‘During the past six months the asset value of our German residential portfolio has gone up 1.7 percent, and this was during the height of the credit crunch’, says Floris van Dijkum, global chief investment officer for Speymill Property Group. ‘When you think about value, there are variables that make Germany completely unique. Our portfolio is currently valued at €840 m2, while the underlying land value is €1,500 per m2. The asset values have to go up to justify construction. If you have house prices that on average are 60 percent of construction costs, nobody is going to build anything. Construction has been dead and they are tearing down more houses every year than they are building. The supply is going down. That makes the long-term prospects for German residential property astounding.’
In recent years Germany has proved an exceptional case in respect of residential property, with house prices mired in stagnation while in other countries they have skyrocketed. This trend is closely related to the surplus capacity built up in the stock of property and the building industry in the course of German reunification. A consideration of national price aggregates all too easily clouds the fact that Germany is actually comprised of two entirely different property markets – one in West Germany where prices are rising slightly and the other in East Germany where they are falling sharply. The differences between the two stem mainly from the specific ‘locational premium’ on the respective property markets. In the special case of East Germany this is determined in particular by high vacancy rates and an adverse demographic trend.
Düsseldorf
No better example of this can be seen in the fashion capital of Germany, While the rest of the world is in a real estate meltdown, Germany’s residential sector seems to be holding up well. There are around €700 million worth of housing projects being built in Düsseldorf alone – totaling around 153,000 m2. Despite the continuing turbulence in the world's real estate and financial markets, Düsseldorf's upmarket housing sector has been holding up well so far, largely because such houses are rare. Overall, the German residential market has been faring better than many others in Europe because most prices have remained flat over the past decade, as cheap rentals made it more attractive for many people to rent than to buy, keeping house prices in check.
Although varying greatly across cities and regions, by type of housing unit, number of household members, and by age and wealth of households, the mean owner-occupation ratio for Germany is very low by international standards, which is partly a function of the structure of the housing stock. Germany's post-war situation necessitated extensive state intervention in the housing market and led to the construction of subsidized social housing (mainly rented apartment blocks) in and around city centers. At the same time, the government introduced tax incentives for landlords. Thus, Germany has comparatively more apartment blocks and relatively few one- and two-family homes, compared with other countries. The housing policies of the 1960s and renovation programs of the 1970s reinforced this trend, as did government support of the rental sector during the housing shortage arising from reunification. Also, public-sector construction companies build a high portion of residential properties, with much of the space let to tenants at subsidized rental rates. These factors, along with high land prices and high construction costs relative to other European countries, erode the relative financial attractiveness of owner occupation.
Undersupply
On a long-term basis, the German housing market looks like a good bet. Projecting out to 2020, the demand for housing is seen to be rising in the long-term. Powering this is a quantitative undersupply, a strong need for qualitative restructuring and a moderate uptrend of rents
Demand for residential properties in Germany is set to rise further over the next decade, despite declining population figures. This is due to the ageing of the population, accompanied by an increasing number of single households. Demand on the housing market is not expected to stagnate until 2020. Metropolitan areas in Germany's south and west are benefiting from an influx of residents and provide investment stimuli in the multi-storey residential building sector. These are the results of a study entitled ‘German housing market: Outlook to 2020’ by the HSH Nordbank subsidiary HSH Real Estate AG.
The number of households in Germany is set to rise by 1.1 million to a total of 40.5 million by 2020, an increase that will primarily be due to a growing number one and two person households. By contrast, the number of family households is expected to decline by 1.8 million. The focus of demand on the housing market is shifting from family dwellings to smaller ones that are suitable for the older generation – particularly in cities. ‘The population shift in Germany will above all benefit the federal states in the south of Germany, the city states, the major cities and their surrounding areas’, says Marc Weinstock, CEO of HSH Real Estate AG. ‘Here, rising demand for living space is leading to investment in residential housing.’ With respect to the quality of fittings and furnishings of the housing units, HSH Real Estate expects to see growing demand for inexpensive municipal rented apartments and for high-quality apartments, primarily owner-occupied ones.
Due to the low level of construction work in recent years, the supply of housing units in Germany is inadequate in many places as far as quality is concerned. For example, in eastern Germany 44 percent of all dwellings were built before World War II; for single-family houses this figure totals as much as 52 percent. 60 percent of all owner-occupied homes in eastern Germany have a living space of less than 120 m2. A good 45 percent of single-storey dwellings are smaller than 60 m2; in western Germany this applies to 37 percent of all housing units.
Construction
‘Over the past few years the professional private housing industry has gained market share in Germany, not least thanks to large portfolio transactions’, says Weinstock. The number of properties owned by the public sector has declined by 700,000 and now accounts for 6 percent of the total. More than three-quarters of dwellings are either owner-occupied (40 percent) or owned by small private-sector landlords (37 percent). The number of state-subsidized housing units will decline from the present level of 1.75 million to 1.25 million by 2020 and play no more than a marginal role in housing construction.
Although construction work has been on the decline since 1997, multi-storey residential construction has now probably bottomed out. Due to dismantling, the markets in eastern Germany are still not in balance although vacancy rates are declining; according to the study, therefore, the ‘Stadtumbau Ost’ (‘City Reconstruction in the East’) program is due to be continued until 2016. Vacancy rates on the eastern German housing market came to more than 16 percent five years ago but have since then declined to about 11 percent. Demand for new buildings is particularly high in the metropolitan areas, which benefit from a population influx; moreover, investments on existing buildings and on new buildings is required for housing designed for the elderly.
Moderate rents
Rents have risen only moderately over the past few years, reporting growth of 9 percent since 1999. During the same period inflation came to 15 percent, while fuel prices were up by as much as 58 percent. All told, therefore, housing has become 19 percent more expensive since 1999. The recent rise in energy prices should push housing costs up even further. Rents of existing apartments in the lower-priced segment were up 1.7 percent p.a., thus growing faster than those of other types. The rents of new housing units in eastern Germany are now considerably lower than they were ten years ago. In terms of average rents, the sharpest increases were recorded in the major cities. This trend is likely to continue.
The low mortgage rates are not a sufficient incentive to encourage investments in residential housing and owner-occupied homes. They are insufficient to offset the adverse impact of a no more than moderate increase in rents and falling real wages. Moreover, some major incentives, such as degressive depreciation in rental housing construction and home ownership subsidies, have been abolished. The introduction of the ‘private home pension’ scheme (Eigenheimrente) is not to be seen as a substitute for home ownership subsidies, which have been abolished, but as an incentive to save for old age. No acquisitions of properties using the ‘private home pension’ scheme are to be expected before 2010.
The federalism reform, which sets out a new framework for the competences and promotion of the supply of social housing and of urban construction, has provided the federal states and municipalities with greater financial and formative scope. This means that municipalities currently have, on principle, more financial resources for local ‘housing space policies’ available than ever.
At present, the promotion of qualitative restructuring of housing space offers too few investment subsidies. Until now, it has essentially been taken up by private-sector households. In order to meet the ambitious climate-protection targets, however, additional incentives could be provided by giving landlords more flexibility for rent increases. The tax burden on the owners of real estate and the state of the property sector are hampering their willingness to invest. This includes the ‘Zinsschranke’ (interest-rate barrier) and the fact that the REIT Act has not yet been given sufficient shape. Moreover, private-sector property investors are weighed down by the inheritance tax reform.
Quantitative deficits in the supply of housing are only observed in the metropolitan areas that are benefiting from a population influx. ‘The policy on subsidies should focus primarily on the continued qualitative conversion of housing, particularly on greater energy efficiency in order to protect the climate, but also with regard to housing suitable for the older generation’, commented Marc Weinstock. Current promotion schemes should be complemented by corresponding subsidies. A broadening of the scope to increase rents might trigger appropriate investments.
The dismantling of non-marketable housing units should be continued in eastern Germany and should also be initiated in western German locations that have a similar structure. Generally speaking, the promotion of urban construction and urban restructuring ought to include private players in the housing sectors more than it has done so far.
