Germany is a social market economy with a large capital stock, a highly qualified workforce, a high level of innovation and low levels of corruption. It is the largest economy in Europe and the fourth largest nation in the world in terms of nominal GDP. In addition to the intelligent economy and productive market structure, Germany also offers investment opportunities in its real estate segment.
What influences the German real estate market?
The volatility of the real estate market can be explained by numerous macroeconomic and social factors in the country. Due to the zero interest rate policy of the European Central Bank, mortgage interest rates remain at record lows and offer historically favorable financing conditions. In addition, the quantitative easing (QE) policy being pursued by the ECB is leading to increased liquidity, increasing investment pressure as investors look for potential investment opportunities with above-average returns in relatively safe sectors. QE is also weakening the euro, making the German real estate market even more attractive to investors from outside the eurozone.
New projects and construction activities lag far behind the growing demand, which leads to rising property prices. The German Property Index (GPI), which measures the return on all real estate investments in Germany, reached 14.7% in 2016, a record level since German reunification. The demand for high-quality real estate is increasing due to the demographic and overall economic development in Germany – ongoing urbanization and growing metropolitan areas. Germany is experiencing a positive reversal in birth rates and other demographic factors. The birth rate rose from 1.39 to 1.50 per woman between 2011 and 2015. In addition, Germany has a persistent migration surplus, which can partially compensate for the demographic imbalance.
Commercial real estate, especially office space, is also in high demand due to record employment and the low unemployment rate, and is also benefiting from increasing purchasing power and high consumer spending. Logistic and warehouse real estate is crucial for growing businesses and therefore in high demand due to the increase in wholesale and retail trade. Below you will find an overview of the most important sectors of the German real estate market.
Residential real estate
The residential real estate market has recovered from the financial crisis and market stagnation in the years since 2009. Residential property construction projects have risen steadily in recent years, resulting in around 277,000 completed residential units in 2016. 2015 Residential real estate With a total investment of EUR 170 billion, 60% of the total construction volume in Germany went into construction. Despite a significant increase in building permits issued (375,400 permits issued in 2016) and a record level of completed projects, demand still significantly exceeds the volume of completed housing projects.
Future prospects call for applications for new building permits to increase to 272,000 units per year by 2020 and further slow down to 230,000 units per year by 2030. Meanwhile, the number of residential properties could increase to 380,000 units in the short term due to increased immigration.
However, the demand for residential real estate differs greatly from region to region. In some regions, the gap between demand and supply could close soon, especially in eastern Germany. In some regions, especially in prosperous metropolitan areas, the available housing units will remain very scarce.
Along with the insufficient supply, the asking rents have risen accordingly. In large cities in particular, the trend towards rising rents is quite dynamic. For example, the annual growth rate of residential rents in Germany has been around 1.7% since 2004. In the meantime, rents in Berlin and Munich have risen by 3.9% and 3.5% annually, respectively. Both cities recorded an annual growth in purchase prices of 6% in this real estate sector.
Similar to residential real estate, the office real estate market is in good and forward-looking shape, mainly due to a positive migration balance and historically low unemployment rates. In 2016, around 3.9 million square meters of office space was let in the top 7 cities in Germany. This means growth of 12% compared to the previous period. A particularly dynamic development was observed in Frankfurt, Cologne and Stuttgart with growth rates between 25% and 48.4%. Hamburg, Düsseldorf, Munich and Berlin have meanwhile experienced a slowdown in take-up compared to previous years.
The overall office vacancy rate has declined due to several factors: dynamic demand, slow space expansion and high pre-letting rates. In the top 7 cities mentioned above, the vacancy rate fell by 0.7 percentage points to 4.9%. In the top 7 real estate locations in Germany, the top office rents are between EUR 21/m2 and EUR 37.50/m2 and offer attractive yield potential. This applies in particular to Berlin, where rents have increased by more than 17% compared to 2015 to EUR 28.7/m2. The highest office rents are currently being achieved in Frankfurt and Munich (EUR 37.50/m2 and EUR 35/m2 respectively).
Local investors retain the dominant market position, accounting for around 60% of all transaction activity in the office real estate market. Foreign investors now account for around two fifths (or EUR 20.9 billion) of the transaction volume.