Feb 05, 2020 Real Estate

Residential properties: three reasons why the boom is likely to last

The high on the residential property market could continue even further. Key drivers are urbanisation, a growing number of single households as well as new forms of living. How investors stand to benefit from this trend.

  • The trend in the direction of urbanisation is unabated in Europe: demand for urban residential living space should continue to see robust growth.
  • In the metropolitan regions, prices and rents for residential properties should continue to grow in the future.
  • Demographic factor: the number of one-person households is growing in tandem with the increasing proportion of singles and senior citizens.
5 minutes to read

Where trains once rolled across track systems, workers reloaded goods and diesel locomotives were refuelled, today multi-storey buildings are neatly arranged around a freshly created park. What was once a place of work has been transformed into a residential location. Hamburg’s “Mitte Altona” district growing on the premises of a former freight train station is one of the Hanseatic City’s showcase projects. Up to 3,500 apartments are being built in the heart of the city.

This is really coveted living space, which is scarce in many metropolises – and is causing prices to soar. For residential properties in Germany, in the third quarter of 2019 these were up by 4.9 per cent on average year-on-year. Freehold flats and houses in urban locations appreciated particularly sharply: most recently, prices climbed by 9 and 7.5 per cent, respectively, in the seven biggest German cities.[1] At the same time, the gap between supply of, and demand for, new living space in Germany continues to widen. In 2018 some 286,000 residential properties were completed throughout Germany, only 0.4 per cent more than in the previous year. This means that building construction still lags far behind the political target parameter of 375,000 homes per annum.[2] Accordingly, the upward pressure on prices is likely to continue. Investors stand to benefit from this boom via real estate funds, which are increasingly focusing on residential properties at present.

By what percentage are purchasing prices for residential properties in Berlin above the federal German average?

Urban appeal and attraction

“The trend towards urbanisation continues and urban populations are growing. This influx of residents continues to boost the level of demand for living space in major cities,” explains Taskin Mutlu, Real Estate Fund Manager at DWS. For the year 2035, for instance, demographic experts forecast 11 per cent more Berlin residents compared to today; for Leipzig, the population is expected to rise by 16 per cent.[3]

High demand for living space

In all seven of Germany’s biggest cities, since 2016 not enough new homes have been completed in order to satisfy the robust demand


of the European population is likely to live in cities in the year 2050.

Source: Urban Europe - statistics on cities, towns and suburbs

“The number of new buildings completed in numerous cities remains far behind the needs of the newcomers. It will not be possible to close this gap in the near future. According to Mutlu, there are several reasons for this: conservative procurement of building sites, rising construction costs and a dearth of skilled workers in the construction industry. However, other obstacles include speculation with land, delaying the construction of new buildings, lengthy waiting periods for building permits and stricter energy requirements for homes. Consequently, Mutlu believes that rentals and purchasing prices are likely to carry on rising in the medium term. And the metropolises are not only growing in Germany; people are streaming into conurbation hubs throughout Europe. According to the EU Statistical Office Eurostat, in the year 2050 over 80 per cent of the European population will be living in cities.[4]

The widening gap of purchasing prices for urban and rural properties reflects the attractiveness of metropolises. In fact, property prices in German cities exceed the federal average by 50 per cent. Munich, at 130 per cent, has the highest figure in Germany. A look into other European countries reveals an even more extreme picture. Prices in London are up by 198 per cent and in Paris and Lisbon by as much as 220 per cent above the nationwide average.[5]

“Against the backdrop of the dynamic development unfolding on the residential property markets, at present – in addition to Germany – in particular the Netherlands, Spain, Ireland and the northern European countries are interesting,” reports Mutlu. The outskirts of cities and regional surroundings in the vicinity are increasingly benefiting from the surplus demand in the centres of European metropolises. For instance, the number of households in the hinterland of Gdansk and Amsterdam is rising sharply – but, in the case of Munich, this also applies to Landshut located some 70 kilometres away from the Bavarian capital.[6]

Singles and senior citizens are driving demand

A demographic factor with an intense influence on the demand for residential units is the growing number of one-person and senior citizen households. Since 1991, the share of one-person households has grown by almost half.[7] Accordingly, this also increases the residential area utilised per person. In Germany, this area amounted to 46.7 square metres in 2018; ten years earlier, the area was only 42.2 square metres – up by almost eleven per cent.[8] Other factors are current trends like co-living, for instance. In the case of the modern co-living variant, individual rooms of an apartment are let, attractively furnished and well equipped in technical terms and are thus being adjusted to the needs of growing commuter flows. The segment of student apartments is likewise booming since an increasing number of students need more and more accommodation. In both new forms of living, it is frequently investment funds that acquire the estates and then let these to the operators as long-term tenants.

A look at other European countries, in which the level of rents is significantly higher than in Germany, provides additional clues as to how the German market could develop in the future. According to Fund Manager Mutlu: “In view of the European letting environment, a further increase in rents payable in German cities is on the cards – which means good prospects for investors.”

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1. Source: https://www.destatis.de/DE/Presse/Pressemitteilungen/2019/12/PD19_509_61262.html, as of: December 2019

2. Source: https://www.bauindustrie.de/presse/presseinformationen/bauindustrie-zu-den-wohnungsfertigstellungen-2018/, as of: May 2019

3. Source: https://www.berlin-institut.org/newsletter/anzeige.html?tx_news_pi1%5Bnews%5D=203&tx_news_pi1%5Bcontroller%5D=News&tx_news_pi1%5Baction%5D=detail&cHash=064895afd263246bda1345a4a83e15df, as of: April 2019

4. Source: https://ec.europa.eu/eurostat/statistics-explained/index.php/Urban_Europe_-_statistics_on_cities,_towns_and_suburbs_-_executive_summary#City_and_urban_developments, as of: November 2018

5. Source: https://www2.deloitte.com/de/de/pages/real-estate/articles/deloitte-property-index-2019.html, as of: July 2019

6. Source: Oxford Economics 2019

7. Source: https://www.destatis.de/DE/Presse/Pressemitteilungen/2019/07/PD19_272_122.html, as of: July 2019

8. Source: https://de.statista.com/statistik/daten/studie/36495/umfrage/wohnflaeche-je-einwohner-in-deutschland-von-1989-bis-2004/, as of: January 2020

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