Investing in German Real Estate

A practical guide

Florian Hackelberg, Dirk Hennig

• Publisher: Haufe
• Year: 2021
• Topic: Business
• eBook ISBN:
  9783648146583
• Subtopic: Management
• Index: Business

Investing in one of the most promising real estate markets in Europe offers enormous opportunities. And as with every real estate market, in Germany too, the local framework conditions must be understood and their particularities must be adequately taken into account. The authors are renowned senior executives, real estate advisors and academics, who share here their extensive experience and real life insights from countless real estate investments, covering all aspects of a successful investment process in Germany. Includes: markets, the regulatory framework and investment guidelines.Contents: - Essentials for successful real estate investments in Germany- Macro-economic structure and dynamics of the German real estate market- Real estate investment, trends and strategies- Diverse submarkets: residential, offices, retail, hotel and nursing homes- Real estate legal, tax and audit frameworks- German REITS and ESG in real estate investments- Real estate M&A, financing, due diligence and valuations

[57]II. Markets – German Real Estate Market Sectors

[59]3 The Housing Market in Germany

Ingeborg Esser

3.1 The Provider Structure in the German Housing Market

In terms of provider structure, the German housing market is dominated primarily by small-scale private landlords. Private, non-institutional landlords – also termed »amateur« landlords – constitute the largest group of housing providers in Germany and own housing stock in the region of 15 million residential units. This is a characteristic specific to the German rental housing market, and something that sets it apart from other European countries, whose rental housing markets are typically dominated by professional commercial providers. Small-scale private landlords manage around 63 % of all rental housing in Germany, which equates to 36 % of the total housing stock.

Professional commercial providers hold the remaining 37 % of the rental housing stock, managing almost 9 million rental apartments in Germany. In terms of housing stock, two thirds of the commercially managed dwellings (that is around 6 million residential units) are organized within the Federal German Housing and Real Estate Organization (GdW), which counts approximately 3,000 companies among its members.

[60]

Fig. 3.1: The provider structure in the German housing market1

[61]3.2 Rental Accommodation in Germany – The Most Common Form of Housing, High Quality and Stable Demand

The German housing market is characterized by a high and relatively stable rental housing share compared to the European standard. Only Switzerland has a higher share of rental housing in the total housing stock. The last special survey on the housing situation, which was conducted as part of the 2018 microcensus, counted approximately 23.7 million rental apartments among the 41.4 million residential units. This corresponds to a share of 57 %. Just under 18 million, or 43 %, of all dwellings in Germany are occupied by their owners. Compared to the rest of Europe, Germany therefore has the biggest rental housing sector of all the EU member states. In terms of inhabited housing, 54 % of all German households live in rented accommodation.

In almost all the other European countries, more than half of all homes are owner-occupied. Italy, Spain, the Czech Republic, Poland and Norway have the highest ownership rates of 77 % or more, followed by the UK, which has a home ownership rate of more than 60 %. In these housing markets, the rental housing sector primarily caters to low-income population groups and households that are just starting out. Only marginal segments of the rental housing market, for example in the large metropolitan regions of these countries, also offer a limited stock of attractive rental housing for high-income households.

Fig. 3.2: Rental housing share for selected European countries in 20182

[62]Looking at the economic strength of the countries concerned, it is clear that the home ownership rates in Europe are neither a measure of quality of the housing supply nor an indicator of social prosperity. In fact, wealthy countries, such as Switzerland and Germany, are among the countries with the highest share of renters. By comparison, in the economically weaker countries of the EU, such as the Czech Republic, Poland and Portugal, only a small proportion of households live in rented accommodation.

There appears to be no imminent end in sight to the dominance of the rental housing sector. The divergence between the different age groups is particularly noticeable. More young people in particular are once again living in rented accommodation: between 2010 and 2018, the proportion of renters among 35 to 44 year olds increased by 5 percentage points, compared to a drop of 5 percentage points for the over-65s. In addition, the proportion of renters has increased for public servants and decreased for self-employed people. For new dwellings built since 2011, 58.5 % are occupied by the owners themselves, while 41.5 % are rentals.3

It should be noted that many tenants do in fact own residential property that they, in turn, rent out. This is motivated by tangible tax advantages and a desire to create lasting value for their retirement provision.

Regional Clusters in Independent Cities and Conurbations

The proportion of renters varies throughout Germany. Tenant households dominate all the big independent cities, representing well over 60 % of the housing stock. In some cities, more than 80 % of households live in rented accommodation; these include Leipzig (89 %), Dresden (86 %), Berlin (83 %) and Frankfurt am Main (81 %).4 Rented accommodation is also particularly prevalent in the Ruhr valley, south-eastern Lower Saxony, the Rhine-Main region, in the Stuttgart region and in the greater Munich area. In the new German federal states, there is a higher proportion of tenant households in almost all districts, including more rural areas, as a result of the former German Democratic Republic’s housing policy.

Regions where less than 30 % of households live in rented accommodation include north-western Lower Saxony, the rural areas of Rhine-Hesse, Rhineland-Palatinate and Hunsrück, as well as some districts in Bavaria. Tenant households are in the minority (at between 30 and 40 % of the housing stock) in western Schleswig-Holstein, the area surrounding Bremen, the southern area of Hamburg, north of Wolfsburg and [63]in Wendland, also in northern Hesse, the eastern Black Forest and the city region of Ulm, as well as in almost all Bavarian districts north of Munich.5

Among the German federal states, the territorial state of Saxony has the highest share of renters, at 65 %, after the two city states of Berlin and Hamburg, in contrast to Saarland, which has the lowest proportion of renters in Germany at just over 35 %.

Fig. 3.3: Rental share in the German federal states in 20186

Structure of Tenant Households and Rental Trends

Looking at the income situation of households in Germany, it is not surprising that the available net household income proves to be a decisive determinant of home ownership, alongside household size and the age of the occupants. There is a clearly positive correlation between income levels and the proportion of owner-occupied dwellings.

However, it is noteworthy that, in Germany, more than one third of all households with a net monthly household income in excess of 3,200 EUR (around 36 %) live in rented accommodation. This corresponds to just over one fifth of all tenant households. By way of comparison, this income group accounts for just over 47 % of owner-occupied households.

A significant proportion of higher income households with greater opportunity for equity capital formation therefore choose to live in rented accommodation in Germany – an indication that ownership rarely offers significant qualitative advantages over renting.

[64]

Fig. 3.4: Monthly household income of households living in rented accommodation in Germany in 20187

Since 2000, net base rents have developed moderately below inflation. Between January 2000 and May 2020, there was a 28 % rise in net base rents. Over the same period, the general cost of living increased by 33 %. In price-adjusted terms, therefore, rental prices experienced a slight downward trend over this period.

Fig. 3.5: Net base rents and general price development since 2000, monthly values8

[65]Compared to net base rents, there has been a significant rise in the costs of utilities and other fees over this period. In view of the high price increase for some costs, utilities and other fees have become a significant proportion of total housing costs in recent years.

To assess the price elasticity of demand, it is more useful to look at the relationship between gross base rent and household income than the rent price development per square metre.

For households entering into a rental contract within the last four years, rent represents a 28.6 % share of the average household budget nationwide. For those living in a metropolis or larger city, this share rises to 30 % or even higher, as can...

Table of contents

• Inhaltsverzeichnis
• Hinweis zum Urheberrecht
• Impressum
• Foreword
• Foreword from the Editors
• I. Fundamentals – Basics of the German Real Estate Market
• II. Markets – German Real Estate Market Sectors
• III. Framework – German Regulatory Real Estate Framework
• IV. Management – Guidelines for Investing in German Real Estate
• The Editors and Authors