A new study by researchers and valuers Wüest Partner shows just how the eastern German housing market is still characterised by large regional differences, but also highlights how investors may have greater return opportunities outside the bigger cities of the region.
The current study - "East German Housing Markets: Data and Prospects 2022" - examines the development of demographics, economic strength and housing markets in the five federal states of Brandenburg, Mecklenburg-Western Pomerania, Saxony-Anhalt, Saxony, Thuringia and the federal capital Berlin.
The study looks at the housing stock, construction activity, the rental and owner-occupied housing market and the market for multi-family houses. The study also shows which cities have the most profitable risk/return ratio, including forecasts for the future development of the locations.
As a generalisation, the biggest metropolitan areas and the strongest economic regions in eastern Germany are indeed characterised by above-average population growth and lower vacancy rates. However, median rents have risen significantly in the last 10 years, by over 107% n Berlin, by about 70% in Potsdam and by about 52% in Leipzig. The housing cost burden ratio is also above the national average of 20.3% in 13 of 20 eastern German cities. The highest rate is in Berlin with 37%, the lowest in Plauen with about 18 per cent. The trend is therefore towards smaller flats with higher rents per square metre. The situation is different for owner-occupied project developments: three-room and more flats in new buildings often command higher prices per square metre.
For investors willing to take risks, the highest return in the rental sector is in Plauen in Saxony at over 10%. Yields of between 8% and 9% can also be achieved in Dessau-Roßlau and Gera. Although all three cities are experiencing population declines averaging minus 4%, they show a stable to positive development forecast for their economic strength. The boom cities of Berlin, Leipzig and Dresden, on the other hand, are characterised by a low investment risk, but also offer investors only low average returns of between 3% and 4%, and at their peak considerably less. Attractive for risk-averse investors are the state capitals Potsdam and Erfurt as well as Rostock, the most populous city in Mecklenburg-Vorpommern, with average expected returns between 4% and 5%. All three major cities have a positive forecast for their economic strength, while at the same time purchase prices there have not yet risen as sharply as in Berlin, for example.
Newly built apartments (for rent) are most expensive in Berlin with a median rent of €17.38/sqm, followed by Potsdam with €14.84/sqm and Rostock and Jena with over €12.00/sqm. This order is also reflected in the median purchase prices for new-build condominiums (for sale to new owners). Here prices in Berlin are around €7,400/sqm, in Potsdam just under €7,000/sqm and in Rostock, Dresden and Leipzig €4,500/sqm.
Purchase prices for multi-family houses rise by 16%
The average purchase prices for multi-family houses rose by around 16% in eastern Germany compared to 2021. As with rental prices, Potsdam at €4,583/sqm and Berlin at €3,984/sqm are the most expensive on average. Cities with shrinking populations had significantly lower average purchase prices, such as Plauen at €645/sqm and Gera at €838/sqm.
Karsten Jungk, Partner and Managing Director of Wüest Partner Germany, summarised the outlook for the eastern German housing market: "Our study clearly shows: the established and expensive housing markets, such as in Berlin, are facing subdued development. Due to the now very high housing cost burden, there are limits to further rent increases despite high demand. Likewise, yields are historically low at a time when interest rates are under pressure. In contrast, cities with lower price levels are benefiting from the good framework conditions as well as the scarce housing supply in the metropolises and are catching up in both the rental and investment markets."
Wüest Partner recently joined real estate industry association ECORE as a Solution Partner, in recognition of the role ESG taxonomy has taken on in the valuation of real estate portfolios. Structured data from Wüest Partner's proprietary software can now be integrated into ECORE's scoring system.
The ECORE standard is a dynamic scoring method whereby all regulations, laws, ordinances and ESG criteria are combined to arrive at a score when valuing an asset, on a point scale between zero and 100. The ESG Solution Partners who support the ECORE standard are made up of leading real estate consultancy and service companies.
ECORE, which stands for ESG Circle of Real Estate, was founded in February 2020, and now counts more than 150 companies from among funds, asset managers, project developers and banks among its members. Jungk said Wüest Partner's joining the initiative was an opportunity to improve the quality of its valuation reports, that included sustainability data that may come from ECORE as standard, and thus make qualitative value statements on investments made for more sustainability in buildings. "We can now show property owners even better what the right steps are in the required quality towards CO2 neutrality and a sustainable property portfolio," he said.
