Subsidized rental housing still falling despite new building

In the middle of the whole debate about affordable housing in Germany, and the urge to “build, build, build” to meet the housing demand, it is easy to forget that Germany has always traditionally had a subsidised housing sector to help those on low and below-average incomes. Much of the new housing construction in the country over the past few years is way out of reach price-wise for many low earners (and indeed for a great many average and above-average earners).

A new study on subsidised housing in Germany, commissioned by WERTGRUND Immobilien AG and carried out by researchers Bulwiengesa, shows that between 2011 and 2019 the share of subsidised rental housing stock in overall housing construction fell by an average of 21%, despite a tripling of building volume in absolute terms.

The study demonstrates just how many low-income households exist, and how the supply of subsidised housing in the lower priced segment is not keeping anywhere near pace with demand. Despite Germany's apparent prosperity, about 21% of households have a net income of €1,600 or less per month, while 7% have net incomes of less than €1,000 per month, averaged across all cities. The share of subsidised housing in the rented housing sector is about 9.4%.

The variance is particularly clear in the two cities of Leipzig and Dresden, where the share of subsidised rental housing is less than 0.2%, while both cities have a high share of low-income households, at 25% in Dresden and 30% in Leipzig. The roots of this lie in the cities' determination to sell off nearly all of their municipal housing about fifteen years ago, to clear their crushing debt burdens. 

The sale of 48,000 units by Dresden's municipally-owned WOBA housing group to private equity group Fortress was a particularly landmark deal, (and our first-ever cover story here at REFIRE). Those holdings have been passed on via GAGFAH, then Deutsche Annington, which then morphed into becoming part of Vonovia's massive holdings.

The gradual and costly remunicipalisation since then has been particularly acute in eastern Germany, although the demand for social housing has also been rising strongly in poorer western German cities like Bremen and Kiel in the north, and economically-weaker cities in the Ruhr such as Dortmund, Duisburg, Bochum and Essen.

Only very few cities have seen increases in their subsidised housing, as the survey shows. Mainz (+9.6%) and Münster (+7.1%) saw increases, but in 23 of the 26 cities analysed, social housing stock declined, on average by about 21% in the period. Leipzig led the way (down 90%), followed by Dresden (down 89%), Berlin (down 37%) and Kiel (down 36%).

Although this downward effect is dampened by new building or additional acquisitions, it is not enough to counteract the negative trend. Only in Berlin is an increase in subsidized housing of around 8% expected by 2025 in order to maintain the stock of social housing above 100,000 units. In North Rhine-Westphalia, the projected declines are lowest in Bochum at 28% less and highest in Bonn at a fall of 60%. Germany's federal system, in particular the 2006 federalism reform, inevitably throws up strong regional differences, with very different municipal subsidy programmes, and responsibility for social housing promotion remaining at the level of the individual Länder. 

WERTGRUND highlights in its study the increasing importance of ESG-compliant investing for investors in the private sector, who play a key role in subsidised housing construction. "Subsidised Housing" as an asset class will become more interesting for investors, the company believes, as new guidelines for ESG investing by 2025 are implemented. With the quota system of allocation, subsidised housing currently makes up 26% of all new housing in the construction pipeline.

André Adami, Bulwiengesa's head of residential, said "Private investors are building more than 55% of the planned apartments in this segment, making them the most important investor type alongside municipal players. The results of our survey clearly show that the creation of affordable housing is a mammoth task that also stems from historical mistakes such as the privatisation of municipal housing stock. Only a joint effort by private and municipal companies can handle this task."

In certain cities such as Hanover, Regensburg and Cologne the proportion of subsidised rental apartments in the pipeline is even over 40%, with the provider structure showing a mix of municipal, private and even co-operative contractors, but with a heavy emphasis on private developers.

According to Thomas Meyer, CEO of WERTGRUND, "We need to embrace a turnaround in our subsidized housing construction. Municipalities, cooperatives and private players must work together so that we increase the share of subsidized housing and create more rental housing in the affordable segment. Despite subsidy programs and stronger requirements imposed by cities and municipalities, a joint approach is needed."