German resi rents move relentlessly upwards as investment markets stagnate

There is plenty of evidence now as to how the lack of transactions in the German residential investment market is leading to a spillover effect, whereby rents are being pushed solidly upwards.

Parallel to the investment markets beginning to crumble in 2022, rents started accelerating upwards. JLL's analysts report that in the second half of 2022, rents in Germany's BIG 8 cities (including Leipzig) rose by 6.3% year-on-year, while purchase prices barely rose at all, and in many cases fell slightly. 

Berlin apartment rents on new leases headed the list, jumping 27%. From an average of €9.86 per sqm/month, rents jumped to currently €12.55 per sqm/month, making it the second-most expensive of the big metropolitan markets, after Munich.

A study by the largest web portal Immoscout24 points to the biggest quarterly rise in rents in Q1 of this year since it started tracking rents in 2007. Rents for newly-built apartments rose faster than for older properties (more than 2 years old), probably because of their greater energy efficiency. In Berlin, new lease agreements for newer properties went beyond €17.00 for the first time, placing it second behind Munich (at €22.30 per sqm/month).

Data from all the big portals are also showing that the explosion in rent levels now goes way beyond just the biggest cities. The secondary B- and C-cities are also seeing rents rocketing upwards, by as much as 18%, as new figures from portal Immowelt show. In 99 of the 110 cities analysed by Immowelt, rents have jumped upwards. Demand for rental apartments has doubled in towns with between 50,000 and 100,000 inhabitants, which traditionally have had more vacant apartments available.

So what exactly is going on? Reiner Braun, the CEO of research institute Empirica (who's been predicting the collapse of German residential property for a decade), sees the cause in a general flight from the big cities, and not just a little bit outside, but ever further away. Initially it was the high purchase prices in the cities that scared people off, particularly those with young families hoping to buy a home. The higher interest rates and soaring building costs mean many have given up on the dream of owning their own place. Instead, they're looking now at the better quality of life in a smaller town - a larger apartment, a home office, a balcony or maybe a shared garden.

"A lot of people have simply given up looking for a place to buy in the biggest or most attractive cities, because they now know they just can't afford it", says Braun. They've shifted their focus to smaller places, further away from the big cities, where they can hope to build a better life.

An annual study produced by mortgage broker Interhyp on Germans' living aspirations would seem to support this thesis. The willingness of respondents to quit the big city and buy in a smaller place has risen continually - with confirmed big city-dwellers now in a minority. Tenants, too, are following good commuting tracks ever further away from the Big City, and out into the countryside.

A good example is Berlin, as shown by researchers RBB in a study of affordable housing (i.e. an apartment which consumes less than 40% of an average earner's income). In 2012 there were 75,000 rental apartments on offer which qualified, but by 2021 there were under 50,000 which met these criteria. In other words, the choice of places to rent for average earners had fallen by a third, despite the enormous influx of new inhabitants into the city, including tens of thousands of refugees.

A survey by portal meinestadt.de underlines the shift in intentions by those who had been seriously anticipating buying a property until recently. The survey found that 38% of those looking to buy property are now reconciled to renting, and have given up their purchasing plans. Given the unlikelihood of interest rates falling sharply downwards in the immediate future, this will have further ongoing consequences for the rental markets.