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German real estate market overview

Germany is a social market economy with a large capital stock, highly skilled labor force, high level of innovation and low level 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 impacts the German real estate market?

Real estate market’s volatility can be explained by numerous macroeconomic as well as social factors of the country. Due to the European Central Bank’s policy of zero interest rate, mortgage interest rates remain record low providing historically favorable financing conditions. Furthermore, quantitative easing (QE) pursued by the ECB leads to higher liquidity increasing the investment pressure as investors are looking for potential investment opportunities with an above-average return in relatively safe sectors. QE also weakens the Euro making the German real estate market even more attractive to investors coming from outside of the Eurozone.

New projects and construction activity notably lags behind the growing demand leading to growing real estate prices. The German Property Index (GPI) which follows the return of all real estate investments in Germany reached 14.7% in 2016 which is a record level since German reunification. The demand for high-quality properties is increasing due to the demographic and macroeconomic trends in Germany – still ongoing urbanization and growing conurbation. Germany is experiencing a positive reversal in birth rates and other demographic factors. For example, the birth rate increased from 1.39 to 1.50 per woman from 2011 to 2015. In addition, Germany is experiencing a continuing migration surplus which manages to partly compensate the demographic imbalance.

Similarly, also commercial property, especially office spaces, experience a great demand due to record employment levels and low unemployment rates in addition to benefiting from the growing purchasing power and high propensity to consume. Logistics and storage properties are crucial to growing businesses and therefore in high demand due to the increasing numbers of wholesale and retail trade. Below is an overview from the main sectors of the German real estate market.

Residential Properties

The residential property market has managed to recover from the financial crisis and the market stagnation in the years after 2009. The construction projects of residential properties have increased steadily in the previous years leading to approximately 277,000 completed housing units in 2016. In 2015, residential property construction with a total investment of 170 billion EUR accounted for 60% of the total construction volume in Germany. Despite a meaningful increase in the granted construction permits (375,400 granted permits in 2016) and record high levels of completed projects, the demand still significantly surpasses the volume of completed residential projects.

Future outlook expects an increase in new construction permit requests and reaching 272,000 units per year till 2020 and further slowing down to 230,000 units per year until 2030. Meanwhile, in the short term, the residential property could surge to 380,000 units due to increased immigration.

However, the demand levels for residential properties significantly differ from region to region. In some regions, the gap between the demand and available properties could close soon, particularly in Eastern Germany. Meanwhile, in some regions, particularly in thriving urban 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.