Market report German residential market - Growth in the shadow of the major cities - Savills
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Savills World Research
Germany
Market report
German residential
market March 2018
Growth in the shadow of the major cities
savills.de/research 01
savills.de/research
Market report | Residential market Germany March 2018
Growth in the shadow of the major cities
Conditions in the German residential market remain excellent for owners and investors. The population
continues to grow, average household incomes rose at the fastest rate for ten years in 2017 and the
unemployment rate is at its lowest level since German reunification. Furthermore, it is highly unlikely that
this environment will significantly deteriorate in the foreseeable future. Residential investors are, therefore,
expected to enjoy continued outstanding conditions over the coming years. However, this also entails
certain challenges. Already, there are no longer any genuine hidden gems for investors to discover in
the major cities and competition among bidders is correspondingly strong everywhere. That being
said, outside of the traditional ABCD city categories, there remain some interesting locations where few
investors have been active to date.
Text: Matti Schenk
GRAPH 1
only risen for thirteen years. New-build
Half of all districts will activity has also risen consistently Population will decline, number of
continue to grow since 2010. In 2016, a total of around households will increase by a majority
Population growth is not only benefiting 278,000 apartments were completed growing stagnating shrinking
350
the major cities. Between 2012 and in Germany, approximately 115,000 of
2016, the population increased in which were in apartment buildings. This 300
some two thirds of the 401 rural represents an increase in completions
districts (Landkreis) and urban districts of almost 39% compared with five 250
(kreisfreie Stadt). In further 81 districts, years earlier. The number of new-build
number of districts
the population remained relatively apartments completed in apartment 200
stable (+/- 1%). Only 45 districts buildings even rose by 62% (Graph 2).
150
recorded a decline of 1% or more in However, this still fell significantly short
the number of inhabitants, with 32 of of the current annual requirement of 100
these situated in the federal states 400,000 new-build apartments. In
created from the former East Germany. addition, the trend for the number of 50
Going forward, however, population building permits is showing signs of
figures will decline in an increasing reversal. According to the Federal 0
2012-2016 2017-2030* 2012-2016 2017-2030*
number of districts. According to Statistical Office, around 313,700
population households
projections from Bulwiengesa based apartments were approved between
Source: Bulwiengesa, BBSR / * forecast
on the 13th coordinated population January and November 2017, which
projection of the Federal Statistical reflects an 8% decrease year on year.
Office, only 95 rural and urban districts While there may be a large backlog
GRAPH. 2
will witness growth between 2017 and in terms of building permits, the
2030. In 237 rural and urban districts, indications of an end to the boom in More is being built, but still too little
the population is expected to decline apartment construction are increasing.
(Graph 1). Growth in the number This is substantiated by research from completions permits
of households is significantly more the German Institute for Economic completions: proportion of apartments permits: proportion of apartments
450,000 90%
positive. This is expected to increase Research, which cites a lack of
in 198 rural and urban districts, i.e. half tradespeople, shortage of sites and 400,000 Demand of new buildings per year 80%
share apartments in apartment buildings
of all districts, by 2030. These regions rising construction costs as reasons. 350,000 70%
account for 62% of all households. The effects of measures to promote
300,000 60%
housebuilding agreed between the
apartments
SPD and CDU/CSU during coalition 250,000 50%
No relaxation at the negotiations remain to be seen. 200,000 40%
rental apartment However, there is little evidence to
markets indicate any noticeable relief in the 150,000 30%
Owing to the high demand, rents on strain in the housing markets on the 100,000 20%
existing and new-build apartments rose horizon. Consequently, landlords will
50,000 10%
once again last year, increasing by an remain in a strong position in many
average of 6% year on year in the 127 locations. 0 0%
2010 2011 2012 2013 2014 2015 2016
largest property markets. Rents did not
fall in a single city. Indeed, they have Source: Federal Statistical Office
savills.de/research 02Market report | Residential market Germany March 2018
even these cities have witnessed GRAPH 3
Investment market appreciable yield compression since Largest investment dynamics in some
remains highly 2015. Yields in Oberhausen, for
cities in the Ruhr region
competitive instance, hardened by 167 basis points
transaction volume 2017
In view of the favourable general between 2015 and 2017 while those transaction volume compared to the 5-year average
conditions combined with modest in Mülheim hardened by 144 basis 28 700
growth in supply, demand for points. This represents significantly 24 600
2017 vs. Ø previous 5 years
22
apartments also remains high in greater yield compression than in the
20 500
the investment market. Moreover, A-cities, where yields hardened by an
a multitude of recently launched average of just 90 basis points. The 16 400
€m
15
residential funds will now start to same applies to other cities. Of the 22 12 300
11
build their portfolios, which will cities that recorded yield compression
8 200
further intensify competition among of more than 150 basis points, 18 7
116
333
630
89
bidders. Average prices of apartments have negative population growth 5
89
245
4 4 4 100
3 3 3 3 3 2 2 2
Oberhausen 124
transacted have already risen projections. These include Salzgitter,
Mainz 190
76
Remscheid 50
Ingolstadt 81
Kaiserslautern 68
Hanau 65
Fürth 55
Neuss 60
0 0
significantly over the last three years. Brandenburg (Havel), Recklinghausen
Mülheim (Ruhr)
Düsseldorf
Bochum
Chemnitz
Duisburg
Schönefeld
Essen
In 2017 alone, average prices rose and Siegen (see Graph 4). Oberhausen
by 28%. In the seven A-cities, the and Mülheim will also witness
corresponding increase was 33%. population declines of 5% by
While this may be explained by other 2030 according to the projections. Source: Savills / * only transactions from 50 units; locations from €50m
factors, such as a higher proportion of Although population projections are
development acquisitions, it is likely to just one indicator among many for
be at least partially attributable to the evaluating opportunities and risks, GRAPH 4
more intensive competition among this observation can be regarded as
bidders. an indication of stronger appetite for Strong yield compression even in
risk on the part of investors. While shrinking cities
stable rental income can doubtlessly 300
Majority of investors be achieved on residential properties Salzgitter
remain focused on
yield compression in basic points 2015-2017
in good locations in Oberhausen, 250
established markets
Brandenburg (Havel)
Chemnitz and Mülheim, the
Recklinghausen
Competition among bidders remains significantly greater risks of the macro- 200
Chemnitz Bremerhaven
Zwickau
strong, particularly in the A-cities, location cannot be ignored. Villingen-Schwenningen
Erfurt
which is attributable both to the
150
positive growth prospects and the
high liquidity of these markets. The Under-valued cities are
seven A-cities accounted for around now scarce 100
50% of the transaction volume last That some investors are now venturing
50
year (5-year average: 46%). A further into cities with unfavourable population
19% of the volume was attributable to projections could also be explained by
the 14 B-cities (5-year average: 16%). the fact that there are now scarcely any 0
-20% -15% -10% -5% 0% 5% 10%
To put this into context, these 21 cities with favourable fundamental data population forecast 2017-2030
cities are home to around 20% of the that do not attract significant demand
Source: Bulwiengesa
German population. Hence, investors from investors. If we compare average
are narrowing their focus on a small gross initial yields and population
number of major cities, driving local projections in the 127 largest property
GRAPH 5
prices even higher. markets (Graph 5), there are only six
growing cities in Bergisch Gladbach, Yield-risk-matrix: Hardly any
Brunswick, Bremerhaven, Flensburg, under-valued growth location
Some investors are Greifswald and Halberstadt where tendential overrated tendential balanced tendential underrated
relaxing their attitude to yields appear relatively high. Two years 10%
risk ago, there were eleven such cities. This
9%
However, other cities also attracted also demonstrates that investors have
8%
gross initial yield 2017
significantly greater interest from widened their search radius.
investors last year. Transaction 7%
volumes in cities such as Oberhausen 6%
and Mülheim an der Ruhr, for Beyond the city limits – 5%
example, totalled more than ten times are surrounding regions
the hidden champions?
4%
the average figure over the last five
3%
years. Other cities in the Ruhr region, While some investors are seeking
such as Duisburg and Bochum, also investment opportunities in the 2%
witnessed significant growth (see demographically less favourable 1%
Graph 3). Many of these locations C-cities and D-cities, the population is 0%
are gaining in popularity due to increasingly migrating to other regions. -20% -15% -10% -5% 0% 5% 10%
population forecast 2017-2030
relatively attractive gross initial yields The surrounding regions of A-cities
of significantly above 6%. However, in particular are registering increasing Source: Bulwiengesa
savills.de/research 03Market report | Residential market Germany March 2018
GRAPH 6
„In the surrounding areas of A-citites Population growth in the surrounding
strong fundamentals are meeting areas is gaining momentum
comparably low demand from investors.
core cities: 2011-2015 surroundings: 2011-2015
core cities: 2014-2015 surroundings: 2014-2015
9%
Therefore, checking these locations could 8%
be worthwhile.” Matti Schenk, Savills Research 7%
growth of population
6%
population growth. While such regions increased migration to surrounding 5%
have received little attention as areas. As shown by BBSR analysis,
4%
investment locations to date, there is Berlin and Munich for instance have
much to suggest that this neglect is consistently lost inhabitants to their 3%
unwarranted. surrounding areas since 2005. Even
2%
during the boom in the major cities
of recent years, there has been 1%
Metropolitan regions are continuous suburbanisation and 0%
likely to be even more there are indications that migration Berlin Frankfurt Hamburg Munich Düsseldorf Cologne Stuttgart
attractive going forward to surrounding areas has been on Source: BBSR, Federal Statistical Office
It is safe to assume that the major the increase. Migration from Berlin
metropolitan regions will continue to Brandenburg, for instance, was
to grow. As centres of academia higher in 2015 than at any time in the GRAPH 7
and business, they will continue to last 15 years. Migration from Munich
attract young and well-educated to Bavaria has also risen significantly. Asking rents are rising partly faster
people from elsewhere in Germany Both cities have been growing for than in core cities
and abroad. Besides the core cities, many years, primarily due to positive rent core city rent surrounding area
core city: rental growth 2014-2017 surrounding area: rental growth 2014-2017
this is also likely to benefit the external migration. As shown by BBSR
20 20%
surrounding areas as illustrated by research, the immediate surroundings
average asking rents in € per s qm
18 18%
the small-scale population projection of commuter intersection areas are
from the German Federal Institute particularly likely to benefit from 16 16%
rental increase 2014-2017
for Research on Building, Urban increasing migration from cities to 14 14%
Affairs and Spatial Development surrounding regions 12 12%
(BBSR). In contrast, the prospects
10 10%
in small and medium-sized cities in
structurally weak areas in particular Some surrounding 8 8%
are overwhelmingly unfavourable. In regions are already 6 6%
his column in the New York Times, growing faster than their 4 4%
Nobel Prize winner Paul Krugman core cities 2 2%
recently wrote about the decline of For the purpose of defining the
0 0%
America’s small and medium-sized surrounding regions, we will use the Berlin Düsseldorf Frankfurt Hamburg Cologne Munich Stuttgart
cities. Although the situation in the urban-rural regions (Stadt-Land-
Source: empirica Systeme Marktdatenbank
USA cannot be compared directly Region)1devised by the BBSR. Based
with that in Germany, industrial cities upon these regions, more than 9.9
and rural locations in Germany are million people live in the surrounding
GRAPH 8
also expected to predominantly regions of the A-cities. This is higher
lose inhabitants over the long term. than the populations of the cities Transaction volume remains behind
Conversely, in an increasingly themselves, which total approximately core cities
digitised knowledge-based economy, 9.8 million people. While population transaction volume surrounding areas of A-cities*
academia, research and high-quality figures in the A-cities grew faster than transaction volume compared to A-cities
900 18%
services will continue to expand. This in the surrounding regions between
transaction volume in % of the A-city-volume
suggests that the metropolitan regions 2011 and 2015, this trend is slowly 800 16%
could be even more attractive going reversing. In 2015, four in seven
transaction volume in €m
700 14%
forward. Another consequence of surrounding regions witnessed faster 600 12%
this is that demand for housing will growth than their core cities, as shown
500 10%
increase further in future in Graph 6. This was particularly the
case in Berlin and Munich. While 400 8%
no more recent population growth 300 6%
Are we at the start data is available from the individual
of a new wave of municipalities, it can be assumed that
200 4%
suburbanisation? this trend has continued and there is 100 2%
However, the core cities in the much to suggest that the growth will 0 0%
metropolitan regions already continue for the long term. 2009 2010 2011 2012 2013 2014 2015 2016 2017
appear to be reaching their growth
limits. This could potentially lead to Source: Savills / * only transaction from 50 units; locations from €50m
1
The demarcation of these regions respects municipality (Gemeinde) boundaries and is primarily
based around commuter intersections and accessibility. savills.de/research 04Market report | Residential market Germany March 2018
Some surrounding GRAPH 9
regions are overtaking The seven urban-rural regions of A-cities with development of
core cities in terms of asking rents since 2014
rental growth
Not only are the surrounding regions
benefiting from relatively favourable
demographic growth, the situation
in the rental apartment market is
also attractive to investors. This
is substantiated by an analysis of
average asking rents (Graph 7).
Between 2014 and 2017, these
showed higher growth in the
surrounding regions of Frankfurt,
Hamburg and Stuttgart than in the core
cities. In Cologne and Munich, asking
rents rose at the same pace in the
surrounding regions and core cities.
Only in Berlin (-5 percentage points)
and Düsseldorf (-1 percentage point)
did rents increase more slowly in the
surrounding regions (see also Graph 9).
Building a portfolio in
the surrounding regions
could be worthwhile
In addition, from an investor's
perspective, the investment markets
in surrounding regions are significantly
less competitive than in the core cities.
Although the surrounding regions of
the A-cities have more inhabitants than
the A-cities themselves, residential
properties in the surrounding regions
changed hands for a total of just
€812m last year (Graph 8). This
compares with a transaction volume
of more than €6.7bn in the A-cities
themselves. A total of approximately
5,400 apartments were sold in the
surrounding regions at an average
price 20% lower than in the core
cities. While the number of existing
apartments in apartment buildings
is lower in the surrounding regions
than in the A-cities, surrounding
districts account for approximately
44% of all apartments in apartment
buildings. Consequently, investment Legend: rental growth of core city and surrounding area in comparison
opportunities for institutional investors stronger rent increase
are available. Therefore, it may be weaker rent increase
a promising strategy to extend
same rent increase
investment searches beyond the
boundaries of the A-cities. Source: Savills / map source: BKG
savills.de/research 05Market report | Residential market Germany March 2018
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