germany’s rental market is tenant friendly with more open ended leases. Hausverwaltungs are pressured to maintain the unit well, despite not being able to raise rents due to rent controls. Landlords can pass on certain costs and the Berlin rent control law was overturned . In some cities, landlords cannot charge rent on new rental properties by more than 10% of the local average. Evictions are possible if the renter falls behind in rent by two months (Brookings.edu).
Brookings in their recent study found that 16.5% of German renters consider the financial burden of renting to be heavy. The income to rent ratio is just under what is considered unaffordable.
Germany’s social programs have supported renters very well, and this no doubt has saved many landlords from disaster. Without accumulated rent debt, renters will likely be ready to compete harder and pay more for rental homes going forward.
Any Hausverswalter who can improve management efficiency helps to keep rent prices under control. Efficiency works well for the value proposition of property management companies, and it helps to grow profits for property owners. Good property management helps achieve many worthy goals.
Home Prices Rocketing this Fall
Property Guide reported that Germany’s housing market is strong as the German economy improves. They quoted the average price of apartments in German have risen by 8.25% in 2021. And house prices rose 2.25% during Q3 2021. It all points to unaffordability and a flow of homebuyers into the rental market.
Germany’s housing market has been growing continuously since 2014, with house prices up by more than 70%. Prices rocketed in 2018 to 2020 before the pandemic took hold.
Rental Supply not Meeting Demand
Rent prices in the major cities of Berlin, Stuttgart, etc., are:
- Leipzig €500
- Cologne €700
- Stuttgart €900
- Berlin €900
- Frankfurt €900
- Hamburg €90
- Munich €1,100
Investment in German Housing Market
As this graphic from Statista shows, investment in Germany’s residential housing market is growing, particularly in September. The challenges and extra stimulus funding due to Covid 19 have resulted in more investment. Change creates opportunity yet it appears rental shortages and rising prices will create much pain for renters.
The theory is that Germany is in better shape than most of the other economies. And therefore, in a way, if you’re going to buy anywhere, you buy in Germany. — Pan-European fund manager cited in a PWC report.
PWC suggests Berlin, Frankfurt, Munich and Hamburg are 4 of the best cities in Europe to buy property.
Similarly, BNP Parabas in its latest report also points to record levels of transactions and investment this year. Most of the investment is in big projects above 30 million Euros.
Investment in rental property will help ease the crisis, yet with interest rates rising, inflation, immigration continuing, and the economy regaining momentum, combined with rent controls, it will be an uneasy time for all landlords. GDP in Germany rose 10% in Q2 2022, after yearly declines. It’s expected to grow by 2.7%, however continuous Covid 19 surges are pushing back full economic recovery for German and the EU region.
Real Estate Firm JLL shows how the German property investment market took a dive in the first half of 2021. You can read more on their website coverage of the major German Cities.
Jll states that rental growth had weakened, especially at the upper price segments. They said rental price increases reached 5.0% in the first six months of 2020, the annualized rate has dropped to 2.4%.
Their report shows that in the first half of 2021, the transaction volume for residential properties and portfolios in the German commercial residential investment market totaled around €10.3 billion (around 57,300 dwellings, 257 transactions).
And to support the view of a growing market further, is Savill’s report that housing investment transactions have rocketed of late, reflecting the desirability of German property.
Germany is the central country in the EU, meaning it will benefit more from the union over the coming years. However, the German Central bank is warning about overheating property prices. What would have to happen to stem the tide of rising rent prices?
A number of political and health factors will drive the direction of the German rental markets in the short term creating volatility and uncertainty. Political and economic events appear to point to rising rents, but this may lead to outcries from renters and politicians to once again strengthen rent controls.
Foreign property investment buyers, if able to invest in Germany should find an experienced property agent to help mitigate risk. The German housing market may be the brightest but there will be challenges in 2023.
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* the views and information provided in this post are the express opinion of the author, and not necessarily reflective of the views or beliefs of ManageCasa Inc., and it’s associates. The information is provided as a perspective and not as advice for buying and selling properties in Germany, nor from any of the companies mentioned in this post.