Adalbert Pokorski, CEO, Greenwater Capital GmbH
The consequences of demographic change in Germany, a country with an ageing population, are already apparent in the labour market. Many training places and job vacancies can no longer be filled, a trend that is significantly impacting economic performance. But what does this demographic shift mean for the residential real estate market, and what are the implications for residential real estate investors?
First, let us look at some figures. The population of Germany grew by 1.3% to around 84 million in 2022. This growth was driven by net immigration, with approximately 1.5 million people migrating to Germany over the past year, primarily as a result of the war in Ukraine. In 2021, a year still dominated by the Covid pandemic, the German population only increased by 0.1 percent. It is also interesting to note that the population in Germany’s eastern federal states (+1.1%) grew at a roughly similar rate in percentage terms to the population in western Germany (+1.4%). Immigration has a moderate impact on demographics by not only triggering population growth but also increasing the share of younger people in society. While the number of people under the age of 20 declined by 0.3% within the German population, it rose sharply by 23% among foreign nationals.
The German Federal Statistical Office has made various model calculations for the next few decades. The largest population group – so-called ‘baby boomers’ born between 1955 and 1970 – will move into the age group of those aged 80 or over from the mid-2030s onwards. Medical advances are likely to continue the life expectancy increases observed in recent decades. The number of working-age people is critical to a country’s economic development. According to the German Federal Statistical Office, this figure will decline by 1.6 million by 2035, despite high net immigration levels. If net immigration is low, the number of people at working age could slump by as much as 4.8 million. Ultimately, the number of working-age people also depends on how immigrants are integrated into the labour market. Asylum seekers who eventually have to leave the country again after a couple of years and immigrants who take a long time to find work due to lengthy bureaucratic procedures act as a drag on the labour market. This is currently illustrated by the employment status of Ukrainian refugees. Although they have been assigned protected status that theoretically enables them to start work immediately, only 18 percent of Ukrainians in Germany are currently in paid employment. By contrast, two-thirds or more of Ukrainian refugees are already employed in other EU countries such as Czechia, Poland and Denmark. This is also helped by the fact that the latter countries have already introduced digital procedures to fast-track Ukrainians into employment, while Germany continues to rely on sluggish bureaucratic processes.
Demographic impacts are not to be underestimated
According to a forecast from real estate consulting company PREA, demographic change is creating significant regional differences and opportunities within the residential real estate market. Rural areas in economically weaker regions such as Saxony-Anhalt or Thuringia could see their populations decline by up to 60 percent over the next 10 to 20 years, a development that would leave large number of residential properties vacant. Cities would continue to profit from an increased influx of people as the trend towards urbanisation persists.
The purchase price forecast calculated by the Hamburg World Economic Institute (HWWI) for the 2023 Postbank Wohnatlas housing study concludes that 43 percent of Germany’s administrative districts and independent cities can expect an estimated average annual increase in property values of 0.15 percent until 2035. In addition to the Big Seven cities, the forecast also anticipates a bright outlook for the federal states of Bavaria, Baden-Württemberg, Hesse and Schleswig-Holstein. In eastern Germany, only individual cities such as Leipzig or Potsdam can expect a rise in property values.
Rents skyrocketing in rural regions
In our opinion, the studies cited here do not sufficiently account for developments in past years. For example, a study by the Berlin Institute for Population and Development on population trends in Hesse came to the conclusion that migration flows in 2019 and 2021 reversed completely compared to those observed between 2009 and 2011, with more people in Hesse moving from cities into rural areas. However, this was not enough to offset a decline in the ageing population. Although the period being analysed was heavily impacted by the Covid pandemic, it can be noted that increasingly flexible working arrangements are driving the shift towards rural regions. High housing costs in cities, whether in the form of purchase prices or rents, could increasingly prompt people – particularly those between the ages of 30 and 49 who have started a family – to escape to rural regions with good links to economically prosperous locations in order to be able to afford a sufficiently large place to live.
We expect rents in rural areas to increase considerably as persistently high interest rates mean less buying and building in the countryside and create greater demand for rental properties. Meanwhile the supply of rental properties in rural locations to meet this growing demand is already limited, a trend that has become apparent in data from the past 12 months. According to analysis from Jones Lang LaSalle (JLL), quoted rents in rural districts rose more sharply at +6.0 percent than those in metropolitan areas and independent cities in the second half of 2022. Advertised purchase prices in rural districts recorded a virtually identical increase to rents at +6.0 percent. These purchase price and rent trends appear to be diverging in 2023. While rents in rural districts rose by 4.9 percent in the first half of 2023, purchase prices for residential properties fell by 2.2 percent.
Both rural and urban areas set to profit from demographic change
Germany’s shrinking, ageing population could help demand for homes to ease over the next few decades. A population that is getting older while remaining physically and mentally fit may choose to sell their existing properties in order to move to smaller, more accessible properties with good links to the nearest town or city. Meanwhile the middle-aged section of the population has discovered the countryside, where the current lack of government financial support, high interest rates and limited supply of residential real estate in rural areas could create significant potential for rents to rise. Yet cities also remain attractive. The trend towards single households among younger members of the population in particular, together with immigration from abroad, may also keep demand high in these areas and cause rents to increase further.
About the Author
Adalbert Pokorski is the CEO of Greenwater Capital GmbH, a specialist in investment and asset management in the German residential sector.
