Living sector the most resilient in Germany, offices in demand

The living sector has proved to be the most resilient during the last difficult few months of economic slowdown and market uncertainty, experts agreed at Real Asset Media’s Germany Investment briefing, which took place recently at Greenberg Traurig’s offices in London.

Rainer Nonnengässer, Senior Managing Director, Head Germany & Netherlands, AMRO Partners

“I’m a strong believer in living products as a good investment opportunity, ranging from student accommodation to senior housing to micro and co-living”, said Rainer Nonnengässer, Senior Managing Director, Head Germany & Netherlands, AMRO Partners.

Student accommodation continues to be a strong sector, as the post-pandemic pick-up continues and  the imbalance between supply and demand widens. German universities are attracting more and more international students and many Europeans doing their Erasmus programme stint, yet coverage rates are 11-12%, compared to 24% in the UK.

Even in the current sluggish market, student accommodation is attracting investors’ interest because it’s seen as a structural, rather than a cyclical opportunity, like senior housing.

“There’s a growing number of Anglo-Saxon institutions that have a track record and are keen to invest in PBSA”, said Nonnengässer. “A lot will happen in this sector in the next few months”.

There’s a wide range of accommodation and of monthly rents, that vary from €300 in Eastern German towns to over €1,000 in Munich for a room. But rents are expected to increase because there is little new product coming to the market as development activity has virtually ceased.

“As yield decompression continues, low-yielding asset classes and secondary assets are the most affected”, said Oliver Kummerfeldt, European Real Estate Analyst, Schroders Capital. “The living sector, from multifamily to student housing, has been the most resilient, while retail and offices have been the worst hit”.

However, ESG-compliant offices are still in demand and Germans have flocked back to work post-pandemic. Occupancy rates are around 10% down on pre-Covid times, compared to 30-40% in the US.

“People are taking advantage of the opportunity of working from home one or two days a week but offices are not empty by any means”, said Kummerfeldt. “Modern space in central locations remains scarce, because companies are realising that it’s a crucial factor to attract and retain talent”. 

Modern offices need to be reconfigured to offer more meeting rooms and collaboration spaces, said Markus Beran, Head of Origination International Investors, Berlin Hyp: “We don’t need less space but rather different space”.

Another option for investors is to avoid the top 7 cities altogether and focus on smaller towns that may not feature on institutional investors’ radar screens but that have good market dynamics and strong potential.

“Business parks in B locations, cities that you may never have heard of, are attracting a lot of interest from private buyers who are paying all equity”, said Tobias Schultheiß, Managing Partner, Blackbird Real Estate. “They are keen to invest in real estate because they see it as an inflation hedge, and they are also counting on rising rents”.

Rents are expected to increase across the board because demand is still strong but supply if forecast to peak this year.

“High construction costs and difficulties in finding financing have made development difficult”, said Kummerfeldt. “But the occupier market is strong and in a few months liquidity will come back, so I am not too worried about Germany”.