Residential: turnaround in rent growth but purchase prices still on the up

Various studies now indicate a slight downturn in achievable rents across many German cities, even in Munich which is typically an expensive place to rent. Meanwhile prices for condominium apartments continue to rise and according to market observers, larger inter­na­tio­nal investors are now tending to hold back.

Rents: New calculations by the researcher F+B indicate that average rents for new residential lettings continued to stagnate over the 3^rd and 4^th quarters of 2019. It reports a slight downturn in rents over the last 12 months with a year-on-year fall of 0.3% to the end of 2019. F+B managing director Bernd Leutner blames this on decreasing tension on the market. 

A look at the 50 German cities with the highest rental price levels shows the trend towards a more subdued market. Rents fell in 23 of the Top 50 locations over the last quarter (compared to 15 cities over the period Q2 – Q3) and real rents fell in 11 of the Top 50 cities since the same quarter the previous year. F+B concludes: “This could be interpreted as the effect of lower rental income expectations on the part of owners, but is almost certainly a reaction to the expected tightening of the rental price brake”.

Asking rents in Berlin fell by 1.2% year-on-year. But other Big 7 cities experienced marginal growth such as in Stuttgart (+0.8%), Frank­furt (+0.5%) and Hamburg (+0.1%), all of which are below the inflation rate according to F+B. The most noticeable dips in rent were in Gar­misch-Par­ten­kir­chen in Bavaria (-4.4%), Fell­bach near Stutt­gart (-3.0%) and Olching near Munich (-2.3%). Munich remains the most expensive city in Germany, but prices have also fallen here by 0.6% to an average of €16.40/m²/month.

By contrast there has been strong rental price growth in some of the 50 most expensive German towns and cities. F+B says that rents in Bie­tig­heim-Bis­singen near Stutt­gart grew by a massive 13.6%. This was followed by 11.4% in Lands­berg am Lech in south west Bavaria , 8.6% in Ett­lingen near Karls­ruhe, 6.7% in Dachau in Bavaria and 4.6% in both Remseck am Neckar and Kirchh­heim unter Teck in Baden-Württemberg.

The research institute Empirica reports similar results from its own surveys, which show that rents in Germany have risen less strongly in the period up to year-end 2019. It says that the year-on-year growth in rents to the 4^th quarter of 2019 is the slowest since 2014 and average rents for new lettings in the Big 7 cities grew by just 1.5%.

Prof. Dr. Michael Voigt­länder and Pekka Sagner from the Institut der deut­schen Wirt­schaft (IW) in Cologne report a widening gap between the Top 7 German cities. Rents in Munich are far outstripping the growth in salaries. In Berlin the difference is minimal, whilst in highly priced cities such as Hamburg and Frank­furt, rents have actually become more affordable. In Berlin there is simply too little new-build activity, partly due to a significant rise in construction costs of 5.4% over the last year alone. Rents in southern Germany are rising significantly faster than incomes whilst rents in eastern Germany are relatively low compared to salaries and incomes are now rising faster than rents. The affordability of rents has become highly divergent from city to city.

The overall conclusion is that rents have become more affordable. Gross salaries across Germany in the period 2014 – 2018 have risen by 9.4% to €3,312 p.m. whilst rental prices for new lease contracts have risen by 8.5% to an average of €7.44/m²/month. According to the IW, rents have become more affordable in 269 of the 401 locations under review.

Purchase prices: By contrast property prices in Germany have grown significantly more strongly than rents. Year-on-year prices for condominium apartments grew by 5.4% to the 4^th quarter of 2019 whilst prices for detached houses grew by 3.8% over the same period.

There has been a change in investor structure on the German residential property market. F+B reports a change amongst the purchasers: according to the top agents such as JLL, CBRE and Savills, inter­na­tio­nal purchasers are increasingly holding back from the German market, which is reflected in the F+B index. One reason for the drawback may be the increasingly complex and incalculable effects of tenancy regulations in Germany such as the rental price break and the proposed rental price cap in Berlin. By contrast, the proportion of activity attributable to German insti­tu­tio­nal investors has increased from 78% in 2018 to over 90% in 2019. 

Leutner says that the widening gap between developments in rents and prices “is now due to German residential property companies, open-ended special funds, wealthy private individuals, the public sector and owner-occupiers”. There is a lack of alternative investment opportunities in the market and the level of security offered by real estate is driving prices paid by German investors. “Irrespective of the reasons, at the end of a property boom, these will suffer the most when a collapse in prices has to be worked through financially”.

Leutner warns that the current situation is the result of a “herd” effect, which history shows does not always work out well for the stragglers. “If you look at the last 25 years, the real estate economy has been characterised by continually delayed reactions to international capital market trends on the part of German investors. At the start of the high point when whole stocks of public sector and company apartments were sold between 1998 and 2005, almost all purchasers were Anglo-American funds which went on to make enormous profits. German investors and housing funds joined at a relatively late stage when prices had already skyrocketed. The public sector is particularly pro-cyclical in this regard, as it sold its stocks at what we now see as ridiculously low prices, in some cases only to buy them back at enormous premiums, in fact at price levels at which private buyers had long since lost interest”.