Participants in the press discussion organised by Berlin consultancy Rueckerconsult
The German real estate industry is not going to be able to solve its ever-worsening housing shortage itself, and there will be no alternative to emergency support at federal, state and local authority level to help get the industry back on its feet. This was the unmistakable key takeaway from a lively press discussion organised by Berlin consultancy Rueckerconsult, entitled "Does Germany need a housing miracle?"
Participating companies in the discussion were construction group Becken, Catella Residential Investment Management, DLE Land Development and data-driven real estate platform PREA.
Dieter Becken, CEO of Becken Group, said that Germany will lack around two million new apartments by 2026, with little chance of making up the gap. The financial mathematics simply make the construction of affordable apartments unfeasible. "The high level of construction costs combined with persistently high interest rates can only be compensated for by high rents with significantly lower returns," he said.
"The causes of the current housing crisis result from a mixture of persistently high land prices, very high construction costs and skyrocketing interest rates. Project developers can only compensate for this high cost level for residential construction at all levels by charging higher rents, which is simply no longer affordable for the user. In the calculation, we need a basic rent of 25 euros per square metre in order to build at a small profit. We stop at €15 per square metre, because the masses can't afford more."
Becken called for state funding to boost construction of affordable housing. "We need an emergency plan to boost housing construction. Because in the next three years, we are heading for a housing shortage of unprecedented proportions. The often restrictive policy in housing construction to date must evolve towards subsidisation. The housing industry must no longer be seen as a supplicant, but as a solution partner. The state has failed to take countermeasures in good time. Now it must act.
"Taxes are an important lever, but so is the procurement of land. The state must subsidise the procurement of land, the housing credit institutions must subsidise the high interest rates. The administration must be completely restructured in order to reliably deliver housing construction projects in the shortest possible time. All of this is necessary to move housing construction forward, but I don't see any signs of this happening."
Real estate industry unable to solve housing shortage by itself
Michael Keune, managing director of Catella Residential Investment Management, said the real estate industry couldn't solve the housing shortage itself from its own resources. "Due to the changed interest rate situation, institutional lenders are withdrawing from financing new residential construction via forward deals," he said.
He painted a gloomy picture of the financing and investing environment. "There is no more capital for forward funding projects because the basic idea of institutional investments simply no longer works at the moment. Capital providers such as large pension schemes and pension funds have actively withdrawn from property investments due to the changed conditions on the credit and capital markets. The investment capital is looking for a 3.5% to 4% distribution yield, which corresponds to purchase price factors of 18 to 19 times the investment and construction costs. It is currently no longer possible to realise new residential space for these prices."
"We are currently still buying residential property on the market at these factors from players who have to sell. But this is also a challenge for us in terms of profitability, especially as these are placed in sustainable funds in accordance with Article 8 and Article 9 and we only acquire energy-sustainable projects."
As a result of the changed market environment and demand behaviour on the investor side, Catella Residential Investment Management will record significantly lower completion figures for flats in 2024 and 2025: "In 2024, around 1,000 new apartments will be completed via project developments in our funds, and in 2025 there will only be 500 residential units. The latter corresponds to just one sixth of the 3,000 completions in 2023," added Keune.
Rising land prices not the cause of construction slump
Dr. Simon Kempf, managing director of DLE Land Development GmbH, downplayed the trend in building land prices, saying there weren't the cause of the slump in construction. "Even if building land were to cost nothing, the construction of new rental apartments would not be profitable due to the rise in interest rates and high construction costs," he said.
He gave a concrete example of what developers were up against. "If a project developer aims for a rent of €15 per square metre with a 5% interest rate, this corresponds to a price per square metre of €3,600. However, the construction costs alone amount to €3,400 euros per square metre. If a buffer for unexpected additional costs of 10% is also included, the project developer would have to be given the land more than as a gift for construction to pay off. Such an investment would be loss-making."
"In theory, the state would have an effective lever to make the construction of rental apartments worthwhile. If, in the same calculation example, the 19% VAT on the construction costs were removed, this would result in a price of around €380 per square metre for the property, which the project developer could even pay including the buffer in order to achieve the targeted return."
Kempf also agreed that a jolt is needed not only at federal and state level, but also at local authority level, which is decisive for the planning permission figures. In particular, he called for more cross-municipal thinking and action in planning and authorisation in Germany: "In around a third of our project developments, the complex structures delay the planning procedure. In our estimation, the 'fear' of further immigration, both on the part of the population and politicians, also significantly hinders approval procedures for around 20% of our projects."
New-build rents surging in the big cities
Gabriel Khodzitski, CEO and founder of Berlin-based data-analysis specialist PREA, pointed to the upward pressure on rental prices, with increases being recorded in 124 of the 127 cities his company researches. The dynamic for new-build units is particularly strong in the top cities, where the pace of rental development has long been set by furnished apartments; rents of €30 per square metre are now to be expected in some cases, with such rent levels likely to impair the influx of workers and the competitiveness of the cities.
PREA has been seeing a significant increase in new contract rents since the beginning of 2022. By the beginning of 2023, new-build rents in Berlin, Hamburg and Munich had risen by 24.1%, 19.1% and 9.3% respectively, and by 8.9% on average in the A-cities.
The influx of international professionals is a key driver of the latest rental price growth. "People who are familiar with the rent levels in other European and non-European countries are more willing to pay higher rents than local workers," said Khodzitski. In addition, the market for furnished accommodation in major cities has developed from a niche segment to an established player in the residential property market. In Berlin, for example, this market already accounts for every second apartment advert. This is significantly less regulated than the traditional rental property market.
Accordingly, prices per square metre in Berlin (€33.60), Frankfurt am Main (€32.20), Hamburg (€30.00) and Munich (€32.20) are already on a par with those in other major European cities such as Amsterdam (€32.90), Milan (€29.20) and Lisbon (€35.70). Only in Paris are rents per square metre significantly higher at €44.00. The majority of Berlin households (32%) with a household income of between €1,500 and €2,600 can no longer even afford a two-room flat in a new build, assuming a maximum rent burden of 40% of their disposable income.
"The significant increase in rents has a long-term negative impact on the competitiveness of cities and inhibits the ability to attract new workers," says Khodzitski. As a result, the low supply of housing causes stagnation. "Innovations and technologies could make housing construction in Germany more efficient and sustainable: AI-based analyses, for example, allow more effective use of subsidies. By clustering locations, the regions most in need can be identified and funds deployed in a targeted manner.
Khodzitski stressed the role played by urbanisation and demographic trends in the collapse of the birth rate in many regions of Germany, with consequences for investors, as well as the risk of rent losses due to declining productivity in key regional industries. This could particularly affect certain eastern German cities with their higher risk of poverty and large rental housing stock.
PREA says population declines of up to 60% over the next 20 years with growing vacancies are a particular threat in rural regions such as the Saale-Holzland district. The rural federal states of Saxony (-9.5%), Saxony-Anhalt (-17.2%) and Thuringia (-14.9%) are particularly affected by the decline in the younger population, where an oversupply of housing is emerging away from the larger cities.
