Residential rents in Germany’s top eight cities have soared by more than 50% since 2003, with cities like Berlin witnessing increases of 72%, according to the latest data from Empira.
It marks an enormous shift in the German capital, which 20 years ago, had the second lowest rents in the country. Other cities have also seen rents rocket in the period, including Stuttgart, where rents have risen by 62%. Even in cities like Leipzig where the average price per square metre for a first-time rental apartment is still comparatively low at €12, rents have risen by a whopping 59% since 2003, outstripping the increase in Munich of 55%.
In contrast, rents in Düsseldorf have risen by a more modest 20% in the period under review, while they have risen by 24% in Hamburg and 33% in Cologne.
‘Residential real estate is the new darling of investors and promises stability in economically uncertain times,’ said Florian Wenner, head of research & ESG at Primonial REIM Germany. Although the residential real estate investment market hit the brakes in the first six months of 2023 with an investment volume of around €2.3 billion, against the backdrop of declining approval and completion figures, many investors are looking at the market with renewed interest. ‘The simple formula is: less construction activity in the next few years will lead to higher demand in the portfolio and thus to significantly rising rents,’ he added. However, he points out that neither the interest-rate-related devaluations nor the costs of the green transformation are sufficiently reflected in the price level. Whether this can be fully offset by rising rents in a highly regulated market or whether it makes more sense to wait for further price corrections depends on the further development of interest rates.
Berlin rents soar by 16.7% y-on-y
However, the rental market in German is clearly divided. While the high demand for rental apartments clearly exceeds supply in many places, leading to strong rent increases in some cases, a reluctance to buy is causing supply prices for owner-occupied apartments to fall.
According to new research by JLL, asking rents in the eight major cities of Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Leipzig, Munich and Stuttgart rose on average by 6.7% year-on-year in the first half of 2023. This shows that rental price momentum has accelerated: in the first half of 2022, this figure was just 3.7%.
In some cities, rental growth has been even more dramatic this year. In the German capital, asking rents have risen by a huge 16.7% year-on-year. Only in Leipzig did rents also rise by double digits (11.1%); in other major cities, rent adjustments were much more moderate. In Stuttgart, the median rent fell by 1.3%, according to JLL.
‘In all the metropolitan areas considered, there is an enormous shortage of supply, which will be exacerbated by stalled residential construction,’ warned Roman Heidrich, lead director Residential Valuation & Transaction Advisory JLL Germany. ‘The German government's target of completing 400,000 housing units per year is not feasible in the next few years. The significant drop in the number of building permits suggests that new construction will fall short of demand for some time to come. An end to rent increases is therefore not in sight.’
Munich remains by far the most expensive rental market, with an average new contract rent of €22.25/m2. A similar picture emerges when looking at the top rent, which now stands at €32.25/m2 in Munich - an increase of 7.5% year-on-year. Here, too, Berlin has seen the strongest price growth: At their peak, asking rents have reached the €30 mark, an increase of 19.3%. In the past five years, top rents have risen by 50%.
Lowest rental yields to be found in Munich
However, gross rental yields, which put the purchase price in relation to the annual cold rent, have fallen in all of the top eight cities over the past 20 years, according to Empira. In 2003, landlords in the eight largest cities were banking on an average yield of 6.7% - today, that figure has more than halved to 3.1%, due to higher interest rates and a lower rental risk. As such, rental yields are close to each other and have been higher than the yields on German government bonds in the past 20 years.
Of Germany's 200 largest cities, Munich is the city with the lowest rental yields, according to Baufi24, at just 2.39%, despite an average rent of €20.05 per m2. Empira estimates that rental yields in the top eight cities will rise to an average of 3.9% by 2026. Just seven of the 200 cities did not record a reduction in rental yields and the highest increase was achieved by the North Rhine-Westphalian city of Hamm, at just 0.2%. However, the rental yield there is relatively high at 4.1%. In 46 cities, the average rental yield still exceeds the 4% mark, but in 33 cities the 3% threshold has already been breached, according to Baufi24.
For many property owners, this is a challenge, given that the rental yield does not take into account the ongoing expenses, such as repairs or ancillary costs, which cannot be passed on to the tenant.
Nonetheless, there is an upside: rising residential rents are making residential investments more attractive, due to high demand and low supply. High construction prices combined with a sharp rise in borrowing costs have led to many residential construction projects being cancelled. JLL expects around 240,000 new apartments to be built in 2023, whereas around 700,000 residential units per year would be needed to meet demand, including the current construction backlog.
The number of project developments sold (forward deals) has fallen steadily over the past year and reached its low point in the first and second quarters of 2023, with only three and four deals observed respectively. It is still noticeable that the registered deals are predominantly smaller transactions of projects that are also close to completion.
Resi deals down by 37%
In the first half of 2023, residential deals totaled around €4.5 billion and around 20,500 units, of which just under 13,000 were traded in the second quarter, according to JLL. Compared to the first half of 2022, this represents a decline of around 37% in both units traded and transaction volume.
‘There continue to be many deals in the pipeline and buyers and sellers continue to converge on their asking prices,’ said Michael Bender, head of residential JLL Germany. ‘The transaction processes are still quite long in some cases, but the probability of closing is steadily increasing. For the second half of the year, I am therefore positive and expect a further slight market recovery.’
Two big deals drove second quarter
Vonovia/Simon Bierwald
Vonovia headquarters
Encouragingly, some big deals were pushed through in the second quarter. Apollo acquired a minority stake of just under 30% in Vonovia's Südewo portfolio as part of a joint venture structure for several insurance companies and other long-term investors for around €1 billion. Also, CBRE Investment Management acquired five buildings with 1,350 residential units in Frankfurt, Berlin and Munich for around €560 million from Vonovia: ‘The fact that transactions like this are coming about is a good signal for the market,’ Bender said. ‘It could convince one or the other that attractive transactions are currently possible for both sides and, on the other hand, sensitize market participants to the fact that the complex market environment also requires more complex solutions such as joint venture structures or other forms of cooperation.’
However, such deal sizes are clearly not the norm. The second quarter was dominated by smaller deals with an average size of just €14 million, according to JLL. With a total of 53 registered transactions, market activity was down a third compared to the prior-year quarter (78 transactions). However, compared to the first quarter (40 transactions), deals were up by almost a third: ‘With an overall only slow revival of the residential investment market and a large number of very small deals, the lack of transparency in the current situation with regard to the price level in line with the market therefore remains high,’ said Helge Scheunemann, head of research JLL Germany.
Pressure on rents also remains high due to weak construction activity. Moreover, the labor market remains very robust despite the weak economy and the number of people in work continues to rise, suggesting that the recent strong wage growth stimulated by high consumer prices should continue to fuel the dynamic development of rents over the year as a whole. Overall, Scheunemann sees positive signs for a market recovery in coming months: ‘The ongoing yield compression and the prospect of further increases in nominal rental yields in the current housing market environment should further stimulate demand in the residential investment market,’ he said. ‘However, due to the caution of market participants, the market continues to only develop in small steps.’
