Chapter 6
Living
Germany Real Estate Market Outlook 2024
Key Takeaways
- Dried up but attractive residential investment market
The residential transaction market will continue to operate with the hand brake on in 2024. Against the backdrop of excellent fundamentals, however, international investors in particular see significant opportunities in the housing market. - Core highly desirable – but remains a rarity
Investors with plenty of equity, pension funds for instance, are especially keen on ESG-compliant core properties. How yields will develop in the context of the supply shortage will make for interesting observation. - Repricing process ongoing
Yields are set to grow across all sub-segments of the housing market. However, there are signs that indicate that the price of contemporary ESG-compliant properties will stabilize as the year progresses, and we expect the transaction market to generally rebound in the second half of the year. - Residential construction to grind to a halt
The sharp increase in financing costs, in conjunction with persistently high construction costs and the lack of housing promotion, coupled with a new buildings policy that is difficult to predict and erratic, will bring residential construction to a virtual standstill in the years ahead. - Significant increases in rent to be anticipated
Owing to the sustained strong uptrend in the demand for housing, rentals can be expected to rise significantly across the board, especially in the metropolitan areas.
Refinancing, portfolio pruning and ESG are the housing market topics in 2024
Yield polarization on the residential investment market
Measured by the investment volume, the residential transaction market slumped by almost 60% in 2023. This steep downturn was caused by the current gap in buyer and seller price expectations, the sharp increase in the cost of borrowing and general uncertainty in the market regarding housing promotion, regulation and global imponderables. As a result, the lowest transaction volume since 2011 was recorded at €5.7 billion.
Portfolio streamlining already intimated in the previous year captured a major part of the transaction volume. The largest deal involved the sale, accompanied by CBRE, of a Vonovia development portfolio worth around €360 million in Greater Berlin to CBRE Investment Managers. In addition, Vonovia sold other large portfolios, also in Dresden among other locations. These portfolios, largely located in the core and core plus segment, were met with demand that was enthusiastic in this market phase. The financing deals on sub-portfolios in good locations with high occupancy rates that Vonovia successfully negotiated with financial investors show that good residential property remained in demand.
The associated price recalibration process that culminated in 2023 can be expected to persist in 2024 as well. However, this process will slow sharply or even halt completely in the core and core plus segment through to the end of the year. In the case of properties in less good locations with overdue renovation, quite considerable price declines continue to be anticipated.
Living prime yields in the Top 7 markets
Source: CBRE Research
Transaction volume - residential Germany
Source: CBRE Research
Demand for core on the rise – value-add acquisitions so far made on a selective basis
While, according to information from Vonovia itself, the company should now have returned to safer waters in 2024 in terms of equity capitalization due, among other endeavors, to pruning its portfolio, other (listed) housing companies still have this work ahead of them this year. Stabilizing prime yields may possibly benefit them, however, resulting in less extensive divestments from streamlining.
Irrespective of these processes, foreign investors perceive the German residential investment market as especially positive and are on the verge of re-entering the market. In this context, the major cities with their strong fundamentals in the form of rising rents and dwindling supply are most especially on these investors’ radar. Moreover, the segment of modern living, with student apartments, micro-living and partly service apartments, as well as housing for senior citizens, hold growing appeal for institutional investors.
By the end of 2023, properties requiring some renovations were already increasingly observed to come on the market. Portfolio holders with many years of experience are particularly reluctant to invest the CapEx needed for (ESG-compliant) renovation. Local cash rich market players who are very familiar with the local market and the development potential are currently presenting as buyers. Given improved financing conditions, investors operating with borrowed capital can be expected to become more active again on this segment.
New housing construction put on ice in the medium term
Although both occupiers and tenants in Germany are eagerly awaiting new housing, the assumption is that these expectations will not be fulfilled in the medium term.
The reasons for this are complex, ranging from high construction costs, staff shortages in administration through to extensive municipal requirements and on to inappropriate tax policies on the part of the federal and state governments. According to ZIA (German Property Federation), the cost of building new housing stands at €5,150/sq m in usable area, the highest on average in Europe, driven by high sales and land transfer tax. The tight housing situation has led to sharp cuts in fiscal depreciation and support measures. For instance, the new energy standard EH 55 has already been dropped in favor of the older standard EH 40 standard. Along with the annual linear depreciation of 3%, limited depreciation for wear and tear (restricted to three years and a maximum of €4,800/sq m of the production costs) can currently be applied to new housing construction. The planned introduction of a reducing balance method of depreciation on fixed assets of 6% on the construction of new residential construction has been shelved.
Furthermore, municipalities’ inflexible building land models, with high standards placed on infrastructure and high quotas for social housing construction, burden developers’ calculations. In conjunction with more stringent, energetic and financial requirements on the part of banks, new housing construction is virtually unrealisable at present.
price and rental index in the Top 20 cities
Source: CBRE research based on VALUE market database
Housing construction activity in Germany
Housing construction in decline – veritable explosion in rents – boom in new forms of living
New housing construction will slump dramatically in 2024 against the backdrop of poorer financing conditions. Although an only marginal year-on-year decline in the completion volume can be expected for 2023, building permit figures plunged by almost a quarter through to October 2023, compared with the previous year. This steep downturn will impact the completion volume in two to three years’ time and trigger a decline of between 20% and 30% in residential construction. This would then be equivalent to only around 130,000 to 150,000 units compared with a minimum of 400,000 units needed per annum.
The consequence of this dramatic nosedive is already evident in the significant increase in asking rent. Over the last decade rents in the top 20 housing markets have risen by more than 40% on average. The average asking rents for new housing construction in these cities now stands at €14.80/sq m/month, up 6.3% compared with 2023. Demand-side pressure on the rental housing market is set to increase. The pressure is on not only due to immigration, but also to owner-occupiers who are entering the rental market, notably because the higher costs of financing property ownership have not yet been compensated by price declines.
One sub-sector will benefit long term from this development: Modern living with small, furnished apartments, are increasingly attracting the attention of students and young professionals, and consequently of investors, even if demand in this segment also far outstrips supply.