German residential prices rising faster than rents

Studies from two of Germany’s leading internet portals Immowelt and ImmobilienScout24 provide strong evidence that the rate of price increases for residential housing in Germany’s larger cities is rising now much faster than the rate of rental increases – often a harbinger of a bubble building.

The Immowelt barometer compares the online broker’s quoted rent rates in the major German urban markets, with the Nüremberg-based online platform logging nearly 1.2m rental and sales offers per month, making it fairly representative of the market as a whole. Immowelt’s data suggests that housing rents largely stabilised in the largest German cities over the first quarter, following a year of strong growth in 2012, with Berlin posting the strongest growth year on year of nearly 11%.

Munich remains the city with highest rents in Germany at an average of €14.20 per sqm per month for new leases, up 7% on 1Q12 and more than double the nation’s average of €6.60. It is followed by Frankfurt at €12.80 (+4%), Hamburg (€10.90) and Stuttgart (€10.70; +2%). While rents rose significantly in Frankfurt, Hamburg and Stuttgart last year, prices have stabilised in the first quarter, with Hamburg even seeing a 1% decrease on 1Q12. Berlin comes in at 7th place, after Düsseldorf and Cologne, at €8.40, following 11% rental growth due to a supply bottleneck and continued high demand.

Immowelt and rival ImmobilienScout24 both show similar figures for the rise in purchase prices of residential property over the past year, with the big cities of Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart seeing price rises of up to 20%. These prices are still rising steadily, with Munich and Berlin jumping by 1.7% and 1.6% in the month of May alone, compared to April of this year.

Purchase prices in Munich have risen by 15% over the last 12 months, while rents rose by only 7%. In Düsseldorf prices have risen by 14% in the period, while rents have stagnated. Hamburg has seen price rises of 7%, while rents have actually dropped by 1%. These figures correspond to a rental yield of 3.5%-4.5% for investors, or more likely less than 2% after deducting brokers’ fees, property purchase tax, and lawyers’ fees as well as basic maintenance charges.

We reported in a recent REFIRE issue on the findings of the AWI Aengevelt Residential Index, managed by the Aengevelt brokerage house, whose latest readings suggested that this is where the professionals start leaving the field to the latest wave of amateurs desperate to enter into the fray. Aengevelt’s head of research Markus Schmidt strongly suggested that investors consider an imminent exit from some of their holdings.

Despite strong demand in most markets, the pace of new building is also acting as a force to dampen both rental and purchase prices – a factor not present a couple of years ago. Last year 211,215 building permits were issued, compared to the 148,340 issued in 2008 – a rise of 42%. Visitors to cities such as Frankfurt can see the enormous amount of new building of residential housing going on to cater for the undoubted demand, but this is likely to ease pressure on prices over the coming years. With bond yields creeping back up (10-year Bunds have risen from 1.31% to 1.78%), interest rates will be rising slowly to match, which will also act to put a damper on super-cheap financing deals.

Meanwhile, a new report issued by the research team under Marcus Cieleback at Augsburg-based Patrizia Immobilien warns that the pace of growth in residential rents is set to slow, although Germany’s largest cities will see continued growth through 2017. Rents for existing homes are likely to rise faster than those for new-built homes, they believe.

In fact, the researchers draw a strong distinction between existing assets and new developments in their latest Residential Property Investment Compass. “Rents on new constructions will not increase as much as existing apartments,” says head of research Marcus Cieleback in the report. Investors should distinguish between the existing property market and newly built property market depending on the location in order to ensure a good investment strategy for their portfolio.”

Cieleback explains why he sees this as being particularly important: Rental growth for apartments in Germany’s Big 7 cities remained below the annual inflation rate of 2% in all the years between 1992 and 2007, before catching up significantly and making up for much lost ground. He explains that, before 2007, rents for newly built properties rose by 0.5% a year on average and existing apartments by 1.5%. “Contrary to the widely-held opinion in Germany that rents would explode, the increases seen were still weaker than actual inflation,” says Cieleback. “In particular, increases in the newly built property segment were weaker than originally thought, with an average growth rate of 0.5% a year.”

This is where Cieleback sees risk for investors – specifically, where rents deviate greatly from overall market trends.

Frankfurt, for example, is the most volatile market with the largest deviations from the average rental price trend for new-build; Berlin is the city with the greatest risk for existing properties. By contrast, rents in Düsseldorf deviate only slightly from average rents for new-build; the same is true for existing assets in Hamburg. “Depending on the sub-market, Germany’s individual cities also differ in the potential risk they pose for investors”, he cautions.