For many people the prospect of investing in residential property in Germany has never really stacked up as a viable option. It is well known that Germans prefer to rent their homes rather than buy them and the very British attitude of home ownership at any price has never caught on in Germany. People seem happy with longer leases that allows housing without the need for debt or the stresses of landlord responsibilities. This attitude has led to fairly flat house-price growth. A rather pessimistic demographic trend with shrinking population has also made the property market a dismal investment prospect.
However, with several changes happening including mortgage rates, foreign macro instability and the ongoing strains on the Eurozone, many foreign buyers are starting to scan the globe for safe havens. Germany, with a steady and relatively balanced economy that is the financial engine of Europe, is starting to look attractive. Mortgage rates plunged as the European Central Bank move to negative interest rates, fueling the trend even further. Unemployment is now at its lowest level since the country’s postwar reunification in 1990s and the economy is still churning along despite regional instabilities. These winds of changes have somewhat steered the obstinate Germans towards property – a steady, low risk and tangible asset at a time when the currency is fluctuating and the short to medium term story is likely to remain one of uncertainty.
Compared to other developed economies German house prices have not risen much in the last 40 years, according to Green Street Advisors. It is expected therefore that some catch up is due and some growth is inevitable. An growth of 5.6% over the last 5 years (double the average annual rate since 1970) is a noteworthy trend.
Along with the slowdown in the UK-London market, German house price growth is starting to outpace UK. This growth is seen particularly in urban areas where young people increasingly want to live in or near cities for work and access to leisure. Berlin as the capital city is of course a very popular rental hub. Frankfurt too, has seen prices of new-build apartments rise 59% since the beginning of 2008. According to research institute Empirica, advertised prices in the top 7 cities rose 14.5% in 2015, the highest increase since the millennium!
We would attribute a lot of this capital value growth to the fall in interest rates, some of the lowest interest rates on record. For many well-off Germans with permanent jobs renting no longer makes sense. Commerzbank, the country’s second-largest lender, offers a mortgage with an ultra-cheap 10-year fixed rate of just 0.94 per cent. That is not to say this is automatically a short term trend, there is no immediate sign that interest rates are due to rise, unemployment is still very low and Germany is experiencing a population boost, albeit potentially only in the short term, there are indications that Germany is experiencing a property boom and it’s got further to go.
It is interesting that another driver for the rental market may actually stem from the the spike in population due to the Refugee crisis. Germany made headlines for accepting the biggest percentage of refugees within Europe. This influx of more than one million refugees has led to a housing demand that the market is struggling to keep up with. For example, LEG Immobilien has already let about 1,300 apartments to refugees and admitted that refugees wanting accommodation in cities where they can find employment is “an important additional demand driver”. According to UBS analysts, holders of properties in Berlin (including companies such as Deutsche Wohnen and ADO Properties), are likely to be the biggest beneficiaries.
Trying to estimate how many refugees will ultimately stay in Germany, where they will choose to live and how many will bring their families to join them is a difficult task. However even if a small percentage decide or are obliged to stay, Germany will need to do better and provide more housing supply.
The country built around 270,000 new apartments in 2015. but given the undersupply of new apartments in previous year, according to an estimate by the Cologne Institute for Economic Research that figure needs to rise to about 430,000 a year until 2020 to meet the shift in demand. Urban hubs have to be the focus for developers, not just because they are the employment centers but it’s also where refugees are likely to best integrate and want to settle.
The main problem with this focus is the quickly growing land costs in major cities. Building regulations including energy efficiency policies have also affected the build costs not just in Germany but all across Europe, particularly in Britain who tend to comply to these EU regulations closer than some other member countries. These issues have combined to make building affordable housing in central, and therefore popular areas, very expensive.
The German government is planning an increase in funding for public housing as part of its 2017 budget plan. There is also talk of relaxing building rules but this will take some time to actualize. The government has not had to navigate this issue for some time and are dealing with quite an outcry from the public concerned with rising rents. The German government introduced a cap last year limiting increases in rent to 10 percent above comparable local rates. New apartments are exempted though, so there is still a growing market for foreign investors. Any political interventions in the housing market unnerve investors and may also dissuade much needed construction.
The combination of the increase in demand and a still limited supply is currently creating an exciting investment environment. There is already talk of the market overheating, we believe the market is some way off to entertain that fear. Yet as Germans start to turn to home ownership we may very well start to see a lot of the same issues that plague other western European countries. It remains to be seen how the German election and other potential shifts in the European market will affect the politics and tax arrangements for investments.
Any changes are likely to be after the worst of these questions have been answered and the rest of the world will be looking on with interest to how this market will evolve in the next decade. One will have to weigh the strengths of the economy, the effects of migrant driven housing boom and the directions of the interest rate to decide if the German market, and as such, the Euro is worth the time and resource for the profits. While it is certainly a stable diversification for Asian investors, we think that the upside potential might just not be worth the downside risks, especially when you stack it up against the more established markets around the world.
Dan Toh, CEO/Founder of RunningStream have been involved in various projects across Asia Pacific and Europe and UK for over a decade. He has coached many investors across Asia and leads a team of highly qualified professional’s helping investors with her global real estate portfolio.