Micro-living isn’t just for students - there’s a whole market out there

Germany is rightly praised by envious European neighbours for having a well-developed res- idential rental market. By and large it works for landlords and tenants. Its rude health helps explain why Germany still has the lowest rate of house ownership in Europe, bar Switzerland.

Stable returns is the chief attraction of being a residential investor in Germany. With demand for housing in Germany’s cities soaring, it’s no surprise that prices and rents have risen strongly. And yet, real returns for many individual investors are marginal, if not actually negative. This is due to frictional costs, repair and maintenance upkeep, new compulsory energy-saving investment, and other drains on actual yield. Zero real returns is, in fact, surprisingly widespread.

So what’s an investor to do? Up until a few years ago there were few alternatives to the classic housing rental model. Apartments get let, empty down to the plug sockets on the walls and the stub of a water pipe coming out of the wall to indicate where the kitchen is to be installed. The prospective tenant fights past thirty competitors to convince the landlord that he and his girlfriend’s bona fides are beyond reproach, both their jobs are secure for the next forty years, and that they value good neighbourliness above all. Finally, they’re in.

Having paid three months rent in advance, plus nearly three months rent in the form of broker commission, plus the costs of a new kitchen and sundry other costs associated with a new start, moving back out is almost unthinkable. Of course, while in situ the tenant can do what he wants – painting the walls in green and orange polka-dot or indulging his DIY fantasies. Live a little. Whatever.

However, the tenant IS liable to the landlord for handing back the apartment in its original condition – that is, renovated to a high professional standard. This is costly and fraught with pitfalls. It’s little wonder that renting an apartment for less than several years is an unappealing proposition.

Germany has been slow to innovate on its housing market, despite increasing evidence that the classical rental model is way out of sync with the way younger people actually live and work. For years the industry ignored the opportunities provided by the market for ‘temporary living’, for providing accommodation at affordable prices for people who had no interest in competing for apartments which would require a stay of several years to justify the outlay.

The penny has finally dropped, and niche sectors are now rapidly becoming mainstream as developers climb over themselves to gain exposure to alternative forms of housing. Boarding-houses, budget hotels, student housing, micro-living – all offer new development alternatives. Now that we’ve started, Germany can demonstrate the structure and characteristics to offer a fertile breeding-ground for these developments, and investors should take a much closer look.

In particular, the abundance of moribund commercial property suitable for conversion into adaptable living space seems to us to offer plenty of potential for alternative business concepts that can compete with the rigid, inflexible model of old. This is now starting to happen.

Germany has seen the number of single households rise from 24% twenty-five years ago to more than 50% now – and yet the offer of small, one-or-two room apartments has barely changed in that time, remaining stuck at the 3%-4% mark. While student accommodation receives the most headlines, the natural constituency of people seeking accommodation of well-designed, partor fully-furnished 22-35 sqm of living space extends to much of the working population – shortterm contractors, young professionals, corporate colleagues, semi-retired consultants, and many more.

We recently attended an excellent seminar dealing with investment in “temporary living” organised by Heuer Dialog, entitled “Small, Smart, Lean – New Products for Different Target Markets”. In a day-long series of discussions and presentations, bosses from many of Germany’s top companies involved in the growing sector told of their experiences in developing suitable products for this emerging market.

For those with offspring belonging to Generation Y, or parents of the so-called millenials, much of what these hardnosed developers were reporting from the front makes abundant sense. Community, wi-fi, personal services, affordability, art, culture, sharing – these are IN. Paying for parking spaces, furniture, giving long notice periods – OUT. It is no longer just students who are making these value judgements, but whole rafts of people for whom career progression has proved less than linear. And that’s a lot of people.

For investors, returns within ‘residential’ are better in the student housing sector, perhaps by as much as 100 to 150 basis points. They have the potential to be even better in the German ‘micro-living’ sector, which suffers from under-supply and rapidly growing demand. Germany’s decentralised structure means that successful concepts can be rolled out faster across a broader range of prospering cities of 100,000 inhabitants or more.

Where young people are going, that’s where to invest. And in Germany they’re going to many of the smaller cities, as well as the Big 7 urban centres. They’re bringing youth, dynamism and creativity to a range of secondary cities such as Trier, Heidelberg, Halle an der Saale, Mainz, Jena and Würzburg – not coincidentally, cities with lively and popular universities. And which create above-average numbers of new jobs, employing many who are no longer students. The alternative sector is gaining momentum, and with it, soon, international capital.