Why residential real estate investments have a future
Despite the recent slump in the investment market, the German rental housing market continues to offer opportunities for investors – thanks to continued strong tenant demand and a shortage of housing. This entails further rental growth potential and ensures stable and sustainable cash flows.
From an investor’s point of view, the main arguments in favour of involvement in the residential real estate market are the stable, easily predictable rental income and the demographic development in the growth regions, which is leading to a correspondingly stable to increasing demand for housing. The low level of new construction activity is causing the housing shortage to worsen, which is reducing the level of vacancy to a minimum and causing rents to continue to rise. Projections show that there will be a shortage of up to 1,650,000 apartments throughout Germany by 2027. The rental housing market in Germany will therefore be characterised by a considerable gap in demand and the resulting potential for rent increases for years to come.
A positive market assessment is also not contradicted by the fact that purchase prices for residential real estate have fallen in recent months after several years of enormous growth rates. The remarkable resilience of residential real estate is evident, among other things, from the fact that owners in Germany can still record average increases in value of around 40 percent in a five-year comparison, despite the price declines in recent months. This is shown by studies by the companies Immowelt, Immoscout24 and Sprengnetter from recent months, which refer to the development of residential property prices in the years 2018 to 2023 and concern the development of average asking prices and the transaction prices actually achieved.
Purchase prices for residential real estate stabilize, while rents rise continuously
In the latest published report on the IW Housing Index by the Institute of the German Economy (IW) in Cologne, a continuing stagnation in purchase prices for apartments and houses is communicated. In a year-on-year comparison, slight reductions (ETW: -1.4 percent / ECFH: -2.1 percent) were still recorded in Q2 2024 compared to the previous year’s figures. Compared to the previous quarter, however, there are slight upward trends (ETW: +0.9 percent / ECF: +1.1 percent) in the price development. This is also confirmed by the German Real Estate Index (GREIX), which also takes into account the development of apartment buildings. All residential segments are increasing in value compared to the previous quarter of Q1 2024. Even adjusted for inflation, real estate prices rose again in the months of April to June for the first time in two years. In contrast to the IW index, the GREIX is determined on the basis of actual transaction data from the purchase price collections of the appraisal committees. Rents are continuing to show strong upward momentum, which could be further intensified in the future due to the widening shortage of supply. For example, the number of advertised rental properties is continuously decreasing on average in Germany. Since the first quarter of 2022, the IW has recorded a decline in the number of rental apartments on offer by almost 18 percent.
Location, location, location – and energy certificate
A market assessment by DZ Bank also expects value to stagnate for the current year after price declines as a result of the steep increase in construction and financing costs in 2023, and justifies this primarily with the low number of new construction completions. Discounts are to be expected, especially for properties with “negative characteristics” such as a very poor energetic condition. If interest rates fall faster than expected, residential property prices could rise again as early as 2024.
The IW data also shows that energy-efficient houses apparently lost less value during the crisis than those with low energy efficiency. With the housing index, it has now also been possible to examine prices according to energy efficiency classes, according to the IW. In the highest efficiency class A+, price decreases of only 1.1 percent were recorded, but in class A 5.2 percent. In contrast, the declines in the poorer energy efficiency classes were close to each other at between eight and nine percent. The IW experts suspect that the reason for this is that the need for renovation of these properties is assessed in a similar way.
For investors, this means that those who focus on energy-efficient new buildings or project developments in those German cities whose housing markets will have a significant excess of demand in the foreseeable future will be rewarded. This applies to both direct investments and investments in real estate funds. A long-term investment horizon is also crucial to success in order to compensate for short-term market fluctuations.
About INDUSTRIA
INDUSTRIA opens up investments in apartments in economically strong locations throughout Germany for private and institutional investors and offers a comprehensive package of services in asset and property management. As of 30.06.2024, the company, headquartered in Frankfurt am Main, manages around 20,500 residential units with a volume of more than 4.9 billion euros, drawing on the experience of 70 years of activity in the market. INDUSTRIA’s acquisition strategy is focused on both new construction and existing investments. INDUSTRIA is part of the Becken Group, an owner-managed Hamburg-based real estate and investment company.
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