Savills World Research
Germany Investment
Market report
Germany residential
investment market
February 2016
Summary
Residential investment market at a glance
■Germany's population has been
growing more strongly than expected,
even before the influx of refugees.
Consequently, in the core growth areas
in particular, there are now scarcely
any apartments available and the
low completion figures mean that a
continued shortage is certain.
■Apartment rents have also risen
at an above-average rate in recent
years as a result. Asking rents across
Germany as a whole have risen by
6.5% since 2012. Cities with more
than 500,000 inhabitants have even
witnessed double-digit growth in many
cases.
■In addition to the favourable
fundamental data, the German
residential market is also characterised
by very high liquidity. When low bond
yields are added to the equation,
residential property therefore remains
a sensible cornerstone of portfolios,
particularly for risk-averse investors.
■However, the search for suitable
supply is becoming increasingly
challenging. Initial yields are at record
lows and there are significantly
more purchasers than vendors. The
increasing new-build activity and
growing willingness to sell are likely to
help in relieving the strain.
”The time for counter-cyclical buyers in Germany is
over. However, income-oriented investors still find
favourable conditions.” Karsten Nemecek, Savills Corporate
Finance - Valuation
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Market report | Germany residential investment market
Rents are rising,
particularly in the major
cities
Consequently, the average asking
rents for apartments in most cities with
more than 500,000 inhabitants have
witnessed above-average and, in many
cases, double-digit growth since 2012.
The equivalent figure for Germany as a
whole stands at 6.5%. The conditions
for investors are favourable, particularly
since the population growth in general
and the influx into the major cities in
particular will continue for a number
of years and the number of building
permits remains significantly short of
projected requirements. It is, therefore,
expected that apartment rents in such
cities will continue to show aboveaverage growth over the coming years.
The only element of uncertainty here
is the rental cap (Mietpreisbremse)
that has now been introduced in
many cities, although it remains to
be seen what real impact this may
have and whether it will actually slow
rental growth. The facts remains that
apartment completions across the
country remain significantly lower than
required to satisfy demand. Around
220,000 apartments were completed
in 2014 compared with an annual
new-build requirement of 350,000
to 400,000 apartments according to
current projections. On that basis, the
graph 1
Housing supply and demand in cities
with 500,000+ inhabitants
Population change
180,000
Completed flats
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
German residential
investment market is
among the most liquid in
the world
In view of the extremely attractive
fundamental data and favourable
(growth) prospects from an investor's
perspective, it is almost logical that the
German residential market has also
attracted large amounts of international
capital in recent years. A total of almost
€70bn was invested between 2010 and
2015, with Germany attracting around
half of the capital invested in European
residential property during this period
(Graph 3). The USA is the only country
in the world with a higher transaction
volume in the residential sector. Thus,
not only does the German residential
market stand out with attractive and
stable conditions, it is simultaneously
one of the most liquid residential
investment markets in the world. When
the historically low bond yields are
added to the equation, the German
residential market therefore remains
a sensible cornerstone of portfolios,
particularly for risk-averse investors.
Consequently, two investor groups,
namely property companies and
special funds, have been the principal
net investors in the market over the last
five years (Graph 4). Both are backed
by money from insurance companies,
pension funds, sovereign wealth funds
and other investors with a similar risk
profile. Since these investors also
make their allocation decisions based
upon the relative attractiveness of
property compared with other asset
classes, and primarily bonds, the yield
differential between residential property
and long-term bonds is a principal
allocation criterion. The fact that this
yield differential has been extremely
high for several years and that
residential property produces very high
(initial) yields compared with bonds is
likely to have contributed significantly
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012 2013 2014
Source: Statistisches Bundesamt / * Census, no data for 2011
graph 2
Size of households and flats
developed contrary
persons per household (left axis)
average size of flat -completions (right axis)
average size of flat -perrmissions (right axis)
2.5
86
2.0
84
1.5
82
1.0
80
0.5
78
sq m
Germany is growing. Between 2011
and 2015, the number of people living
in Germany rose by significantly more
than a million. This trend is surprising
insofar as relevant projections in 2010
assumed a population decline of
several hundred thousand people. The
consequences for the German housing
market are now all the more serious
since significantly fewer apartments
were built in recent years than was
necessary to satisfy demand. In the
major German cities in particular,
there are now scarcely any available
apartments, with vacancy rates in
many cities at 2% or lower at the end
of 2014. Around half of the population
growth in Germany in recent years has
been attributable to 14 cities with more
than 500,000 inhabitants. Between
2012 and 2014, the population in these
cities rose by more than 460,000 while
only 100,000 apartments were built
during the same period (Graph 1).
housing shortage is certain to become
even more acute over the coming years
and rents will continue to rise, unless
this is curtailed by regulatory measures.
Small apartments will be particularly
affected by these developments since,
although the average household size
has been in decline for decades, new
apartments have become larger year
on year. However, building permits
are showing a trend reversal in favour
of smaller apartment sizes (Graph 2
and commentary box "Lack of small
apartments").
0.0
76
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bulwiengesa, Statistisches Bundesamt
graph 3
Residential transaction volume in
Germany and Europe in comparison*
Europe
€bn
Germany is growing and
the housing shortage is
intensifying
February 2016
Germany
Share of Germany
40
80%
35
70%
30
60%
25
50%
20
40%
15
30%
10
20%
5
10%
0
0%
07Q4
08Q4
09Q4
10Q4
11Q4
12Q4
13Q4
14Q4
15Q4
Source: RCA, Savills / * past 12 months rolling
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Market report | Germany residential investment market
to these investors' decisions to
increase allocations to residential
property within their portfolios. Since
this environment is not expected to
change in the current year or next year
in view of continued expansionary
monetary policy, at least from the
European Central Bank, demand for
residential property in Germany will
remain high.
Surplus demand and low
interest rates are driving
yields to record lows
This substantial demand is faced with
a limited supply. In recent years, there
has been more capital in the market
than it has been ultimately possible
to invest. This surplus demand has
led prices to grow at a faster rate
than rents, causing a corresponding
hardening in initial yields (Graph 5).
This yield compression is highly likely
to continue this year in view of the
sustained high risk premium compared
with bonds, albeit at a slower pace.
For while the European Central Bank
will maintain its accommodative
monetary policy in the short term, the
US Federal Reserve commenced its
interest rate hike path at the end of
last year. Even if the Federal Reserve
is likely to be as hesitant in continuing
this path at it was in introducing it, the
familiar parameters of recent years
have nevertheless changed. From
now on, the question at central bank
meetings will no longer be whether
interest rates should be lowered or not,
but whether they should be raised.
This is one reason why an increase in
US government bond yields is now
more probable, which would make
these securities at least potentially a
legitimate option for investors once
again.
Everybody wants to
buy; scarcely anybody is
selling
Although the looming rise in bond
yields should dampen demand for
residential property in the medium
to long term, the significant surplus
demand will persist at least for the
current year. This is underlined by the
fact that the residential supply actually
available to direct investors has
diminished appreciably in recent years.
The five largest residential property
companies alone, namely Vonovia,
Deutsche Wohnen, LEG Immobilien,
TAG Immobilien and Buwog, now
own almost three quarters of a million
apartments in Germany, which is
almost one third of the entire private
sector apartment stock in professional
ownership. All five companies are
pursuing a growth strategy and,
therefore, primarily act on the
purchaser side. Disposals only occur in
the course of portfolio optimisation and
corporate acquisitions. Even the public
sector, which owns approximately 2.5
million apartments, has no (political)
interest in disposing of its apartment
stock at a time when the housing
shortage is becoming increasingly
acute. On the contrary, in cities such as
Berlin, municipal housing companies
are set to increase their holdings to
satisfy the rising demand. Taking
apartments in private and co-operative
ownership out of the equation leaves
a maximum of 2 million apartments
that constitute suitable supply for
institutional investors (Graph 6). By
way of reference, in the five years
between 2011 and 2015, almost 1.1
million apartments were purchased by
institutional investors.
Disposals may be
sensible for those that
bought in recent years
A not insignificant reason why there
will still be purchase opportunities for
investors going forward is that prices
have risen so sharply in recent years.
This will enable investors that bought
early in the cycle to bank significant
capital gains. Between 2010 and
2015, the average market price of an
apartment building across the top
seven cities rose by more than 50%
from approximately €1,600 per sq m
to almost €2,500 per sq m. For owners
with no long-term commitment to the
residential property market, it may
therefore be sensible to realise these
gains and part with (some of) their
holdings. In some instances, this may
even be lucrative with significantly
shorter holding periods, such as the
sale of the Obligo portfolio by Patrizia
last year after only a few months of
ownership.
Rising development
activity is increasing
supply
The rapid growth in the development
segment is also creating purchase
opportunities. Last year alone, the
transaction volume for development
projects (50 residential units or more)
February 2016
graph 4
Residential transaction volume by
type of investor
Purchases, past 12 months
Net investments, Ø past 5 years
Sales, past 12 months
Net investments, past 12 months
Listed property company
Open-ended special fund
Housing association
Other asset manager
Public administration
Leasing company
Sovereign wealth fund
Bank
Open-ended public fund
Other
Closed-ended fund
Private-equity fund
Private investor / Family office
Corporate
Insurance company / Pension fund
Developer
-16
-12
-8
-4
0
€bn
4
8
12
16
Source: Savills
Comment
Lack of small apartments
Germany is running out of apartments, at least in the
core growth areas. This is now a consensus view.
However, there is little discussion of the fact that
the apartment shortage is also so acute because
apartments are too large. The average number of
persons living in a household has been in decline
for decades, while the proportion of single-person
households is currently at a record high of 41%.
This is contrasted with a supply of 1 and 2-room
apartments that represents just 12% of the total
German housing stock. However, new-build
apartments have become increasingly large in recent
times. Something that could previously be described
as indicative of an affluent society, in which people
with rising incomes could afford larger and larger
apartments in a market with relatively flat growth
in apartment rents and prices, is now becoming a
serious problem. The strong price growth over the
last five years now often means that the spacious
apartments in Berlin, Hamburg and Munich are
unaffordable for the average two-person German
household. Consequently, apartments that were once
considered cramped are now once again in demand.
Low-income, single-person households such as
students and young professionals have felt the effects
of this for a long time and are being completely
squeezed out of the apartment market. Moreover, it
is highly likely that the peak of this trend has yet to
be reached. A change of thinking is urgently required
and the quicker this happens, the earlier the current
housing shortage can be resolved.
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Market report | Germany residential investment market
February 2016
graph 5
”The fundamental conditions for the
german housing market remain excellent
in the medium term and the demand of
investors stays high.” Matthias Pink, Savills
Multi-family housing yields* and
risk premium vs. government bonds
Premium A-cities vs. 10Y bunds
B-cities
D-cities
10%
A-cities
C-cities
9%
Research
8%
7%
Sixty towns and cities
have positive population
projections
Whether their investment requirements
are large or small, in the current
highly competitive environment, the
question for all investors is in which
towns, cities and regions they should
deploy their capital. For investors
with a short-term, counter-cyclical
investment approach, the answer is
fairly clear: in preferably none of them.
The cycle is too far advanced and
the downside risks in terms of capital
appreciation outweigh the upside
prospects. Against this background,
the traditionally opportunistic private
equity funds, who had invested several
billion euros in German residential
portfolios by spring 2013, have now
largely withdrawn from the market
(Graph 7). For long-term investors,
who consider stable rental income
more important than short-term capital
growth, the German residential market
remains appealing. However, these
should focus on those towns and cities
with favourable population projections
in order to minimise structural risks.
This currently applies to around
sixty relevant markets, which had an
average gross initial yield of 6.2% at
the end of 2015 (Graph 8). Investors
seeking above-average initial yields
could focus on those locations within
these sixty towns and cities that
are under-valued in relation to their
population projections. These include
Braunschweig, Erfurt, Gießen and
Greifswald, all of which have gross
initial yields above 7%.
6%
5%
4%
3%
2%
1%
0%
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bulwiengesa, Thomson Reuters, Savills / * yields: gross initial yield
graph 7
Net investment volume of private
equity funds in Germany
2.5
2.0
1.5
1.0
€bn
totalled more than €1.7bn, which
represented an increase of almost
one fifth compared with the previous
year. In view of the rising development
activity, investors will be able to invest
significantly more capital here over
the coming years. However, given its
fragmented nature, with an average
transaction volume of approximately
€30m in recent years, the segment is
somewhat unsuitable for investors with
large investment requirements.
0.5
0.0
Population projections
likely to be revised
upwards
-0.5
-1.0
-1.5
The picture shown in Graph 8 is
likely to prove a more pessimistic
representation of expected population
growth than can actually be
anticipated. This is explained by the
fact that population projections are still
-2.0
-2.5
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Source: Savills
graph 6
An overview of the owner structure of the german housing stock - high concentration within
the private sector
Housing stock in Germany
38.6 million flats
Privat person(s)
Community of
home owners
Municipal
housing
companies
Private housing
companies
Housing
associations
Other
22.7m
8.5m
2.2m
2.1m
2.1m
1.0m
Vonovia
Deutsche
Wohnen
LEG Immobilien
TAG Immobilien
Buwog
Other
370,000
150,000
110,000
75,000
27,000
1.4m
Source: Statistisches Bundesamt, Savills
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Market report | Germany residential investment market
based on assumptions made before
the wave of immigration into Germany
had reached its (provisional) peak. In
that respect, it can be assumed that
the next projections for Germany will
generally assume stronger population
growth. While it remains unclear
how the immigration will impact
demographic growth in the individual
towns, cities and regions, there is
much to suggest that the towns
and cities already showing growth
will witness further increases. Since
the construction industry is already
working at close to capacity, residential
supply cannot grow at the same pace
in the medium term. Thus, the existing
disparity between housing supply
and demand will become even more
acute in these towns and cities over
the coming years. This will translate
February 2016
into even greater income prospects for
investors that already hold residential
property or those that win the bidding
contests for these sought-after
properties.
graph 8
Risk-return matrix:
Overview of multi-family housing yields and population forecasts of German cities
12%
Salzgitter
11%
Bremerhaven
Frankfurt (Oder)
Plauen
Suhl
10%
Zwickau
Dessau
gross initial yield
9%
Gera
Lüdenscheid
Neubrandenburg
8%
Gelsenkirchen
Brandenburg (Havel)
Eisenach
Herne
Recklinghausen
Duisburg
Wilhelmshaven
Albstadt Görlitz
Hagen
Solingen
Minden Chemnitz Oberhausen
Remscheid
Bochum
Wuppertal
Neumünster
Siegen
Saarbrücken
Cottbus
Wolfsburg
Bottrop Witten Krefeld Mönchengladbach
Halberstadt
Flensburg
Greifswald
Halle (Saale)
Kaiserslautern
Coburg
EssenVillingen-Schwenningen Braunschweig
Hildesheim Hamm
Stralsund Lübeck MagdeburgDortmund
Mülheim (Ruhr)
Pforzheim Ludwigshafen
Gütersloh
Weimar Kassel
Bielefeld
HanauKiel Erfurt
Schweinfurt
Leverkusen
Schwerin
Heilbronn
Düren Detmold
Jena
Paderborn
Fulda Rostock
Bremen
Mannheim
Marburg
Bayreuth Kempten (Allgäu)
Leipzig
Reutlingen
Koblenz Lüneburg
Ratingen
Bamberg
Trier
Neuss
Bergisch Gladbach
Osnabrück
Fürth
Hannover
Göttingen
Tübingen
Darmstadt
Mainz
Friedrichshafen
Aachen
Dresden
Augsburg
Oldenburg Bonn
Offenbach (Main)
Landshut
Aschaffenburg
Offenburg
Ulm Düsseldorf
Nürnberg
Passau Wiesbaden
Karlsruhe
Ingolstadt
Köln
Würzburg
Erlangen Ravensburg
Regensburg
Münster
Hamburg
Heidelberg
Freiburg (Breisgau)
Konstanz
Berlin
Stuttgart
Moers
7%
6%
5%
Frankfurt (Main)
Gießen
Potsdam
Rosenheim
München
4%
-24%
-18%
-12%
-6%
0%
Population change 2015-25
6%
12%
18%
Source: Bulwiengesa, Statistisches Bundesamt, Savills
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Market report | Germany residential investment market
February 2016
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