Navigating Germany's Housing Supply-Demand Imbalance

GRI Club partnered with CMS and gathered the leading real estate players to discuss challenges facing the German housing market

October 18, 2023Real Estate
Written by Helen Richards

Germany’s residential real estate market is standing stronger during the current turbulent times when compared to its fellow asset classes. However, a persistent housing shortage, inflation, and increased construction costs are challenges to be faced by real estate professionals.

GRI Club partnered with CMS last month in Frankfurt to gather leading real estate executives for a hybrid - online and in-person - meeting to discuss these challenges. 

Strong Fundamentals

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. Rental growth in Germany’s 14 largest cities doubled in 2022, in comparison to previous years. Within these larger cities, amenities and increased tenant demands are expected to drive rents even higher.

Hybrid meeting gathers leading real estate executives in the CMS office in Frankfurt. (Image: GRI Club)

Housing Shortage

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. This lack of supply, combined with high demand, especially in metropolitan areas, poses difficulties for developers but also creates potential opportunities for investors.

Difficulties are also heightened by elevated construction costs which have seen construction rates decline. Development activity since the GFC has dropped 45% below the levels between 1998 and 2007.

There is also an evident decrease in risk appetite, with riskier assets and projects struggling with financing, for example those with speculative project developments or without pre-leasing, or value add properties in weaker locations or with weaker ESG scores.

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 the German government development bank, KfW (Kreditanstalt für Wiederaufbau), guiding the way and setting parameters for the new core product.

Niche Living Strategies

During the meeting, it was noted that niche living strategies have emerged 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 recurring revenue, as well as 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.

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