German rents finally starting to slow

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Rents for apartments in Germany are finally starting to slow after several years of sharp hikes, according to JLL, which will come as a welcome relief to many tenants in Germany, even if investors are unlikely to share their joy.

In eight cities analyzed by JLL – including Berlin, Munich, Düsseldorf and Stuttgart – average rents did not exceed the 5% mark in a y-on-y comparison published this month. Moreover, compared to rents in the second half of 2018, rents fell slightly in Munich, Düsseldorf and Stuttgart for some segments of the market.

‘Just a few years ago, such a development in rents could not have been foreseen,’ said Sebastian Grimm, senior team leader of Residential Valuation and Transaction Advisory at JLL in Frankfurt.

‘We see, in some markets, that we have reached a kind of ceiling for rents,’ Grimm told REFIRE. ‘For example, if rents are €30 per sqm in some parts of Munich, people get to the point where they don’t want to pay more. Affordability becomes a problem in some markets, even though politicians keep trying to push the rents back down. Munich was expensive even thirty years ago, though, so it’s a long-running trend. Unfortunately, it’s rather an emotional than a rational debate going on in Germany. Freezing rents is not a new idea and it didn´t work in many other countries but it is currently in discussion to be applied to the Berlin market. If rents were frozen, investment in residential properties would go down and landlords would invest less in their properties with very negative effects for the cities and tenants in the long term.’

Predictably, rental growth has been strongest in Berlin, with the median rent rising by 4.7% to €12.20 per sqm a month. ‘The excess demand and the overall decreasing number of housing completions are responsible for the plus in the capital,’ said Roman Heidrich, senior team leader of Residential Valuation Advisory JLL in Berlin. ‘However, the possible anticipatory effects of a possible tightening of rental regulations for existing properties cannot be ruled out as a cause,’ he added. ‘Micro-apartments and the top segment in particular are showing an above-average increase in rents. In the area of the most expensive 10% share of the apartments on offer, the increase was as much as 6.9% year-on-year. ‘

Both the German Property Federation (ZIA) and IVD Real Estate Association also say that the German government’s plan to introduce a five-year cap on rents in Berlin to combat soaring prices would be detrimental to the market, resulting in many landlords reducing the cost of repairs and postponing or cancelling bigger renovations. Strong criticism has also been levied by the owners' association Haus & Grund, which considers the proposed law not only unconstitutional but also in violation of human rights.

Discussions about Berlin’s proposed rent cap haven’t trickled through to the market – yet – according to Heidrich. However, if the House of Representatives does cap rents in the city, JLL expects a sharp decline in new construction activity in the residential rental market.

Elsewhere, rental increases have been modest this year, rising by just 1% in Munich and Stuttgart, 1.3% in Düsseldorf and 1.4% in Leipzig. However, top of the market rents have actually fallen in the period by 7.5% in Munich and by 8.1% in Stuttgart, according to JLL. Overall, compared to the second half of 2018, rents in Munich, Düsseldorf and Leipzig fell slightly on average.

One city which has a good grip on rents is Hamburg: ‘Politicians should be asking themselves why residential rents in Hamburg have gone up much more slowly than in any other big city in Germany in the last eight years,’ Grimm told REFIRE. ‘In 2011, the local government organized a round table to figure out how to build more apartments and by listening to tenant and landlord representatives because they’d realized that the lack of housing was becoming a problem. Previously, developers were obliged to build at least one parking spot for every apartment, even in student housing, which was pointless, as most of them didn’t have a car. Hamburg abolished this to reduce the costs of construction and to speed up the construction process. Since 2011, it has had the lowest increase in rents in the ‘Big 8’, at just 1% in the first half of this year. It’s a similar story in Düsseldorf, although there is a bit of volatility in the construction market.’

Munich remains by far the most expensive city for tenants with rents in the first half of 2019 averaging €19.45 per sqm a month, €4.40 per sqm less than Frankfurt, the second most expensive location, where rents increased on average by 3.4%, compared to a rise of 3% in Cologne.