Investors circling but it is a tough market for foreign investors to crack
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Social housing is becoming an increasingly sought-after asset class but how easy is it for foreign investors to get a foothold in the market?
The short answer is not very. Local municipalities working with local developers dominate the market, according to Matti Schenk, associate research at Savills: ‘It’s a very special market for foreign investors to get into,’ he told REFIRE. ‘Without a local or regional partner, it’s rather complicated and takes a lot of time to get into the market. Some big institutional investors from abroad might say: “It’s too complicated to enter the market and the volume to invest is currently limited compared to other asset classes” and see that local players dominate. There’s strong competition from specialist investors in Germany - almost exclusively German investors. Typically, state housing companies will buy assets from developers as well.’
He describes demand for social housing as ‘as high as ever and supply is as low as ever’: ‘The problem is that due to rising costs and inflation, more people are in need of social or publicly subsidized housing. However, the stock of social housing units in Germany is shrinking. There’s not enough housing development in general and this is also the case for social housing. After 20 to 25 years, some units fall out of the social binding, meaning that more and more units are excluded from the official social housing market.’
However, demand is extremely difficult to summarise because there are at least 16 different housing programs in Germany and many cities have their own programs as well, according to Schenk. ‘In 2020, there were around 1.1 million units of social housing in Germany down from 2.1 million in 2006, meaning it’s decreased a lot,’ he said. ‘Typically, between 20,000 and 27,000 new units are built each year across Germany over the past five years but it’s not enough - it’s estimated that around 100,000 units are actually needed. Last year, there were €1.5 billion in residential deals that were either social housing or which had a social housing component. It’s difficult to break it down more than this because some projects might only have a very small amount of social housing. In total last year, the transaction volume on the institutional residential investment market amounted to some €12.2 billion. The amount of deals with a social housing component was higher than average. Investment in social housing has become more attractive since the turnaround in interest rates because you get more attractive financing conditions due to public funding.’
Interest-free loans being offered to promote development
Some federal states are offering interest-free loans to housing companies providing social housing in a bid to boost construction. Last month, the government of Mecklenburg-Vorpommern revised the guidelines for housing promotion. Going forward, housing companies will receive interest-free loans instead of state subsidies for the construction of social housing. The move is a reaction to increasing construction costs and is also designed to create more flexibility, according to Construction Minister Christian Pegel (SPD). Until now, the state had granted subsidies of up to €850 per square metre. Now the housing companies will be eligible for loans of between €2,730 and €3,075 per square metre, depending on the funding level and region. The credit period is 40 years. Depending on the funding path chosen, the companies will be granted a 25% or 35% reduction in what they have to repay. The rent and loan repayment period has also been doubled from 20 to 40 years. According to Pegel, a total of €47 million in federal and state funds will be made available this year for new social housing construction.
Nonetheless, the severity of the problem is clear: according to a recent study by the Pestel Institute in Hanover and the construction research institute ARGE in Kiel, which was commissioned by the Social Housing Alliance, Germany has a shortage of more than 700,00 apartments. This deficit increased by 300,000 flats last year, according to Matthias Günther, head of the Pestel Institute, largely due to the increase in the population. Around 1.5 million more people are living in Germany compared to a year ago, many of whom are Ukranian refugees: ‘This means we have an absolute record immigration - more than in the previous record refugee year of 2015, Günther said. He has stressed that federal states need to do more, citing Hamburg as the model state for social housing construction, followed by Bavaria, Schleswig-Holstein, Berlin and Baden-Württemberg in terms of the subsidies invested by the Länder. Bringing up the rear in the Länder ranking is Saarland.
Energy efficient social housing projects will be the way forward
Over in Hannover, there is a drive to create social housing that is both sustainable and energy efficient in response to the energy crisis. InvestEU, an investment program at the European Investment Bank (EIB) is supporting a project in the city to build 640 new, energy-efficient, affordable apartments for rent. The apartments, which will be built and owned by Hanova, the city’s municipal housing company, will include 232 social housing units, for two-person households with an income of €23,000 a year or less, and 408 affordable housing units.
‘Germany is a rich country, but there are a lot of people who struggle to gain access to affordable housing,’ said Sotir Trambev, a loan officer at the EIB bank. ‘It’s a huge social problem in urban centres, such as Hannover, which is also one of the hubs for distributing refugees from Ukraine. We were keen to be involved with this project, because it clearly supports two important EU policy goals—social inclusion and climate action,’ he added.
Hannover's growing economy makes the city an attractive metropolitan area, according to Karsten Klaus, chief executive of Hanova: ‘Due to the rapidly increasing number of inhabitants and the current crises, the demand for affordable housing is also increasing. However, this is in short supply. We help to create decent, affordable housing for people on low and middle incomes, thereby reducing imbalances in the city's housing market.’
It’s a timely project, given that the percentage of energy poor German households—those that spend more than 10% of their net income on energy bills—has doubled since 2021 to 41%. Combined with a scarcity of new apartments and rising rents, the cost of living crisis has catapulted housing affordability to the second biggest concern for many people.
Hanova owns around 15 000 housing units. The company, which is the largest real estate service provider in Hannover, supports the city’s housing policies by building new social and affordable flats for rent. It also manages residential and commercial premises and builds schools and kindergartens. The financial solution put together by the European Investment Bank uses guarantees from the InvestEU program to offer a long-dated (27-year), flexible, unsecured (therefore effectively subordinated) loan of €60 million that allows Hanova to secure the rest of the financing it needs, without tying down its own resources. The loan also gives the company the option to repay in one go after 15 years. The deal marks the first investment made by the InvestEU programme in Germany. Since its establishment in 1958, the EIB bank has invested over a trillion euros.
Apartments for the homeless and those in need of protection
Similar projects are underway elsewhere, some of which are targeting the particularly vulnerable. In January, Nöfer Architects announced the design of a new residential building with 85 new flats in Berlin-Marzahn, Marchwitzastraße 33, for state-owned Berlinovo, with KIM - Kilian Immobiliengruppe as the project developer. The flats will be available to homeless people, people at risk of homelessness, single parents with children and women in need of protection. Berlinovo will rent the building to the social institution Unionhilfswerk, which will operate the building.
‘As a strategic partner for the state of Berlin, Berlinovo plays a responsible role in the housing market and in the housing policy of the state of Berlin as part of its provision of public services,’ the company said in a statement. ‘In the coming years, we will continue to expand our portfolio. To this end, we are investing in Berlin real estate projects and playing a significant role in the expansion of innovative housing offers. The focus here is on the development of offers with which we can optimally meet the dynamic developments of the city and the need for affordable housing solutions. In particular, we focus on the needs of people in our city who are not directly the focus of the housing market: Students, senior citizens, refugees and, as in this valuable project, also people who are particularly threatened by homelessness.’
In Berlin, the only official census of homeless people to date took place in February 2020, according to which there are around 2,000 homeless people in the city. In contrast, there are about 390 places to sleep in emergency facilities all year round, and another 800 are provided by Berliner Kältehilfe in winter.
‘We can probably complete the project well ahead of schedule,’ said Jan Kleinebecker, managing partner at KIM. ‘After succeeding in obtaining the building permit in just six weeks in close cooperation with the district of Marzahn-Hellersdorf, the project proceeded at a fast pace - despite numerous overriding adversities, such as supply chain bottlenecks or construction price increases. Thus, the shell was completed after only six months. Everyone involved, from the district administration to the general contractor ANES to utilities such as Vattenfall, was aware of how important this building was. Accordingly, everyone put their backs into it.’
While these projects are a step in the right direction, the German government is still far off its target of building 400,000 new homes a year. Last year, just 293,393 new homes were built in Germany, a y-on-y decline of 4.2%. Chancellor Olaf Scholz has stressed that the goal remains to build 400,000 flats in Germany per year, 100,000 of which will be subsidized through social funding: ‘We want to make it clear that we are committed to achieving our stated goals,’ he said. ‘Our goal is to increase the number of domestic housing units to this level,’ he added, noting that he is well aware of the effort it would take to achieve the ambitious housing targets. Scholz said that the conditions for the construction industry had become even more difficult following Russia’s illegal invasion of Ukraine, which is why the German government is putting a ‘protective economic shield’ in place to ensure that energy and housing remain affordable.
The ‘protective shield’ would make up to €200 billion available to cushion the consequences of high prices for consumers and businesses, according to Scholz. The government has already introduced an electricity price brake, and is working intensively on ways to keep gas prices down. The additional sum of almost €100 billion is designed to ease the burden on both the general public and businesses.
So what can we expect from the market this year? For Schenk, it is just too early to call: ‘It’s too early to say what the deal volume could be this year because the deal activity is currently very low and we would expect the market activity to be subdued for the next few months. It also depends on price expectations, there’s a big gap between buyers and sellers’ expectations - that’s a cross-sector phenomenon.’
