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 measured by nominal GDP. In addition to the intelligent economy and the 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 European Central Bank's zero interest rate policy, mortgage rates remain at a record low and offer historically favorable financing conditions. In addition, the quantitative easing (QE) pursued by the ECB is leading to higher liquidity, which increases investment pressure as investors look for potential investment opportunities with above-average returns in relatively safe sectors. QE also weakens the euro and makes the German real estate market even more attractive for investors outside the euro zone.
New projects and construction activity are clearly lagging behind the increasing demand, which is leading 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 since German reunification. The demand for high-quality real estate is increasing due to demographic and macroeconomic developments in Germany - advancing urbanization and growing conurbations. Germany is experiencing a positive turnaround in birth rates and other demographic factors. For example, between 2011 and 2015 the birth rate rose from 1.39 to 1.50 per woman. In addition, Germany has a persistent migration surplus, which can partially offset the demographic imbalance.
Commercial real estate, especially office space, is also in high demand due to the record employment and low unemployment rates, in addition to increasing purchasing power and the high propensity to consume. Logistics and warehouse properties are of crucial importance for growing companies and are therefore in high demand due to the increasing number of wholesalers and retailers. Below you will find an overview of the most important sectors of the German real estate market.
Residential real estate
The residential property market recovered from the financial crisis and market stagnation in the years after 2009. The construction projects for residential real estate have increased steadily in previous years, so that around 277,000 residential units were completed in 2016. In 2015 residential real estate 60% of the total construction volume in Germany was accounted for by construction with a total investment volume of 170 billion euros. Despite a significant increase in building permits issued (375,400 permits issued in 2016) and a record high in completed projects, demand still clearly exceeds the volume of completed residential projects.
Future prospects anticipate an increase in building permit applications to 272,000 units per year by 2020 and a further slowdown to 230,000 units per year by 2030. In the short term, the housing stock could rise to 380,000 units due to increased immigration.
However, the demand for residential property differs significantly from region to region. In some regions, especially in eastern Germany, the gap between demand and available properties could soon close. In some regions, especially in prosperous metropolitan areas, the available housing units will remain very scarce.
Along with the insufficient supply, quoted rents have increased accordingly. Especially in large cities, the trend of growing rents has been rather dynamic. For example, the annual growth rate of housing rents in Germany has been around 1.7% since 2004. Meanwhile, rent increased by 3.9% and 3.5% annually in Berlin and Munich accordingly. Both cities experienced a 6% yearly growth in purchase prices in this real estate sector.
Office Properties
Similarly as residential properties, also office properties’ market is in a good and forward-looking shape mainly due to positive migration balance and historically low unemployment rates. In 2016, approximately 3.9 million square meters of office space was rented in the top 7 cities in Germany. This indicates a growth of 12% in comparison to the previous period. A particularly dynamic development was observed in Frankfurt, Cologne and Stuttgart with growth rates ranging between 25% and 48.4%. Meanwhile, Hamburg, Dusseldorf, Munich and Berlin have experienced a cool-down in floor-space turnover in comparison to previous years.
The overall vacancy rate of office properties has decreased due to several factors: a dynamic demand, a slow expansion of floor space and high pre-letting rates. Across the top 7 cities mentioned above, the vacancy rate decreased by 0.7% points to 4.9%. In the top 7 real estate locations in Germany, the prime office rents range between 21 EUR/m2 and 37.50 EUR/m2 giving an attractive potential for investment return. This especially applies to Berlin, where rents have increased by more than 17% in comparison to 2015 reaching 28.7 EUR/m2. Currently, the highest office rents are in Frankfurt and Munich (37.50 EUR/m2 and 35 EUR/m2 accordingly).
Local investors retain the dominant market position accounting for around 60% of the total transaction activity in office property market. Meanwhile, foreign investors account for approximately two fifths (or 20.9 billion EUR) of the transaction volume.
https://www.confiduss.com/en/info/blog/article/real-estate-market-germany/