Went to Aldi for some bread and milk, and came home with an apartment

A few hundred metres from REFIRE’s office here in Berlin, the almost unbroken line of buildings with heights varying between five and seven stories is suddenly interrupted by a wide, flat, single-story building surrounded by paving slabs, with space for sixty cars above ground. The cars’s inhabitants, and countless others, spend their days visiting the breezeblock, single-story building, and coming out a short while later with their shopping bags full.

Not surprisingly, the building is an Aldi store - the only discount grocery store within a radius of at least half a kilometre. And not surprisingly, it’s doing a brisk trade all day long - although no doubt it could use a few extra parking spots at peak shopping hours.

Nobody is better at figuring out how to sell good quality products at an everyday cheap price than the master grocers at Aldi, and their equally successful rival Lidl. They sent the mighty Walmart packing a decade ago when the American powerhouse thought they could teach the Germans a thing or two about “Every Day Low Prices”, with a touch of US-style service, their fearsome global supply chain expertise, and a splash of American retailing razzamatazz thrown in.

After five years, four CEO’s and countless pivots on their pre-ordained strategy of bringing service and low prices to the under-served German consumer, they learned an important and expensive lesson. The German consumer was interested ONLY in low prices, it turned out. He or she proved highly resistant to Walmart’s attempts at seduction, such as posting greeters at the door or offering to pack his shopping at the cash desk.

In bafflement and frustration, the Walmart retail geniuses from Bentonville, Arkansas, finally chucked in the towel, and went back to serving markets they better understood.

Now the Essen-based Aldi Nord plans to build about 2,000 apartments in Berlin alone, developing residential blocks with 50 or 60 well-appointed apartments – mostly with balconies and parking spaces for residents – and of course, an Aldi grocery store on the ground floor. Working closely with city planning authorities, the apartments will be developed on existing Aldi sites, and rolled out over the coming five years.

Aldi won’t find itself alone in pursuing this project. The Berlin authorities have identified 330 supermarkets in Berlin alone, which could provide capacity for 36,000 new apartments, and have already convened supermarket owners to concentrate their minds as to how to massively improve the productivity of their sales space. Berlin is already short of affordable accomodation, and the city has acknowledged that it needs 194,000 new housing units to keep pace with the 300,000 new inhabitants the city is expecting by 2030.

To some extent, Aldi is making a virtue out of necessity. Building permits for city-wide retail projects are increasingly being tied by the authorities, in Berlin and elsewhere, to commitments made by businesses to foster denser living quarters and hybrid usage of existing buildings. The message is being picked up loud and clear, not only by Aldi, but also by competitors such as Tengelmann, Penny and Lidl, who have all started their own conversion projects to include integrated housing.

We’ve no doubt that Aldi will find a way to build, and either rent or own, good quality affordable housing, which comes with the added advantage of providing a steady stream of shoppers for its own stores. The demand for housing in Berlin – but also in Germany’s other larger cities such as Munich, Hamburg, Frankfurt, Düsseldorf and Cologne, which are also suffering acute shortages – is such that we cannot see any immediate end to the steady growth in rents and price levels, particularly at the lower to middle end of the market.

It’s thus doubly surprising to hear our old friends at the Empirica Institute continue to issue their Cassandra-like warnings of an imminent crash on Germany’s housing markets. They reiterated their view earlier this year that housing was due a 30% correction, largely based on what they see as soon-to-be-stagnating rents, a slowdown in immigration into Germany, growing supply, and rising borrowing costs.

We’re sure they’re very wrong on this. As our article shows, there has been a marked slowdown in the number of new housing permits issued since mid-2017, after a decaded of steady growth. Given the gap between permits issue and actual completions, it seems obvious to us that the pressure on housing is likely to continue for the next few years.

A big city like Berlin, with its myriad attractions for young and old alike, is experiencing something that it was artificially protected from for years – widespread gentrification. It’s a decades-long process, but these forces are slowly dragging Berlin up from a low-rent environment to a city offering medium-priced accomodation for large numbers of its inhabitants.

This year Berlin is expected to complete 18,700 new apartments, well up on the 8,700 completions in 2014. The gap between supply and new demand is narrowing, it is true, and many new arrivals are young millenials whose ability to pay the new, higher rents is limited. Hence basing investment decisions on rents rising at the same breakneck speed as in the last few years would indeed be foolhardy.

But there are sufficient likely bottlenecks ahead to the steady ow of housing supply that forecasting a major fall in prices is, in our view, simply bad economic reasoning. If Aldi sees an opportunity to get into the housing business without the bene t of taxpayer-sponsored subsidies, this should provide good pointers for other developers as to how, and where, to price and place their products.