Nov 25, 2019

What speaks for real estate despite the price boom

Demand is high, but supply continues to be tight: The price of a lot of real estate – especially residential real estate – is going through the roof. And what now?

  • Real estate funds offer an alternative to poorly yielding government bonds.
  • Instead of interest payments, investors can look forward to regular distributions.
  • Real estate investments in diverse markets are meant to minimize risk in the overall portfolio.
5 minutes to read

Eleven million euros for a high-end apartment in the new Hamburg Elbphilharmonie, 38,588 euros per square meter: The concrete gold boom is driving up the price of residential real estate in Germany. Not everywhere as extremely as in Hamburg’s top location – but still quite significantly: The price of houses and apartments in Germany has gone up by about 45 percent on average since 2004.[1] Despite the rise in prices, demand for real estate remains high, as the numbers show: Investors snatched up about eight billion euros worth of residential property in the first half of 2019.[2] Not only buying prices but also rents have risen sharply in the last few years – particularly in the major metropolitan areas. In Berlin, for example, they went up on average by 2.8 percent annually between 2000 and 2019.[3] That’s good for owners but for tenants it’s an increasing burden. That’s why the Berlin Senate now wants to introduce a rent cap.[4]

Which sectors do real estate funds invest the most in?

Source: BVI, “Auswertung der offenen Immobilien-Publikumsfonds”, March 2019

Investors are asking themselves: Is it still worth getting into the market at this level? “While it’s true that the government intervention now under discussion is creating uncertainty, the fundamentals in many regions in Germany continue to provide a good argument for the purchase of residential property,” Taskin Mutlu, real estate fund manager at DWS, explains. One reason: The number of households continues to rise but the number of building permits issued is not keeping pace. “This could increase the scarcity of supply in many places,” he adds. “As long as the government intervention under discussion does not have any serious repercussions, the owners of residential real estate will likely be able to continue to rely on relatively stable income and continued high property values,” Mutlu says. And then there are new trends like co-living that could really fuel demand: In this modern form of a shared apartment, individual rooms within an apartment are rented out – exquisitely furnished, with cleaning service, Internet access and sometimes even a subscription to Spotify.

More than 25 %

of the money that flowed into European office real estate in the first half of 2019 ended up in Germany.

Commercial real estate attractive compared to government bonds

Apart from investments in residential property, it’s still worth taking a look at commercial real estate such as offices and shopping centers. In the current low-interest environment, these represent a genuine investment alternative: “Although here too prices in some market segments have risen sharply, DWS forecasts that commercial real estate in Europe such as office space will continue to offer return opportunities significantly above the inflation rate to 2023,” Mutlu says. “Compared to the conservative forms of investment popular in Germany, that’s pretty good.” German government bonds, for example, basically do not return any current yield anymore these days. The course the European Central Bank is steering is the main reason for this – and the ECB has made it clear that it will not be making any changes to its policy of easy money any time soon. While real estate does not pay any interest, it does generate regular rental income that can benefit investors in open real estate funds, for instance, with regular distributions.

Broadly diversified portfolio

Open real estate funds offer investors other benefits beyond distributions: Professional fund managers put together a portfolio of diverse components such as office buildings and hotels, and also logistics real estate, from a wide range of cities and countries. This broad diversification lowers the risks in individual markets. If a location or sector starts to falter, others can cushion the effect. This is also true for savings of investors in general: Because real estate funds tend to take a long-term view, they usually trend independently of the stock market and are thus able to stabilize the entire portfolio.

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1. Source: Statista, “Entwicklung der Immobilienpreise in Deutschland von 2004 bis zum 1. Quartal 2019”, June 2019, https://de.statista.com/statistik/daten/studie/597304/umfrage/immobilienpreise-alle-baujahre-in-deutschland/

2. Source: JLL, “Wohnungsmarktüberblick Deutschland”, August 2019, https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/de/Wohnungsmarktueberblick-JLL-Deutschland.pdf

3. Source: Senatsverwaltung für Stadtentwicklung und Wohnen, “Berliner Mietspiegel 2019”, May 2019, https://www.stadtentwicklung.berlin.de/wohnen/mietspiegel/de/download/Mietspiegel2019.pdf

4. Source: Senatsverwaltung für Stadtentwicklung und Wohnen, “Senat bringt Mietendeckel auf den Weg”, October 2019, https://www.stadtentwicklung.berlin.de/aktuell/pressebox/archiv_volltext.shtml?arch_1910/nachricht6802.html

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