Aengevelt’s AWI Residential Index pinpoints trend change

by

The AWI German Residential Housing Index compiled by Düsseldorf-based property broker Aengevelt saw its latest reading showing a mild rise after declining over the winter months, but it does seem to be flagging a levelling out of expectations for further rises in good quality locations.

The latest AWI quarterly spring reading suggests that expectations for rent levels and purchase prices of apartments are confined to price rises only in the ‘simple’ and the ‘medium’ categories, as measured by Aengevelt’s proprietary classification system. The ‘good’ quality homes and apartments in ‘good’ locations are judged from the reading to have less upward potential than the other two categories, showing a downward trend for the second quarter in a row.

Of the 200 market players polled for the survey, only 4% said they envisaged rent levels over all the market classifications and regions to fall, while over 60% said their expectation was for further rising rent levels.

The Aengevelt AWI Composite Index, with 2008 as its base year, tracks active residential industry market participants’ expectations in respect of residential demand, residential supply, known vacancies and rent levels for rental accommodation, as well as expectations for the investment market. The time frame for the AWI Index is always for the next immediate quarter, and not for the general long term.

Aengevelt’s head of research Markus Schmidt commented, “The latest readings suggest that not much will change for the tenant in the immediate future. Since investment in construction is focused mainly on the ‘middle’ and ‘good’ locations, the ‘simple’ segment will experience little relief. In fact, if anything this is where rents are likely to rise. In contrast, given new construction at the upper end of the market, there may be some softening of the rate of increase – meaning still an increase, but at a slower rate.”

From an investment perspective, the Aengevelt researchers believe they’ve pinpointed a turning point in the market for investment at the upper end of the residential market. They recommend investors to review their holdings of particularly good quality stock in good locations critically, with a view to selectively exiting the market at what they believe could be close to medium-term market top. They highlight the danger for investors of viewing only the increased rental income they’re enjoying, while ignoring the future higher cost levels they’ll be facing (modernisation, compulsory energy-saving expenditure, etc.) At the upper end of the market, Schmidt thinks now may be a good time to tidy up the portfolio. (“Sell”.)

In the mid-market and lower segments there may well be some more mileage, Schmidt believes. He cautions, however, of the difficulty of pushing through rent increases, particularly at the lower end of the market, where vacancy rates and management costs may also be proportionally higher. Only when both good local management and the willingness of investors to pay higher multiples for assets in the category are present, are conditions likely to be optimal for a strategic exit. (“Hold.”)

The Aengevelt projections provide food for thought when digested in conjunction with the latest study from the LBS Landesbausparkassen, Germany’s largest association of building societies, which, with about a third of the private mortgage lending market, has traditionally been very close to borrowers’ credit requirements. They expect an overall annual price increase by end-2013 of between 2% and 4%, with prices for new-built houses rising particularly strongly.

The LBS study shows that, despite strong demand in the last few years, existing homes and apartments have barely moved over the past ten years, apart from cities in the south and southwestern part of the country. An exception has been new-built housing which has in fact risen strongly, and which is concentrated in the larger cities.

According to LBS director Hartwig Hamm, the attractiveness of existing homes is clear. “Despite the revival in new building, what ultimately finds its way onto the market is simply far too little to meet current demand.” In addition, while new buildings usually offer very good quality, especially in terms of energy efficiency, this is reflected in relatively higher prices than for housing stock. The average price of a new home nationwide in Germany last year reached €325,000, but existing homes could be acquired for only €161,000 on average. “Even if one also takes into account the repair and restoration needed, a wide range of people inheriting wealth find these entry prices for residential property quite reasonable,” Hamm said.  

Regional price differences play a large role, with detached family homes in Munich, at the top of the table, selling for €850,000 (average), more than ten times as much as in many mid-sized eastern cities. Munich is followed by Wiesbaden (€750,000), Regensburg (650,000) Stuttgart (€610,000) and Heidelberg (€580,000).

Satellite towns in the hinterland of the larger cities can be up to €200,000 more expensive than the big cities themselves, such as Grünwald (Munich), Meerbusch (Düsseldorf), and Kronberg (Frankfurt), with other tourist towns also close to top of the list (Starnberg, Constance, Lindau).

For those wishing to live well in a large metropolis but for moderate prices, the places to go are Leipzig, Hanover, Bremen, Dortmund, Essen and Dresden – or even Berlin, where you can get a decent house for €280,000. In Halle and Magdeburg in the east, €160,000 will see you living very comfortably, while in the west the places for value are Bremerhaven (€115,000) and Gelsenkirchen – within reach of the bigger cities but for a mere €170,000. If you really want to save money, Weissenfels in Saxony-Anhalt will offer you a warm welcome with houses priced at a mere €60,000.