Inflation, rising prices and new regulations – landlords and property owners already have enough on their plates, but the real issue that will dominate the residential real estate sector over the next few years is sustainability. Anyone who owns and rents out a property will have to keep a closer eye on the carbon footprint and energy-efficiency of their buildings and individual residential units. This raises many questions, and not just financial ones. Where can landlords and owners turn for support with their energy-efficiency refurbishments? Which measures are mandatory and which simply make good business sense? And what can owners of older properties do? You can read the answers to these questions – and, of course, interesting facts about inflation, rising prices and new regulations – in this latest WID newsletter.
Read on and stay informed!
Jürgen Michael Schick and Dr Josef Girshovich
The homebuyers of tomorrow
Daniel Preis | CSO, Domicil Real Estate AG
There’s no way of sugarcoating this: landlords are not particularly popular in Germany. Landlords are widely regarded as merciless profit maximisers, a perception that is also widespread among the country’s politicians. In reality, however, the clichéd image of landlords rarely corresponds in any way with reality. Around 60 per cent of German rental apartments are owned by private buy-to-let landlords. In fact, there are around seven million landlords in Germany and these come from a broad cross-section of the population and from all age groups. Landlords also mirror the overall structures of German society in terms of asset and income distribution. Against this backdrop, it is therefore all the more interesting that there have been certain shifts among investors in recent years. Extrapolating these trends provides valuable information on developments in the landlord landscape in years and decades to come.
Real estate investors are getting younger
It is noticeable that landlords are entering the rental apartment market at an ever earlier age. We, for example, are seeing a growing number of investors under the age of 30 buying rental apartments. Understandably, younger professionals may only have been in their jobs for two to three years and will likely have smaller budgets at their disposal. Nevertheless, low interest rates mean that long-term financing remains accessible and affordable. With a deposit of around ten per cent, it is possible to buy an entry-level rental apartment for around EUR 200,000 to 250,000 that will often even generate monthly returns from day one.
Mortgage banks, savings banks and insurance companies like it when young people decide to invest in rental real estate – even more so than when young people decide to fulfil their dream of owning their own home at an early age. After all, what many people may not be aware of is that banks commonly distinguish between mortgages for buy-to-let investors and for owner-occupiers. And the fact that banks make this distinction is quite understandable: owner-occupied homes are, above all, a consumer good, while rental apartments are first and foremost an investment asset.
New joint mortgage models
Irrespective of the average age of homebuyers, there have also been some changes in the people coming together to buy property in recent years. Typically, real estate buyers have long been older couples on higher incomes looking for a tax-efficient investment to fund their retirement and deliver healthy returns on their equity. In most cases, these traditional buyers have been able deploy significant cash reserves having received maturity benefits from life insurance policies or home savings contracts.
Make way for granny and granddaughter, sisters, business partners
Just as our society has become younger and more modern in recent years, the range of people coming together to buy residential real estate has also changed. A growing number of women, for example, are buying collectively to establish an independent financial foothold, while more and more sisters are investing in rental apartments and thereby doubling their equity. It is not uncommon to see multigenerational investments as well. When grandmothers buy an apartment with their grandchildren, this can create significant benfits in terms of inheritance and tax law.
Increasingly, colleagues and acquaintances are joining together to form civil law partnerships (GbRs) in order to jointly invest in property. One major advantage of such an approach is that if one of the partners leaves at a later date, it is the shares in the GbR that are sold rather than the property itself, and this is not subject to real estate transfer tax. In addition, the sale of shares in a GbR puts personal relationships under far less strain than is typically the case with the sale of a jointly owned property.
Right now, it is difficult to identify a clear trend in terms of the occupational groups in such joint ownership models. Among white-collar workers, there is certainly a tendency for academics to invest in rental property; among the self-employed, the proportion of craftsmen is also high. Across the board though, educational attainment is far less important than possessing the insight and willingness to invest private capital outside statutory pension schemes and to take advantage of low interest rates as a key financing lever.
Minimum income limits
The same basic minimum financial requirements apply to all private property investors. For singles, the hurdle to enter the real estate market is a net income of around EUR 2,500 per month; for couples, it is EUR 3,500. This is largely because of the models used by banks to calculate the cost of living. Banks want to be sure that after all costs have been deducted prospective buyers will have at least EUR 200 to 300 left each month before they agree to finance the purchase of a buy-to-let apartment. Similarly, banks get nervous if a buyer is less than ten years away from the statutory retirement age. The size of the cash deposit needed then rises exponentially with each additional year of life in order to meet the requirements of the Residential Real Estate Credit Directive. Both parameters are directly linked to the age of buyers, the bulk of whom are between 30 and 55.
Older buyers want larger apartments, younger buyers are open to risk
When it comes to age, it is also interesting to note two clear trends in buyer behaviour. First, the older the investors, the larger the properties. In particular, dual-income households, particularly couples who have remained together into their later years, tend to have more equity and higher incomes, which allows them to make larger investments. The fact that they are rapidly approaching retirement age also plays a decisive role. Anyone who invests in rental apartments later in life is probably already planning for the rental income this will generate when they buy, which means they tend to opt for larger properties.
Younger buyers, however, are not characterised by size of the properties they invest in, but by their willingness to accept a higher level of risk. This is presumably due to their greater affinity for investments in shares and digital capital investments, together with a certain age-related recklessness. Above all, thanks to the increase in financial advice on social networks and podcasts, awareness of real estate as an investment asset has risen significantly among the younger population. We therefore assume that the quota of private buy-to-let landlords in Germany will continue to grow and become younger in years to come, despite the many regulatory hurdles that stand in their way.
What does the future hold in store for property owners?
Jakob Mähren | CEO, Mähren AG
An interview with Jakob Mähren, CEO of Mähren AG
Question 1: Federal elections are coming up in Germany and it is becoming apparent that refurbishments will be subject to far more stringent energy efficiency requirements in the future. What does this mean for residential property owners?
There’s certainly a lot in store for property owners. I see two major areas that they will have to work on. Firstly, expertise. Private owners will have to familiarise themselves with a host of new regulations. And these won’t only apply to refurbishments but also to the replacement of equipment that is actually in perfect working order. Anyone who thinks that they will be able to carry on heating an apartment building with oil for much longer is in for a big surprise. Which brings me to the second point: Owners and landlords are going to face considerable additional costs over the next few years, costs that simply haven’t been on their radar. Additionally, interest rates are starting to gradually rise again. We will see whether property investments will remain quite so easy to finance.
Question 2: Some business models will no longer be profitable because of higher maintenance costs, but what would be the best way to profit from this situation in your opinion?
Owners apartment buildings will definitely have to make sure they get their sums right from now on. I see real risks in terms of properties that don’t generate more than 4% to 5% rental returns because yields will continue to shrink over the next few years. At the same time, you also need to keep an eye on property prices. Over the past twelve years, real estate prices have only moved in one direction: they have skyrocketed. As a result of this alone, anyone who bought an apartment or an apartment building ten years ago has experienced a significant increase in value. Since many banks will have to adjust their lending values because of the additional investment costs, some owners should think about whether now might not be the right time to sell after all.
Question 3: You have been active in the real estate sector since 2002. Has there ever been a similar market situation in the past 19 years?
The German real estate market has changed substantially over the last few years. And before that, it had been slumbering for years. The state was the biggest landlord, so there was hardly any residential market to speak of. However, since 2013, we’ve seen a steady increase in regulations. Two rental price brakes, other rent regulations, neighbourhood protection areas, modernisation levies, the failed Berlin rent cap, expropriation debates, and now the Building Land Mobilization Act – it is clear where we are headed. The state is constantly sticking its oar, and that’s not going to change anytime soon – on the contrary. Of course, all of this has a significant effect on the market. You have to comply with more and more laws, which requires significant professionalisation on the side of property owners. And then you have to keep in mind that prices have stopped rising as fast as in recent years. The German real estate market is settling back into calmer waters.
Question 4: At the moment, there are more than 2,000 residential units in your portfolio. Is it currently still worth investing in real estate in Germany?
That’s a question I can’t really give a blanket answer to. For some owners, now will be the right time to sell. For others, it might still be worth pursuing new investment opportunities. It depends on several factors. First off, you have to be able to act professionally – we’ve already talked about that. Secondly, you have to look at how high the rental yield is because yields look like they will continue to fall for a little while yet. And, last but not least, you have to look at how much equity you have available or invested. The higher your LTV ratios, the more likely it is that it will make sense to sell now. You can ride the wave and take the asset price gains. We will see how long this window of opportunity stays open.
Question 5: As a Berlin real estate investor, you started your investment career in Berlin. Would you do the same today?
There are worlds between the Berlin of today and the Berlin of 20 years ago. When I started out, Berlin was demolishing buildings and tearing down houses. The Senate assumed that the population would stabilise at around three million. Today, you can’t even imagine that anymore – Berlin is well on its way to having a population of four million. So, the fundamentals are completely different now compared to 20 years ago. Today, real estate prices are so high in many parts of Berlin that properties are more like trophies. Some investors have bought buildings or apartments just because they absolutely had to have a property in Berlin, not because it was a good investment per se. This has little to do with investing and profitability. Whether and for whom investments are still worthwhile is a question that needs to be examined very carefully on a case-by-case basis.
Question 6: Considering the current state of the German real estate market, what makes a good investment?
Rents are generally still very low in Germany. For investors, this means that they have to put in a lot of work to leverage potentials, which isn’t always easy, especially in view of increasing regulation. So, I would advise private investors to look at what they want to achieve over the next few years. If they want the property to take care of itself, they need a lot of equity. And if they want to enter the market professionally, they need a lot of experience and patience. But that doesn’t mean there are no good investment opportunities out there. I just assume that the best investments are now all very long-term. If you’re planning to sell in the near future anyway, for example because the ten-year tax period has expired, you might want to do it sooner rather than later.
Question 7: What is your opinion on the development of the German real estate market over the past two decades?
In recent years, the German real estate market had a lot of tailwind and made massive gains. Now, the market is slowly running out of steam, and that’s understandable. Prices have risen sharply. Interest rates, on the other hand, can’t fall any further. Additionally, the German and state governments have made it unmistakably clear that they are going to ramp up the regulations that govern the market. Private investors have made sizeable profits in recent years, now we are entering a phase of consolidation.
Question 8: Do you have any advice for young entrepreneurs who want to follow in your footsteps?
Just do it. There isn’t a right or wrong moment to start a business. An entrepreneur is someone who acts. If you want to work with real estate, you need to have a good sense for the latest developments and trends. That means you have to read the news and keep your eyes open. You get the most important information by being curious and always asking yourself what people want and need. Then you have to do the math and see if a project is worthwhile.
Question 9: Over the last year, the U.S. dollar has lost about 10% against the Euro while real estate prices in Germany have been climbing steadily. Does that make it more worthwhile for American investors to buy real estate in Germany?
The United States is still by far the largest and most exciting real estate market in the world. As an investor, you experience a different dynamic and scope there, simply due to the size of the country and the multitude of markets across the country. However, looking at exchange rates alone is nowhere near enough and I would strongly advise against relying on it. It’s like any real estate investment: you have to examine the properties individually and then put them in context with the microlocation, the macrolocation and other economic and demographic factors and trends. In this respect, the American market is no different from the German market.
Question 10: Real estate prices are also rising in America. Are there parallels from which an investor can learn something?
We are actually invested in the U.S., mainly in the Sun Belt, which is the southern part of the United States. What you can learn from the U.S. is the classic rules of supply and demand. In the U.S., there is little regulation, which enables both the market and the people to actively and flexibly adjust their budgets and requirements. Back here in Germany, we could definitely learn a thing or two from the U.S, including that it’s easy to over-regulate a market, but there’s no way you can ban entrepreneurs in a free society.
Real estate investors could be among the winners from inflation
Tomasz Dukala | Board Member, EPH European Property Holdings
Over the summer, inflation jumped sharply in a host of countries – including Germany. This was to be expected, as consumers are now spending to make up for lost time as coronavirus lockdowns ease and vaccination campaigns ramp up. However, supply cannot always match the increased consumer demand. That is a reality that is now being felt by everyone and anyone who wants to book a trip or buy certain goods, for example.
Economists are now wondering whether this is just a brief inflationary flare-up or if it is a phenomenon that will be with us for the long term. The European Central Bank (ECB) has already taken the precaution of relieving itself of monetary policy pressure and adjusted its inflation target upward. Instead of “below, but close to two percent” as before, the new target is “two percent”, with significant medium-term upward or downward deviations both being considered equally undesirable. This is definitely a paradigm shift. And the signal the bank is sending out couldn’t be clearer: For the time being, at least, there will be no monetary policy response from Frankfurt to a potentially permanently higher level of inflation.
Most leases are index linked
As a long-term real estate investor, however, I am relaxed about a sustained inflation scenario – provided it remains within moderate ranges and we don’t enter a phase of hyperinflation, for which there are no indications thus far. Commercial real estate leases are generally indexed against inflation, i.e. they are regularly adjusted in line with general consumer price increases. Rental income therefore increases – with a slight time lag –in sync with inflation. The prerequisites are tenants with strong credit ratings and economic strength whose sales can also keep pace.
Real estate investors can actually be among the biggest winners from inflation if they have concluded long-term loans at fixed interest rates and are spared rising borrowing costs. Since the beginning of the year, yields on the government bonds have definitely risen as a gauge of market interest rates, mainly reflecting the healthy recovery of economies across Europe. The ten-year German federal bond is currently yielding around minus 0.3 per cent, compared with minus 0.6 per cent at the turn of the year.
Persistently higher inflation is by no means a given
However, as the ECB extends its loose monetary policy into the foreseeable future – especially as the central bank has learned from the mistakes made when ending its fiscal and monetary stimulus programmes prematurely in the wake of previous economic crises – market interest rates are likely to develop less dynamically than price increases even if inflation does take hold. As a result, real interest rates will continue to fall and real estate will remain a sought-after asset class among investors. If inflation-indexed rental income increases, leveraged yields would rise in this scenario even if borrowing costs also increase at some point as leases and loans are extended.
The question, however, is whether inflation will actually continue to rise. In terms of official consumer price indexes, I would not be so sure. We have already seen in recent years that the heavily forecast wave of inflation has failed to materialise, even though monetary policy conditions were in place, at least according to pure monetary doctrine: very low interest rates, an expansionary monetary and fiscal policy, a robust economy running at the limits of its capacity, virtually full employment (at least in Germany and some other countries). Against these pressures, technological progress, demographic trends and a highly competitive economy have ensured comparatively high price stability. This structural environment has not changed.
Consumer prices alone do not fully reflect reality
There is certainly nothing wrong with questioning whether official consumer price indexes fully reflect reality. In many ways, the basket of goods used as the basis for the Harmonized Index of Consumer Prices (HICP) does not adequately represent long-term purchases. And this applies all the more to investments in assets. Whether you consider valuations of securities, investments in tangible assets or the prices for owner-occupied housing – all have developed far more dynamically in recent years than the official index of consumer prices. Long-term asset accumulation for retirement should not be a luxury, although it has certainly become significantly more expensive.
Conservative real estate investors can take a relaxed view of future developments: Should inflation continue to rise somewhat, current rental income (minus borrowing costs) is likely to increase disproportionately. In addition, even more capital should flow into the inflation-proof real estate markets, causing asset prices to rise further still. Note the use of “should”, though: Structural factors also suggest that, after a brief inflationary blip, we will settle back onto the path we were on before the coronavirus pandemic disrupted everything. And that would not be bad news for real estate investors either. Hyperinflation could become an issue in the long term, but there are no signs of such a development as things currently stand.
The flatlands of Lower Saxony as an alternative to overpriced metropolitan centres
Jürgen Michael Schick, FRICS | President of IVD, Immobilien Verband Deutschland e.V.
Lower Saxony offers yields of between 4.4 and 10.0 per cent
If you are among the investors that have so far restricted your investment horizons to Berlin, Munich and Frankfurt, you would be well advised to take a look at the real estate investment market in Lower Saxony. After all, there are good reasons for identifying exciting investment destinations outside Germany’s traditional Top 7 cities that offer a wide range of opportunities for buyers with different investment profiles.
In 2020, the population of the state of Lower Saxony grew by 10,000, bucking the national trend that saw the population of Germany fail to grow last year for the first time since 2010. Forecasts from the Lower Saxony State Office for Statistics anticipate population gains of up to 6.0 per cent over the next ten years, concentrated especially in and around the city of Hanover and in the area around the Volkswagen HQ in Wolfsburg. Lower Saxony is Germany’s second-largest state and boasts strong growth prospects up to 2030. According to a study from the economic research institute Prognos, for instance, the cities of Wolfsburg and Salzgitter, together with the district of Gifhorn, are among the regions with the highest economic growth potential in Lower Saxony. Even today, Hanover, Braunschweig, Wolfsburg and the districts of Gifhorn and Wolfenbüttel all have an above-average purchasing power index. Wolfsburg has the region’s highest per capita purchasing power at EUR 25,966.
The latest Lower Saxony residential investment market report 2021 from SCHICK IMMOBILIEN examines the regions between Celle and Göttingen, as investors have already registered strong interest in the region between the two cities. The report extends across the Hanover region, covering the cities of Braunschweig, Wolfsburg and Salzgitter as well as the municipalities of Celle, Gifhorn, Helmstedt, Peine, Wolfenbüttel, Hameln-Pyrmont, Hildesheim, Schaumburg, Goslar, Göttingen and Northeim. Our analysis shows that, at 1,585 properties, transactions involving apartment buildings in Lower Saxony were at roughly the same level as in the previous year. As a result, demand for apartment buildings remains above the five-year average, despite the tight supply. Although the transaction volume in 2020 was down by 11.6 per cent at EUR 1.2 billion (after an exceptional year in 2019), it still represented the second-highest transaction volume of all time.
In the ranking of the cities and districts surveyed in Lower Saxony, Hanover clearly dominates in first place. The entire Hanover region, including the state capital, accounted for more than half of the total transaction volume (EUR 667.5 million). Records were also set in the districts of Gifhorn, Wolfenbüttel and Helmstedt, where investment volumes were significantly higher than in recent years. Strong demand for apartment buildings also drove an 11.2 per cent increase in square-metre prices, from EUR 1,070 to an average of EUR 1,190. Lower Saxony registers a wide spectrum of purchase prices. Buyers in Northeim or Goslar, for example, pay around EUR 570 per square metre, while properties in the state capital of Hanover cost an average of EUR 2,363 per square meter, placing them at a moderate level compared with Germany’s Top 7 cities.
Depending on the region, price-to-rent ratios range from between 10 and 23 times the net annual rent, generating yields of between 4.4 and 10.0 per cent. Rents for existing apartments have risen by 3.4 per cent across the study area, from an average of EUR 6.70 to EUR 7.00 per square metre. The highest in-place rents are registered in Göttingen, at EUR 9.73 per square metre. Buyers of multi-family houses in Helmstedt can expect the greatest upside rent potential with rents already rising by 6.6 per cent in 2020 alone. At the top end of the market, rents in newly built apartments have risen to EUR 12.86 euros per square metre, representing a year-on-year gain of 6.0 per cent. The latest vacancy rate data reveals that demand for apartments is particularly high in Wolfsburg, Braunschweig and Hanover. The vacancy rate is currently 1.4 per cent in Wolfsburg and 1.8 per cent in both Braunschweig and Hanover.
The results of the Lower Saxony residential investment market report show that the regions surveyed in Lower Saxony exhibit significant potential for value appreciation. Buyers who have so far concentrated their investments on the Top 7 cities should certainly broaden their focus to Lower Saxony. There are, after all, a wide range of attractive investment opportunities in the region, including in Hanover, Braunschweig and Helmstedt.
Download a PDF of the Lower Saxony residential investment market report 2021 (in German) here:
De facto ban on condominium conversions
With the adoption of the Building Land Mobilisation Act into law, Germany’s 16 federal states can now introduce further measures to restrict the conversion of rental apartments into condominiums in tight housing markets. In particular, the subdivision of houses with more than five residential units will now be subject to a municipal approval. In practice, this requirement for municipal approval is tantamount to a ban on condominium conversions, as there are very few, and very narrow, exceptions. These include, for example, a requirement to approve conversions if two-thirds of a building’s tenants want to buy their apartment. In reality, this will very rarely be the case. Experts predict that the tightening will further reduce the supply of apartments on the real estate market over the next few years and that, as a result, prices for new apartments and apartments that have already been approved for conversion will continue to rise.
The rise of the ’burbs
The suburban and exurban areas of Germany’s major metropolises are becoming ever more attractive. As a result of the coronavirus pandemic and rising prices for condominiums in more central areas, a growing number of families are opting to move to more peripheral neighbourhoods. This trend has not only boosted demand for residential properties for sale in the suburbs, but increasingly also townhouses and single-family homes for rent. Property owners in the suburbs can, as a result, expect increased demand, with not only property developers and end consumers but also investors increasingly interested in such properties.
Landlords need to be more sustainable
It is already clear that sustainability and climate change mitigation in the residential real estate sector are set to become increasingly important across Europe over the next few years. In particular, owners and landlords will increasingly need to replace aging heating systems, insulate the facades of their buildings and even generate their own building energy. Although subsidy programmes are being launched to support the necessary retrofitting measures, implementation will be cost- and time-intensive, particularly for smaller landlords. In France, for example, owners of low energy-efficiency apartments – levels F and G on the energy certificate – will no longer be allowed to rent them out from 2028. Based on developments in other European countries, landlords in Germany should be prepared to expect mandatory energy refurbishments in the near future.