Go to the eastern German states for attractive residential yields

A new study focusing on yields in Eastern German mid-sized cities analyses risk/reward profiles in the region and finds they compare very favourably with comparable risk profiles in the western part of the country. Yields of 4% to 12% are readily available in the region, with vacancy rates falling while, simultaneously, rents are rising as the housing cost burden remains lower than in the western states.

For the third year in a row, real estate consultants WüestPartner carried out the survey “Housing Market Report Eastern Germany 2018" for listed housing company TAG Immobilien. The study encompassed housing markets in 27 large and medium-sized cities in Eastern Germany, including data on demographic and economic trends, rental and purchase prices and tenants' housing costs. In a major new feature, this year's report also includes an analysis of regional risk/reward ratios from an investor's perspective.

According to Claudia Hoyer, chief operating officer at TAG Immobilien, "Many Eastern German regions are experiencing extremely strong economic growth, which certainly bodes well for the future and is already reflected in rents, purchase prices, private consumption, incomes and labour markets. Cities such as Rostock, Magdeburg and Halle have emerged as highly attractive destinations for real estate investments."

The basic thrust of the study is that, in terms of risk, it therefore makes little difference whether investors acquire multi-family assets in Rostock or Düsseldorf.

At 6.0%, however, gross yields in the Hanseatic City of Rostock are significantly higher than the average 4.3% on offer in North Rhine-Westphalia's state capital of Düsseldorf. Similarly, the level of risk associated with residential investments in Magdeburg compares well with the risk profiles of numerous Western German cities. Yet, at 7.8%, the average gross yield in Saxony's capital easily outperforms the yields available in Bremen or Münster, where investors have to settle for more modest gross yields of 5.8% and 4.3%, respectively.

When it comes to risk, there is almost nothing to separate Eastern Germany's Halle an der Saale and Western Germany's Wiesbaden. In terms of gross yields, however, investors enjoy a 3.0-percentage-point yield premium in Halle.

Between 2014 and 2016, the populations of Schwerin, Nauen and Görlitz grew by between 3.2% and 4.0%, a faster rate than in Dresden (+2.0%) and Berlin (+3.0%). Over the same period, the number of households in Freiberg, Görlitz, Merseburg, Halle, Greifswald and Schwerin increased by between 5.5% and 8.8%, compared to a more modest 3.1% and 4.2% in Berlin and Dresden.

At the same time unemployment in each of the study's 27 cities has also declined markedly over the past six years. Döbeln, Freiberg, Potsdam, Jena, Nauen and Eberswalde now have the lowest unemployment rates in Eastern Germany at less than 6.0%. Significant population growth, an increase in households and declining unemployment are all driving wage growth - and fuelling intense demand for housing.

Following strong German economic performance in 2017, rental prices gained further ground in the majority of the 27 surveyed cities. Asking rents in nine markets rose by between 3% and 6% in a single year, including Stralsund, Eisenach, Weimar, Magdeburg and Jena. In six other markets (Cottbus, Leipzig, Strausberg, Schwerin, Nauen, Brandenburg), rents surged by 6-10%. In Berlin and Rostock, asking rents increased by an thumping 14.8% and 23.6% respectively last year alone.

Condominium prices have also maintained their impressive upward trajectory, rising by 3-6% in six markets, 6-10% in another six markets and 10-20% in Erfurt, Gera, Leipzig, Merseburg, Berlin and Waren an der Müritz. The two biggest year-on-year price increases in the existing condominium segment were registered in Rostock (+27%) and Nauen (+42%). Prices in the newbuild segment also rose substantially, with the strongest increases in Thuringia's cities and in areas around Berlin and Potsdam, where prices rose by between 15% (Strausberg and Jena) and 30% (Potsdam and Weimar). In the city of Brandenburg, prices for new apartments gained an average of 50% in just one year.

Vacancy rates across all Eastern German regions have continued to decline as demand for housing has skyrocketed. The only markets still suffering from double-digit vacancy rates are Gera, Dessau-Roßlau and Görlitz. In contrast, the markets in Berlin, Potsdam and Jena have effectively exhausted their housing reserves as vacancy rates have plummeted to 1.1%. Housing supplies are scarce almost across the entire region as vacancy rates have declined in Dresden (1.9%), Rostock and Weimar (2.0% each), Waren an der Müritz (2.4%), Erfurt (2.5%), Greifswald (3.5%) and Strausberg near Berlin (3%).

Despite dynamic rental price growth, housing remains generally affordable for Eastern Germany's many tenants. In a majority of the surveyed cities, net rents (i.e. excluding heating and utilities) now average between EUR 4.80/sqm and just under EUR 9.00/sqm. Berlin (EUR 11.85/sqm) and Potsdam (EUR 10.22/sqm) are the only two markets where average net rents have broken into the double-digit range. Correspondingly, housing cost burdens in all of the region's cities (with the exception of Berlin and Potsdam) have not risen above 20-25% of net household income. In parts of Saxony, housing cost burdens even remain well below 20%.

The MDAX-listed TAG Immobilien currently owns and manages 82,400 residential units, primarily in the Hamburg and Berlin metropolitan areas, as well as in Thuringia/Saxony and North Rhine-Westphalia.