Germany struggles for financeable assets

Written by Helen Richards

With evidence pointing to a recession being underway, smaller transactions in the range of EUR €5-10 million euros are dominating in the German real estate market.

Leading real estate players gathered at Europe GRI 2023 to exchange insights at the regional German panel. Participants indicated a significant decrease in risk appetite, with riskier assets and projects experiencing financing struggles. Although there is anticipation that larger deals will make a comeback, emphasis was made on the importance of local partners to navigate the unstable market environment.

Finding Financeable Assets & ESG

Despite the struggle for financing, the availability of debt is not the primary concern for businesses. Instead, it was reported that the challenge lies in finding financeable assets that align with ESG considerations.

Financial institutions, particularly banks, have incorporated ESG criteria into their evaluation processes for funding projects. These criteria include renewable energy and modernisation of heating systems, with KfW (Kreditanstalt für Wiederaufbau) standards guiding the way as the parameters for the new core product.

These ESG scores play a significant role in influencing decision-making throughout the investment process, making it essential for businesses to consider sustainability and ethical practices in their operations.

Residential

As the most necessary asset class, residential has proven to be the most resilient against external turbulence, such as the COVID pandemic and the ongoing Russo-Ukrainian conflict. Coupled with strong fundamentals, residential sits as one of the preferred asset classes in Germany.

Vacancy rates are currently at a record low - below 1% in Berlin, Munich and Frankfurt - and strong demand continues across the market. This demand is spurred in part by the growing population which hit a record high of 84.3 million in 2022 - an increase of 4 million since 2011. Continued growth is forecast, especially in major cities, enhanced by in-migration and immigration.

High demand in the residential sector has contributed to considerable rental growth. In Germany’s 14 largest cities, rental growth doubled in 2022 in comparison to previous years. Within these larger cities, amenities and increased tenant demands are expected to drive rental growth further.

Considering this scenario, it is no surprise that a significant challenge in the real estate market is the substantial annual shortage of 400,000 residential units per year. This housing shortage and high demand, especially in metropolitan areas, poses both difficulties for developers and opportunities for investors.

Difficulties are also heightened by elevated construction costs which have caused construction rates to decline. More specifically, development activity since the GFC has dropped 45% below the levels between 1998 and 2007.

Niche living strategies

During discussions, niche living strategies were posed as a popular investment for international players. These strategies include student housing, micro-living, serviced apartments, and senior living.

Niche strategies often mean less competition, and combined with the consistent demand and revenue, low vacancy rates and rental guarantors, these sectors are increasingly attractive amidst the current risk-averse sentiment.

More specifically in the German student housing sector, a significant shortage of apartments for this demographic has even allowed landlords to increase rents, mitigating the recent drops in pricing.

All key takeaways from Europe GRI 2023 are published on the GRI Hub. Join GRI Club Europe to gain exclusive access to events, club meetings, and invaluable insights first-hand.

The Germany discussion will continue at the Deutsche Hospitality Investments Club Meeting on December 6 in Berlin. Read more and register here now.