How Germany’s renters make for a buoyant housing market

Article by Emily Perryman
Apartements along river Elbe in Hafencity Hamburg Germany HafenCity Hamburg is a large city development project for residental and office buildings along the Elbe river and Hamburg Port; Shutterstock ID 370227581; Departmental Cost Code : 162800; Project Code: GMKT_SUP_4.9.1E; PO Number: GBLMKT/2015-082
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Low levels of home ownership aren’t something that springs to mind when describing a buoyant housing market, but Germany’s nation of renters is turning mainstream thinking on its head.

Despite having the highest GDP in Europe, Germany has one of the lowest home ownership rates with just over half of its residents owning their home. This compares with 64.4 percent of adults in the UK and 78.8 percent of adults in Spain.

Part of the reason for the lack of home ownership is that Germany acts a lot more favorably towards renters than other countries do.

Tenants can terminate their apartment contracts for convenience whereas landlords can only give notice for good cause – this could include the landlord deciding to live in the apartment themselves or a material breach of contract by the tenant. Notice periods often extend to nine months and there are strict rules governing when the owner can demand an increase in rent.

Despite the challenges facing landlords, there has been increasing demand from both national and international investors for residential properties in Germany, where steady rental yields are an attractive option in the current low-interest rate environment.

Konstantin Kortmann, Head of Residential Investment Germany at JLL, suggests investors are attracted to Germany’s urbanization, stable economic environment and well-established residential market.

As well as having the largest residential buy-to-let investment market in Europe, Germany has one of the biggest and strongest economies in the world. The unemployment rate, for example, stood at just 4.2 percent in August 2016 – the lowest since February 1981.

Investor opportunity

Another factor that makes Germany stand out is its federal make-up. Unlike the UK and France which each have one major city – London and Paris – Germany has seven chief cities, bringing more opportunities for investors.

Of these seven cities, three made the top 10 list of leading European cities for investment prospects in 2016. The capital, Berlin, took the number one spot, followed by Hamburg in second place and Munich in 10th place.

Investors are backing Berlin to thrive well beyond 2016 based on its young population, growing reputation as a technology center and land available for development, according to PwC and the Urban Land Institute.

There are several residential projects in Berlin targeting the higher end of the real estate market, but Kortmann says these should be easily absorbed because of the rising number of international buyers in the capital.

Additionally, Berlin’s public housing companies aim to build around 54,000 new residential units by 2026 to alleviate the housing shortage in the city, partly created by a bottleneck in the processing of building permit applications.

“In addition to the construction of new condominiums, investors will turn their attention to less regulated housing forms such as student residences and serviced apartments,” says Kortmann.

A report by JLL shows asking prices for condominiums in Berlin have risen at an average of almost 6 percent per half-year since the start of an upswing in 2010. Rents, meanwhile, grew by 5.5 percent in the first half of 2016, although this was largely driven by new-build apartments.

In addition, many new German properties promote good sustainability standards, which keeps costs down for renters and investors alike. “Given the attractiveness of Berlin, also as a business location, demand will remain high. Furthermore, given that most new-building activity is in the high-priced residential segment, this situation is not expected to ease,” Kortmann states.

A bright country-wide outlook

Positive trends are also to be found in Hamburg, Germany’s second-largest city. Its population soared to 1.83 million in 2015 and this figure is expected to grow by more than 100,000 by 2030, requiring homes for an additional 70,000 households, according to the Federal Statistical Office.

Since 2004, Hamburg has experienced one of the sharpest rental increases of all the rental housing markets in Germany.

The prospects are looking strong across the country. “From an economic perspective, the German regions and cities, presents investors with a range of opportunities,” adds Kortmann.

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