Micro-apartment
Micro-living is making waves. As landlords look for ways to circumvent the Mietpreisbremse and charge higher rents and an increasing number of singles and professionals seek smaller apartments, furnished micro apartments are going mainstream.
Typically, micro apartments range from 14 to 32 sqm, which includes a bedroom, bathroom and kitchenette, which may be combined into one main space. Traditionally, they have been popular with students who couldn’t afford bigger spaces but as rents continue to rise in major German cities, more and more professionals are looking for a similar living space.
‘Investor interest in the micro apartment and student housing asset class, which is growing in terms of transaction volume, has picked up significantly in Germany in recent years, particularly as universities, as well as companies in high-growth sectors of the economy, are attracting increasing numbers of local and foreign students, expats and young professionals, but the supply of modern, purpose-built housing is scarce,’ said Jirka Stachen, director of research at CBRE.
According to online platform Immoscout24, their share of advertised rentals rose from 8% in the fourth quarter of 2018 to 13% most recently. ‘The rapid increase in furnished apartments is partly due to regulations in the rental market,’ said Gesa Crockford, managing director of Immoscout24. Landlords can charge a premium for furnished apartments, thereby pushing up rents. In the past five years, the average price of a furnished apartment has soared from €15.50 per sqm to €22.50, whereas unfurnished apartments on average cost €9.32 per sqm.
There is currently no legal rule regarding how to calculate the furnishing surcharge, although it is customary to use the surcharge to reflect the current value of the furniture. In Berlin, for example, 2% of the current value of the furniture is usually added to the monthly rent. If the furniture is worth around €6,000, this would equate to €120 per month. A surcharge for a kitchenette is not applicable if it is listed as standard equipment in the rent index of the municipality. At the moment, landlords are not obliged to state the current value of the furniture or the furnishing surcharge in the rental agreement, which makes it hard for tenants to know what they’re actually paying for.
Forward deals dominate investment market
The investment market for student housing and micro-apartments only slightly slowed in 2022, despite the interest rate turnaround, according to CBRE. Around €1.2 billion of deals were transacted last year, down 7% on 2021 but higher than the recent average. Forward deals accounted for more than 75% of all deals. Both national and international investors emerged as buyers in the past year, with international players accounting for 36%.
Investors are largely focusing on cities such as Berlin, Frankfurt, Hamburg and Munich, where supply is very limited, as well as other popular university cities: ‘Despite the great interest in micro apartments and student apartments, current developments on the capital markets with rising refinancing costs and higher returns on alternative investments are causing a shift in returns in this real estate asset class,’ said Tim Schulte, senior director of Valuation Advisory Services Residential at CBRE. ‘For example, the median prime yield of the German Top 7 markets in the fourth quarter of 2022 was 3.75%, about 0.2% above the level of 2021, marking a moderate increase compared to the other real estate segments.’
‘The rent prices per square meter of most micro-apartments are at the level of the most expensive apartments in the respective city’
It’s easy to see the appeal to landlords and investors – you can fit more – often furnished - micro apartments into one building and generate a higher rental income than for bigger apartments elsewhere. According to a report by DIWG Valuation, micro apartments have a comparatively high average rent in all German locations due in part to additional services, such as common areas and/or concierge service. The majority of providers advertise an "all-in rent," so a comparison with the average “cold rents” in the cities surveyed is not possible. ‘The rent prices per square meter of most micro-apartments are at the level of the most expensive apartments in the respective city,’ said Andreas Borutta, managing director of DIWG Valuation.
Rents typically range from €208 per month up to €1,560 per month, according to the latest Micro-Living Initiative, for which bulwiengesa evaluated operating data from a total of 24,735 residential units in 123 apartment buildings of all quality levels nationwide. On average, apartment buildings with very good quality fittings command rents of €24.80 per sqm, while standard fittings average €15.30 per sqm, according to the study. In total, the apartments surveyed comprise around 692,000 sqm of living space. Just under 60% of them are located in A-cities.
The micro-living market has shaken off the effects of the pandemic, according to the study. Occupancy is back up to 94% at the member companies of the Micro-Living initiative. The average “all-in” rent is around €592 per month, an increase of €1.20/sqm over the past six months. Management costs rose by 10.1% to €7.09 per sqm - by far the highest level since the survey began. Persistently high heating and energy costs mean that further increases can be expected in the second half of 2023.
Such is the segment’s appeal that is now has its own association. One of its main aims is to establish micro-living with its own terminology when it comes to the building regulations of the German states and improve the conditions for new construction.
However, some in the industry fear that micro apartments marks yet another move away from Germany’s much needed increase in affordable housing. ‘Due to the high rents caused by the modern equipment and the full availability of the apartments, this could have a negative effect on the rent level of a city or urban district,’ Borutta warned. ‘This would mean that the hope of creating sustainable affordable housing could not be realized.’
