Residential Investments in Germany – December 2024

Dear Readers,

These are indeed dynamic times: Germany’s coalition government has collapsed, new elections loom, and international attention is focussed on the aftermath and potential economic implications of Donald Trump’s election as U.S. President. At the same time, geopolitical tensions continue to dominate the headlines.

The property market is also under pressure: renovation backlogs are hindering progress, and there is a significant population shift as a growing number of people relocate from urban areas to the suburbs and exurbs. This trend can only be reversed with innovative approaches.

Nevertheless, there are signs of optimism on the market. The latest Residential Investment Barometer shows that the mood among market players has improved significantly.

We hope you enjoy reading this edition of our newsletter and wish you a successful conclusion to an exciting year!

JMS and HFR

Serial refurbishment can accelerate the pace of transformation

Almost two thirds of Germany’s building stock was constructed before the introduction of the first Thermal Insulation Ordinance in 1979 and consume up to five times more energy than modern buildings. That adds up: about 21 million buildings in Germany account for around 35 per cent of the country’s energy consumption. This not only places a strain on the environment but also torpedoes Germany’s goal of achieving greenhouse gas neutrality by 2045. Moreover, in accordance with the EU Buildings Directive, all buildings in Europe are expected to meet net-zero standards by 2050.

And the reality? Germany is struggling with a substantial building refurbishment backlog. Despite the fact that an annual refurbishment rate of two per cent is required to achieve the country’s climate targets by 2030, the rate stagnated at just 0.7 per cent in 2024. If this trend persists, it is projected that only 275,000 residential units will undergo refurbishment by 2025, falling significantly short of the legally mandated targets.

A solution with potential: serial refurbishment
Serial refurbishment has the potential to deliver a breakthrough. This process uses prefabricated modules that act as a second skin on existing facades and, in the best case, allow buildings to be upgraded with high-performance insulation, integrated photovoltaics (BIPV), and controlled ventilation systems. Photovoltaic modules can be embedded in the new facade and supply a large proportion of the energy required for the building. Furthermore, the improved insulation reduces heating requirements, while the ventilation system ensures a constant supply of fresh air while minimising heat loss. Serial refurbishment is particularly well-suited for standardised buildings with uniform structures and facades, such as the large housing estates built between the 1950s and 1980s. The owners of these estates – large municipal, state-owned or private housing companies – are under increasing pressure to modernise their properties in line with ESG standards. The EU taxonomy requires companies to fulfil environmental sustainability criteria in order to be considered sustainable investments. ESG-compliant properties not only increase their market value but also reduce operating costs in the long run through energy savings. For capital market-oriented housing companies, ESG-compliant refurbishments are essential to remaining competitive and attracting sustainability-focused investors.

What is serial refurbishment – and what can it achieve in a best-case scenario?
Ideally, serial refurbishment could revolutionise the entire process of energy-efficient building refurbishment and transform even inefficient properties into climate-neutral buildings. For instance, consider a typical residential building from the 1970s with 20 units and a primary energy requirement of 300 kWh/m²a. Through serial refurbishment, this energy requirement can be reduced to less than 50 kWh/m²a. This cuts CO₂ emissions by over 80 per cent, allowing the building to meet its remaining energy requirements with the integrated PV system. This transformation is achieved thanks to the refurbishment method described above that effectively turns old buildings into fully-insulated, energy-generating structures. By enveloping the building in a protective “cocoon”, this solution could to a certain extent preserve the original structure and transform it at the same time. Remarkably, this process can be completed in a relatively short amount of time and with minimal disruption to residents.

What’s the hold-up in Germany?
In Germany, serial refurbishment is yet to really take off and faces various hurdles. On the one hand, there are very few providers with completed refurbishment projects to serve as references. On the other, most property owners are still busy laying the groundwork for future refurbishment projects. The most important aspect here – as banal as it may sound – is for property owners to define their objectives and carefully assess their portfolios to identify which buildings are best suited for serial refurbishment. Internal procedures and planning processes must also be reviewed, as serial refurbishments often differ significantly from traditional refurbishment projects. Special funding programmes, like the federal serial refurbishment bonus, aim to support property owners during this start-up phase. Initial pilot projects are already confirming that serial refurbishment could become an increasingly valuable tool as demand increases and experience grows.

The outlook: the dawn of a sustainable refurbishment culture
The German Energy Agency (dena)[1] and other key stakeholders are actively working on measures to speed up and streamline funding processes, eliminate legal obstacles, and enhance market acceptance in order to accelerate the expansion of serial refurbishment across Germany​. There is no doubt that serial refurbishment can help to finally clear the refurbishment backlog and significantly increase the building refurbishment rate. Serial refurbishment also offers housing companies the opportunity to create attractive, ESG-compliant property portfolios for many years to come – without having to resort to drastic measures such as selling inefficient buildings. So, serial refurbishment is not a matter of “if” but “when”; it offers a sustainable answer to Germany’s energy issues within the building sector. It is efficient, it is expedient, and it is sustainable. The question we must now ask ourselves is whether we are content to carry on as usual – stuck in a traffic jam – or whether we are finally ready to change lanes?

[1] https://www.dena.de/projekte/energiesprong-deutschland-serielles-sanieren/

Time to market: How timing has once again become a risk factor

In the 2010s, developers – and the investors who backed them – were not so bothered about how long it took to complete a property, or even if their projects went over budget and took a lot longer than planned. After all, interest rates were low and rising prices meant that their assets constantly gained value. As a result, whether renting or selling, the timing of any deal became almost irrelevant.

The risks associated with build times
Attitudes changed fundamentally once interest rates began to rise in 2022: Declining market values and rising borrowing costs have made lengthy build times, even those that remain on schedule, among the most critical risk factors for developers and investors. Of particular concern is the uncertainty surrounding interest rates for follow-up financing. An analysis conducted by Interhyp reveals that real interest rates for private construction loans have swung by 55 basis points in 2024 alone and, despite recent interest rate cuts, are currently showing a tendency to rise again. As you would probably expect, interest rate fluctuations typically follow a similar trajectory on the professional real estate market.

In the third quarter of 2024, Bulwiengesa’s BF.Quarterly Barometer reported an index value of minus 13.79, indicating a continued reluctance on the part of lenders. This is comparable to the value of minus 15.24 seen during the Corona crisis in the Q2 2020. Developers looking to refinance at the wrong time are therefore exposed to heightened risks. Furthermore, analysts at Lübke Kelber have observed a stabilisation in the institutional residential real estate market, with an average purchase price of EUR 3,541 per square metre. However, given current economic uncertainties and global crises, many investors cannot be sure what prices their developments might achieve in six, twelve, or let alone 24 months.

With a volume of EUR 4.5 billion, market liquidity has significantly decreased since the interest rate turnaround. What’s more, lengthy marketing times further complicate the situation.

In addition to liquidity concerns, regulatory risks are often overlooked. As rules and regulations change over time, the zoning or long-term financing of a project may be jeopardised even before its completion. This risk is particularly pronounced in projects with low sustainability ratings that are nearing completion or about to come to market. Unforeseen events, such as economic crises or external shocks, can also transform certain asset classes into non-sellers. These unpredictable factors can have devastating consequences for investors and developers.

Considering these factors, time to market – the period between a property’s development and its marketing – becomes a crucial lever for managing project development risks.

Modular and serial construction methods can save time
One effective way to significantly cut the time to market is to use modular building techniques. By incorporating a high level of prefabrication, up to 90 per cent of the time typically spent on traditional masonry construction can be saved. This not only accelerates the construction process but also leads to significant cost savings, including reductions in additional expenses such as HOAI fees. The efficiency of modular construction is particularly advantageous in a competitive housing market. Architects can develop a solution once and replicate it multiple times, streamlining the construction process and allowing for scalability. Modular buildings are also more efficient when it comes to building approval procedures.

While speed is important, it is not the only factor; modularity does not automatically guarantee quality. However, a well-planned and executed modular construction project not only looks sophisticated and modern, it also reduces construction defects and minimises human error on the building site. In order to create a desirable product, it is essential to combine design and quality of stay with high ESG standards and sustainable construction methods, such as wooden modular construction. Anyone who prioritises build time at the expense of quality may struggle to achieve their desired sales price at exit. Conversely, a high-quality product can yield market-standard returns for both the developer and the future property owner.

The neighbourhood as an investment factor
It is equally important to consider individual location factors alongside standardised processes when developing space concepts. By tailoring amenities to suit the specific needs of a community, developers can enhance the overall appeal and functionality of a property.

For instance, in areas lacking fitness or wellness facilities, adding a gym and swimming pool can greatly enhance the attractiveness of a development. Similarly, incorporating coworking spaces can provide a valuable alternative for residents in suburban areas, reducing the need for commuting to city centres. Simply put, properties that offer a high quality of stay and a sense of community perform measurably better than those that don’t. And for investors, this enables greater space efficiency. Shared areas create synergies, especially in combination with smaller private residential units, reducing the need for living space and leading to reduced construction costs and higher cash flow.

In addition, such concepts promote social mixing, which plays a crucial role in fostering social sustainability, the “S” in ESG. A recent study from the Zukunftsinstitut identified “connectivity” as a significant megatrend that will have a major influence on the market in the foreseeable future. Establishing a conducive environment for community building is now considered a necessity rather than a choice in the development of new construction projects.

Despite all the doom and gloom, these seemingly intangible factors can translate into tangible benefits, such as increased rental income, higher property purchase prices, and more affordable follow-up financing. The fact is, properties that offer superior quality of living tend to outperform others on almost all performance metrics.

Time to market becomes a catalyst
By the end of 2023, the market share of serial construction in Germany stood at approximately five per cent, as reported by the Federal Association of German Housing and Real Estate Companies (GdW) – although the analysts predict a potential market share of ten per cent. The current landscape of soaring construction costs, housing shortages, and financing uncertainties may drive the market share of serial construction even higher in the medium term. And the time-to-market factor could serve as a significant catalyst. As developers – and the investors who back them – increasingly prioritise shorter planning and construction timelines, the appeal of serial or modular construction methods is likely to grow. The efficiency gains associated with quicker project delivery remain one of the biggest levers for investors seeking to manage risks more effectively.

Immigration remains high – surprises on the housing market

2.2 million people – that’s how high net immigration has been in Germany over the past two years. In 2023, the country recorded the third-highest net migration rate since 1992, with a population gain of 660,000. Unsurprisingly, this growth has had a significant impact on the housing market, prompting cities and regions to adapt to shifts in demand. However, it is crucial to note that not all regions are equally affected. Precise differentiation is key to truly understanding what is happening.

Regions with high levels of inward migration find themselves dealing with surges in demand for housing, while other areas are grappling with increasing vacancy rates and declining property prices. Heightened demand is particularly evident in major cities and their satellites. And while it is important to keep an eye on international immigration figures, it also makes sense to factor in internal migration trends, especially as rising housing costs are leading more and more people to accept longer and longer commutes.

One major city records a net migration exodus
Data from the Bavarian capital, Munich, of all places, confirms an interesting internal migration trend. Of Germany’s Top 7 cities, Munich is the only one with a negative migration balance, with more people leaving the city than arriving. Notably, the decline in international migration is quite significant. In 2022, approximately 36,800 people relocated to Munich, whereas in 2023, this number was only around a quarter as high at 9,600. At the same time, negative internal migration has continued – almost 14,800 people moved from Munich to other German regions. It should, however, be noted that there have also been a number of register adjustments in the city of Munich, which have caused official population figures to fluctuate somewhat, creating a negative migration balance, despite the fact that Munich continues to grow.

Furthermore, there has been a decline in the immigration of young professionals, impacting a potential source of future growth. This can be attributed to the city’s housing shortage and exorbitant rents, which make it more difficult for people to access the housing market. This in turn fuels a growing willingness to commute, ultimately benefiting suburban and exurban districts. If this suburbanisation trend persists, it is likely to have repercussions on property prices in Munich and its environs.

Berlin retains its appeal
The trend in Berlin is quite different. The city is experiencing a significant influx of international immigrants. Without these 50,000 or so new arrivals, Berlin’s migration balance would also have been negative. This is because a substantial number of Berliners have also been migrating from the German capital to neighbouring districts and the nearby city of Potsdam, with as many as 15,500 doing so in 2023 alone. Both immigration and emigration will continue to have a profound impact on the capital’s housing market. Similar patterns can be observed in Hamburg, where strong international migration is also a prevailing trend.

Rural districts continue to face challenges
The outlook appears grim in many rural districts, especially in structurally weak regions. According to data from empirica regio, 85 rural and urban districts across Germany shrank last year. In many cases, the number of deaths exceeded the number of births, and migration failed to compensate. Consequently, many of these regions are facing challenging futures. Nevertheless, there are encouraging exceptions, such as the strategically located district of Wesel in North Rhine-Westphalia. Situated on the Lower Rhine and on the north-western periphery of the Ruhr region, in close proximity to two major cities, the district witnessed the highest internal migration rate of all districts, with a net influx of 3,805 people. This demonstrates that rural areas can also reap benefits from the “urban exodus”. In contrast, the Heidekreis district in the Lüneburg Heath region continues to grapple with a declining population. Despite a slight decrease in the rate of decline, the district is still shrinking, having lost another 1,299 residents last year.

What does the future hold in store?
The suburbanisation trend and the shift in housing demand towards peripheral areas are projected to significantly impact the property market in the long term. Suburbs and rural regions are poised to become increasingly important, while migration could slightly relieve the pressure on core cities. However, immigration from abroad will continue to be a key driver of growth in Germany’s Top 7 cities, ramping up the pressure on affordable housing. Regional differences are crucial: some rural areas are benefiting from internal migration, while others are struggling with outward-migration. Investors and urban planners should closely monitor these trends if they are to have any hope of making informed decisions.

All signs point to optimism

With the year steadily drawing to a close, it is a good time to contemplate the current and future state of the property market. And above all, what does the latest survey of market sentiment tell us as we approach the end of 2024?

To gain a deeper understanding of market trends, SCHICK Immobilien regularly conducts an exclusive Residential Investment Barometer survey of 2,000 private and commercial property owners and investors. The most striking aspect of the latest Barometer is that it reveals a clear and positive shift in the market, with existing properties becoming increasingly appealing as a viable investment option for both private and commercial investors.

The surge in optimism compared to the previous survey in May of this year is quite remarkable: around 38 per cent of surveyed property professionals now describe the market as “good”, a significant increase from the 25 per cent reported in the previous survey. There was also an uptick in sentiment among the somewhat less brash experts, with the majority of respondents now rating the current market situation as “average” (46 per cent), marking an increase of more than 5 percentage points from the May 2024 survey. In total, more than 80 per cent of respondents rate the market situation as neutral to positive, signalling a positive outlook for the residential investment market and providing a clear indication of what lies ahead in 2025.

Most owners and investors are planning acquisitions in 2025
These trends are also reflected in price expectations. The percentage of respondents expecting prices to remain stable is almost unchanged at around 38 per cent (compared to 35 per cent in May 2024). At the same time, a significantly larger proportion of investors and owners expect prices to rise: 36 per cent predict price increases – a significant increase compared to the 23 per cent from the previous survey. In contrast, the percentage of respondents who expect purchase prices to fall is down to just under 23 per cent (May 2024: 31 per cent). These indicators point to activity and optimism in the market. Looking back a year, only about a third of the survey’s participants were expecting neutral or positive price growth, whereas now, more than three quarters of respondents hold such expectations.

These developments are further bolstered by the strong interest in property acquisitions – another finding of the SCHICK Immobilien Residential Investment Barometer that gives us reason to be optimistic about the upcoming year. Over 56 per cent of respondents are planning acquisitions within the next twelve months, while only about one in five are considering selling. Approximately a third of the survey’s participants are focused on expanding their existing property portfolios, a trend that has remained consistent since the May survey. Such stability in this regard shows, not least, that we are not dealing with a short-term, flash-in-the-pan development: 73 per cent of respondents say they are focused on holding their assets for the long-term. This underscores their confidence in the stability and value retention of real estate assets. In contrast, less than 25 per cent of respondents are planning energy-saving renovations, a factor that is likely to gain importance in light of increasingly stringent ESG (Environmental, Social, and Governance) requirements.

Reasons for concern: tightening of tenancy laws and ESG requirements
Given the current political uncertainty in Germany, in combination with overall economic developments, there are also a number of challenges that cloud the outlook for 2025. The primary concern for investors is the potential tightening of Germany’s tenancy laws, which is viewed as the most significant investment risk by 72 per cent of respondents, followed closely by ESG requirements, identified as a key challenge by 68 per cent. Other risks, however, play a lesser role, with further price declines, for example, expected by only 8 per cent of respondents, and concerns about rising interest rates and inflation also declining at 27 per cent.

Energy-efficiency refurbishment continues to be a source of uncertainty for investors throughout the real estate market. The percentage of respondents weighing up whether to dispose of their properties due to potential costs associated with energy-efficiency renovations has decreased from 14 to 11 per cent. However, only slightly less than a third of those surveyed are currently planning energy-efficiency refurbishments within the next three to five years, while nearly 58 per cent have decided to adopt a wait and see approach. This indicates that while the topic is on the minds of many investors, political instability is hindering long-term planning for property owners.

As the survey confirms, a majority of real estate professionals and investors are approaching the new year with confidence and are looking to grow their businesses in the upcoming year. Nevertheless, the fundamental need for planning security and stability remains a critical factor in determining whether 2025 will be a successful year for the real estate market or not.

News

A nationwide rent cap based on the Berlin model would mean 60 per cent fewer lettings

A study conducted by the German Economic Institute (IW) on behalf of the Friedrich Naumann Foundation for Freedom examined the potential impact on the housing market of a nationwide rent cap based on the Berlin model. The rent cap, a regulatory instrument that was adopted in Berlin in 2020 before being declared unconstitutional by the Federal Constitutional Court in April 2021, differs significantly from the rental price brake, which was introduced in 2015 and is used across Germany to curb rent increases for new lettings. Currently, 477 municipalities across Germany have implemented rental price brake policies, pegging market rents to legally defined local comparative rents, which landlords are not allowed to exceed by more than ten per cent. The Berlin rent cap had a significant impact on the city’s rental market, especially as the rent cap was in some cases much lower than standard market rates. Despite the fact that rents fell by an average of eleven per cent under the Berlin rent cap, the supply of housing also fell by around half. Simply put, the rent cap motivated landlords to sell their rental apartments or convert them into condominiums rather than renting them out. The impact of the rent cap was felt most by families in need of housing, while long-term tenants with higher incomes benefitted. The IW study reveals that a rent cap based on the Berlin model would more than halve the supply of housing in areas across Germany where rental price brakes are already in place. Instead of 280,000 new listings, the supply would plummet by over 60 per cent to approximately 108,000 units within a year.

State-owned housing companies raise rents for 90,000 apartments in Berlin

On Monday, October 7th, Stephan Machulik (SPD), State Secretary for Housing, informed the Urban Development Committee that Berlin’s state-owned housing associations are planning to increase rents for more than 90,000 apartments in the city. The affected properties include 20,000 apartments owned by Degewo, 27,900 units owned by Howoge, 12,500 residences owned by Gesobau, and 12,200 dwellings owned by WBM. According to Machulik, the rents charged for these apartments will increase by an average of eight to nine per cent. When measured against the state-owned housing companies’ total housing stock, he added, the increase would not exceed the prescribed limit of a maximum 2.9 per cent price increase per year. Prior to Machulik’s appearance before the Urban Development Committee, Gewobag had already announced rent increases for around 20,000 apartments averaging 8.3 per cent or EUR 32.00 per month. Tenants living in particularly spacious apartments can expect increases of up to EUR 207.33. Following the collapse of the Berlin rent cap, the Senate froze rents within its own property portfolio. Subsequently, state-owned housing companies in Berlin reached an agreement with the SPD-CDU government in autumn 2023, permitting them to implement rent hikes starting in 2024. In light of the companies’ mounting debts, which stood at nearly EUR 17 billion by the end of 2021, a figure that has not been updated in the last three years, these appear to be necessary measures.

IVD Berlin-Brandenburg property price tracker: prices in Berlin have finally bottomed out

According to the IVD Berlin-Brandenburg, the prices of condominiums in Berlin only decreased by an average of two per cent in the third quarter of 2024 compared to the previous year. The current average purchase price for a condominium is approximately EUR 4,810 per square metre. While the number of property sales remains low, the rate at which prices are declining has slowed significantly, the IVD reported. Both condominiums and single-family homes saw a decrease in sales of around six per cent to the third quarter. According to the IVD’s Berlin-Brandenburg property price tracker, single-family homes, on average, are slightly more expensive than condominiums, with prices averaging EUR 5,480 per square metre. However, prices have fallen by approximately four per cent compared to the previous year, while average rents have remained largely unchanged compared to the same period last year. For more than 90 per cent of households, the price tracker reports a comparative rent of EUR 9.24 per square metre. However, the IVD Berlin Brandenburg has raised concerns about the lack of dynamism in the rental market: “New lettings for unfurnished, open-ended tenancies are now almost exclusively concluded under the table. This is the result of the flawed rental policies of recent years. The market has been regulated within an inch of its life”, commented Kerstin Huth, Chair of the IVD Berlin-Brandenburg. “There is a complete lack of incentive for new construction. And even if construction were to resume, rents would likely continue to rise. There is no other way to finance the energy transition”.