Empira: resi rents to increase in Germany as prices decline

Low supply and high demand are leading to rental increases in the German residential market, especially in the country’s top seven cities, while purchase prices are declining, according to new research published by The Empira Group.

Prof Dr Steffen Metzner, Head of Research, the Empira Group

Rising costs and rigid standards are leading to a reduction in housing supply, while demand continues to increase. In the last year there was a significant reduction in new housing construction, as the real estate market reacted to the economic downturn.

“Among the obstacles to an increase in housing construction are the high costs of building land, materials, wages and financing, exacerbated by long approval processes and more rigid construction standards,” said Steffen Metzner, head of research at the Empira Group. “The resulting excess demand, and especially in the top seven cities, offers very good opportunities for value appreciation in the long-term and stable cash flows.”

After 2022 had seen as many as 304,323 approvals for units, this figure declined to 214,088 in 2023, which corresponds to a delta of about 30%. Thus the political objective of building 400,000 apartments each year is currently unrealistic, according to Metzner.

Housing construction is primarily in the form of multi-family residential buildings and is the domain of professional investors. Some two thirds of the approved apartments are to be found in buildings with at least three residential units (19% of the approved 67,931 apartment buildings).

Forecasts through to 2026 reveal a further decrease in construction completion in Germany from an expected 270,000 units completed in 2023 to 175,000 units in 2026.

The sparse offering on the German housing market contrasts with rising demand, which has been bolstered by a significant increase in immigration numbers. In Germany the average basic net rents increased in February 2024 by 2.2% year-on-year, while purchase prices in the majority of cities fell, and particularly significantly in Hamburg, where they went down by 8.3%. Prices remained stable in Stuttgart and decline by 1.5% in Munich, in line with the trend seen in other European countries.

By contrast, in the US real estate market strong economic growth meets with a positive development in terms of rents. The situation varies significantly in different metropolitan areas: quoted rents range from an increase of 9% in Johnstown, Pennsylvania, to a decrease of 8% in Punta Gorda, Florida.

For 2024 it is expected that purchase prices in the USA will stagnate on the whole, with a possible spread of 0.7% to growth of 2.8%. Rents in general are forecast to increase by 1.1%. Sales figures are set to rise slightly, with figures of 5.3% for new construction and 15.2% for existing portfolio properties.

“Viewed across all markets, the United States stands out as a promising investment location thanks to its economic dynamism, a high level of transparency and the comparatively low level of regulation,” said Metzner. The Empira Group is an investment manager for institutional real estate investments in the German-speaking regions of Europe (DACH) and the USA.