How can investors unlock potential in Germany’s social housing market?

The market for social housing in Germany has been disintegrating steadily for years, despite the state's increased expenditure on housing for those most acutely in need of accommodation. Despite this, the number of council flats has plummeted to alarmingly low levels, compounding the difficulties within the affordable housing sector.

German social housing is a desirable asset class which foreign investors would like to get their hands on, but over the years it has proved to be an elusive market. Too much local dominance, too complex to fully understand the local rules, and too limited a volume to justify the groundwork - these have been the traditional hurdles which have kept most foreign investors from getting more deeply involved in the affordable and social housing sector.

Can foreign investors gain access to the market?

They can, but not very easily, according to Mattie Schenk, associate director research at Savills Germany, speaking recently to REFIRE. Schenk describes demand for social housing as ‘as high as ever and supply is as low as ever’: ‘The problem is that due to rising costs and inflation, more people are in need of social or publicly subsidized housing. However, the stock of social housing units in Germany is shrinking. There’s not enough housing development in general and this is also the case for social housing. After 20 to 25 years, some units fall out of the social binding, meaning that more and more units are excluded from the official social housing market.’

However, demand is extremely difficult to summarise because there are at least 16 different housing programs in Germany and many cities have their own programs as well, according to Schenk. ‘In 2020, there were around 1.1 million units of social housing in Germany down from 2.1 million in 2006, meaning it’s decreased a lot,’ he said. ‘Typically, between 20,000 and 27,000 new units are built each year across Germany over the past five years but it’s not enough - it’s estimated that around 100,000 units are actually needed. Last year, there were €1.5 billion in residential deals that were either social housing or which had a social housing component. It’s difficult to break it down more than this because some projects might only have a very small amount of social housing. In total last year, the transaction volume on the institutional residential investment market amounted to some €12.2 billion. The amount of deals with a social housing component was higher than average. Investment in social housing has become more attractive since the turnaround in interest rates because you get more attractive financing conditions due to public funding.’

Don’t miss interview with Dr. Tilman Hickl of H2i in this issue

That's why we're publishing an interview in this issue of REFIRE with Dr. Tilman Hickl, CEO of Munich-based H2i Asset Management, which specialises in project joint ventures in which the investor participates in the hoped-for value creation. Dr. Hickl, who was for many years head of real estate at global bank UBS, explains Bavaria's Income-Oriented Subsidy (Einkommensorientierte Förderung - EOF) programme as a way in which investors can tap into the subsidies and low-interest loans being offered to developers to provide housing to lower-income tenants.

We recommend you read the interview.

Where has the social housing sector been going wrong?

This ongoing crisis has sparked a contentious debate across political, economic, and social spheres. Federal Building Minister Klara Geywitz and Axel Gedaschko, head of the Federal Association of German Housing and Property Companies (GdW), to give just one example, have exemplified the escalating tension by recently avoiding each other's key events, with affordable housing at the centre of their discord.

A study by the Pestel Institute highlighted the urgent need for affordable social housing, citing a deficit of 910,000 apartment units nationwide. The study's critical findings, which pointed to inefficiencies in the state's housing subsidy system due to the social housing shortage, were met with skepticism from Minister Geywitz, who dismissed the figures as "implausible." (In contrast, industry experts like Tilman Hickl (above) of H2i have supported the study's results, underlining the severity of the social housing issue. Again, we refer to his interview with REFIRE in this issue.)

Social housing in Germany has been likened to a "leaking swimming pool," where new additions fail to compensate for the significant loss caused by the expiration of social commitments within the existing stock. The Cologne Institute for Economic Research (IW) and Colliers have starkly stated that "Social housing is dying out," projecting that the social housing stock will fall below one million units by the end of 2024—a substantial decline from around 2.9 million after reunification in 1990.

Plunge in new construction

This stark decrease comes at a time when new construction is severely lagging, with IW Cologne forecasting only 554,100 social housing units remaining by 2035. The construction of social housing is not keeping pace with the loss of units exiting the system, and the ambitious target of 100,000 new subsidized apartment units per year now looks quaintly pie-in-the-sky.

Rent disparities have only intensified the problem, with social housing tenants paying significantly less compared to the free market—45% less in Germany's major cities in 2023, up from 34% a decade earlier. The shortage of social housing options has led to stagnant movement among existing tenants and a rise in state expenditures to cover high market rents for those in need. In response to this mounting cost, the Pestel study has accused the state of "mismanagement."

State spending more, but calls for reform growing louder

The state has responded by increasing its social housing budget to €3.15 billion for 2024, though industry professionals like Arnaud Ahlborn of Industria have criticized the increase as insufficient given the gravity of the housing crisis.

Investors remain wary, recognizing the benefits of funding in light of high interest rates but hesitant to fully engage. A few, such as Hamburg Team, are leveraging subsidized housing projects to offset financing costs and achieve favorable returns.

The call for reform is growing louder. Industry voices are advocating for increased funding, raising rent caps for social housing, and providing incentives to extend social commitments. The Alliance for Social Housing, along with associations like GdW, has proposed comprehensive measures including a special €50 billion fund for social housing, reduced VAT for construction, and lower land transfer tax (Grunderwerbsteuer) for affordable housing. All groups are calling for the necessity of state-subsidized loans with lower interest rates as a minimum to get building started again.

In the midst of these complex challenges, Bavaria emerges as a beacon, with a combination of tenant and developer funding that may serve as a model for the nation. Yet, the debate continues as associations press for a significant shift in government strategy for social housing promotion—a shift that may require an overhaul of the entire system.