Investors should avoid certain German cities says new report

Collapsing birth rates in Germany are likely to have a profound effect on future housing demand and the authors of a new demographic study say that the falls make some cities unattractive for investors and developers.

Metropolitan regions around Munich, Nuremberg, Berlin, Hamburg, and Frankfurt am Main will benefit from the changing population structure, but predominantly rural states such as Saxony, Saxony-Anhalt and Thuringia will experience population falls estimated at -9.5%, -17.2% and -14.9% respectively. A population drop of as much as 60% is projected for the rural district of Saale-Holzland-Kreis in Thuringia.

Residential investors and developers need to consider the German market on a more regionalised basis than has hitherto been the case, according to technology and real estate company PREA which has published the report.

PREA’s study utilised birth rates, mortality rates, net migration figures, and economic development to forecast the population and average age for all districts and independent cities in Germany over the next 10, 15, and 20 years. The firm then estimated resultant housing demand and regional vacancy risks.

The trend toward urbanisation, observable since the mid-2000s, will continue, exerting sustained pressure on major cities. Nevertheless, the average age will rise from the current 44.4 to over 46.5 years, which is likely to strengthen the demand for barrier-free housing and public space, PREA said.

There are likely to be significant contrasts and a ranking of investment locations for the next 20 years has emerged, with Regensburg, Leipzig, and Potsdam leading in terms of population growth, while Neuss, Trier, and Moers identified as locations with the largest declines in population and housing demand.

PREA has forecast a population increase of +30.2% in Leipzig over the next 20 years and said a significant contributor is the growing importance of knowledge-intensive services.

In areas of population decline there will be increased residential vacancy rates, according to the report’s authors, led by Dr Martin Kern, senior capital market quant at PREA.

Property will need to be adapted even in locations where the population is stagnant because of the need to adapt to changing needs. From an urban planning perspective, neighbourhoods may need to be downsized and in some cases entire settlements may even need to be abandoned.

“The goal of the study is to provide investors with a clear understanding of which locations are suitable for real estate investments based on certain criteria and which may experience increased vacancy rates due to the decline in births and the associated population shrinkage,” said PREA’s CEO and founder Gabriel Khodzitski.

Germany currently has a population of 84 million, the highest ever recorded. However, the negative birth rate of the last 50 years and higher life expectancy is increasing the proportion of older people. However, this will be followed by an increase in the mortality rate and the aging society will thus lead to a decline in productivity and housing demand.

Urban growth regions that adapt to the needs of an aging society at an early stage will be the winners in this process according to PREA, which notes that these do not necessarily have to be exclusively large cities.

“Given the ongoing high demand pressure on economic centres due to demographic change, the cost of housing, both for rent and purchase, will continue to rise,” said Dr Martin Kern. “This could make the surrounding areas of cities more attractive. This presents an opportunity for rural regions to counter population decline if they can present themselves as age-appropriate suburban communities.”