Despite the COVID pandemic, German residential rents have proved highly resilient, with nearly all German cities seeing rising rent levels throughout 2021. While the rate of rental growth has slowed in the biggest cities, growth momentum has been particularly strong in medium-sized cities, according to the latest "Residential Report Germany" published by brokers BNP Paribas Real Estate.
While the rental price level in the Big 7 cities is obviously ahead of the rest, at an average rental rate of €13.85 per sqm/month and growing at 3%, the second-tier cities saw average rent increases on new leases of 5% over 2021, a rise of 2% over the first pandemic year of 2020.
Berlin heads the list of the big cities, and the rise in its median rent of 66% since 2014 is a testimony of the attractiveness of the city to live and work in, and of course the low base from which it started.
But all the big cities are still subject to high demand pressure and an ongoing supply shortage, which continue to drive rents upwards. Vacancy rates are simply very low in these cities, and new construction is just not keeping pace with demand. The current vacancy rate of2.8% on average is still below the required fluctuation reserve of 3%. In certain cities where the vacancy rates are high (Frankfurt an der Oder, at 9.3%, Chemnitz at 8.1%, or Pirmasens at 9.3%), employment opportunities are definably poor, and housing demand is low.
In the Big 7, by contrast, vacancy rates are below 1%, while in the most expensive cities - Munich and Frankfurt - the vacancy rate is below 0.2%.
As the report highlights, one factor which is now becoming significant in overall rental costs is the effect of energy prices. Christoph Meszelinsky, head of residential investment at BNP Paribas Real Estate in Düsseldorf, says that, so far, tenants have been able to shoulder these rising costs and in cities where the overall rental burden as a function of disposable income is bearable, tenants should still be able to manage. However the likely rises ahead could push many tenants to housing cost overload, even in the top A-cities, even if the level of 'cold' rents stabilises. This will then limit the potential for rent increases, from a landlord's point of view.
Given that population forecasts are for increases for most larger cities until at least 2025, the pressure to find housing will remain high. Several cities in the eastern regions are not growing, however, and vacancies there will help keep rents subdued. But in the big cities pressure to find affordable housing is likely to continue for at least the next 15 years, and the new government's projected new building programme is designed to tackle this. Nonetheless, at the rate that new building costs are soaring, it is hard to see how even an increase in supply can counter the need to raise average rents to cover building costs.
The last two years, living in the shadow of coronavirus, has had a dampening effect on individuals' mobility with many potential movers electing to stay put. This has had a flattening effect on the rent curves in several otherwise popular locations - but not enough to put a serious dent in the general upward growth trend on German housing markets. These trends are driven by urbanisation and a general demographic change towards smaller households.
Even if - miraculously - the government's ambitious plans for accelerated construction to achieve 400,000 new housing units a year come close to achievement, the supply gap - particularly in the biggest cities - will remain a fact of life. Barring some form of emergency legislation - and even that, as we know, is no real solution - rents will continue to move upwards.