Das erste Forum » German real estate market overview

Germany is a social market economy with a large capital stock, a highly qualified workforce, a high level of innovation and low levels of corruption. It is the largest economy in Europe and the fourth largest nation in the world in terms of nominal GDP. In addition to the intelligent economy and productive market structure, Germany also offers investment opportunities in its real estate segment.

What influences the German real estate market?
The volatility of the real estate market can be explained by numerous macroeconomic and social factors in the country. Due to the zero interest rate policy of the European Central Bank, mortgage interest rates remain at record lows and offer historically favorable financing conditions. In addition, the quantitative easing (QE) policy being pursued by the ECB is leading to higher liquidity, increasing investment pressure as investors seek potential investment opportunities with above-average returns in relatively safe sectors. QE is also weakening the euro, making the German real estate market even more attractive to investors from outside the eurozone.

New projects and construction activities lag far behind the growing demand, which leads to rising property prices. The German Property Index (GPI), which measures the return on all real estate investments in Germany, reached 14.7% in 2016, a record level since German reunification. The demand for high-quality real estate is increasing due to the demographic and overall economic development in Germany – ongoing urbanization and growing metropolitan areas. Germany is experiencing a positive reversal in birth rates and other demographic factors. The birth rate rose from 1.39 to 1.50 per woman between 2011 and 2015. In addition, Germany has a persistent migration surplus, which can partially compensate for the demographic imbalance.

Commercial real estate, especially office space, is also in high demand due to record employment and the low unemployment rate, and is also benefiting from increasing purchasing power and high consumer spending. Logistics and warehouse real estate is crucial for growing businesses and is therefore in high demand due to the increase in wholesale and retail trade. Below you will find an overview of the most important sectors of the German real estate market.

Residential Properties
The residential property market has managed to recover from the financial crisis and the market stagnation in the years after 2009. The construction projects of residential properties have increased steadily in the previous years leading to approximately 277,000 completed housing units in 2016. In 2015, residential property construction with a total investment of 170 billion EUR accounted for 60% of the total construction volume in Germany. Despite a meaningful increase in the granted construction permits (375,400 granted permits in 2016) and record high levels of completed projects, the demand still significantly surpasses the volume of completed residential projects.

Future outlook expects an increase in new construction permit requests and reaching 272,000 units per year till 2020 and further slowing down to 230,000 units per year until 2030. Meanwhile, in the short term, the residential property could surge to 380,000 units due to increased immigration.

However, the demand levels for residential properties significantly differ from region to region. In some regions, the gap between the demand and available properties could close soon, particularly in Eastern Germany. Meanwhile, in some regions, particularly in thriving urban areas, the available housing units will remain very scarce.

Along with the insufficient supply, quoted rents have increased accordingly. Especially in large cities, the trend of growing rents has been rather dynamic. For example, the annual growth rate of housing rents in Germany has been around 1.7% since 2004. Meanwhile, rent increased by 3.9% and 3.5% annually in Berlin and Munich accordingly. Both cities experienced a 6% yearly growth in purchase prices in this real estate sector.

Office Properties
Similarly as residential properties, also office properties’ market is in a good and forward-looking shape mainly due to positive migration balance and historically low unemployment rates. In 2016, approximately 3.9 million square meters of office space was rented in the top 7 cities in Germany. This indicates a growth of 12% in comparison to the previous period. A particularly dynamic development was observed in Frankfurt, Cologne and Stuttgart with growth rates ranging between 25% and 48.4%. Meanwhile, Hamburg, Dusseldorf, Munich and Berlin have experienced a cool-down in floor-space turnover in comparison to previous years.

The overall vacancy rate of office properties has decreased due to several factors: a dynamic demand, a slow expansion of floor space and high pre-letting rates. Across the top 7 cities mentioned above, the vacancy rate decreased by 0.7% points to 4.9%. In the top 7 real estate locations in Germany, the prime office rents range between 21 EUR/m2 and 37.50 EUR/m2 giving an attractive potential for investment return. This especially applies to Berlin, where rents have increased by more than 17% in comparison to 2015 reaching 28.7 EUR/m2. Currently, the highest office rents are in Frankfurt and Munich (37.50 EUR/m2 and 35 EUR/m2 accordingly).

Local investors retain the dominant market position accounting for around 60% of the total transaction activity in office property market. Meanwhile, foreign investors account for approximately two fifths (or 20.9 billion EUR) of the transaction volume.