Germany briefing: for investors residential is a ‘no brainer’

As capital returns to the German market the residential sector is ‘a no brainer’, the most obvious place to invest, delegates heard at Real Asset Media’s Invest in German Real Estate briefing, which took place this week at BGY’s headquarters in London.

“We are seeing a lot of interest in residential across the board, from BTR to student accommodation to senior housing”, said Krystin Schwendel Smith, Architect, Associate Director, BGY. “The demand is not just in the cities but also in smaller towns and the outskirts.”

With more than 50% of the 80 million strong population million renting, Germany is by far the largest residential market in Europe.

“Investing in resi in Germany is a no-brainer, especially in multi-family as not enough are being built to meet demand”, said Oliver Kummerfeldt, Head of European Real Estate Research, Schroders Capital. “German cities will continue to outperform and there is no city in the country that doesn’t have a housing shortage.”

Supply and demand fundamentals are expected to continue supporting rental growth above inflation, even if rents are regulated and experts agree that rent controls are unlikely to change in the short term.

The residential market is very varied and requires local knowledge. “The top 7 cities are less dominant, with the exception of Berlin, because living is a much more diversified and local play in Germany”, said Marcus Cieleback, Chief Urban Economist, Patrizia. “The outlook for the sector is very solid. The only issues are affordability and changing regulations.”

The recent repricing in the market has made conversions into residential more viable.

“The potential to turn brown assets green and convert offices to resi is huge, and lower entry prices are an advantage”, said Rainer Nonnengässer, Managing Director, OmniLiv. “But there are still question marks over whether there will be subsidies to encourage resi development, while regulatory issues continue to hamper construction.”

Lack of capacity in the construction industry is hampering progress, as well as the difficulties in obtaining financing for development, especially from banks, even if more alternative lenders are entering the market.

“More stranded assets will come to the market as asset managers are forced to sell, so if you can buy cheaply office conversions to resi will be a big play”, said Caroline Gronack, Managing Director, Apleona Invest.

Increasing demand for sustainable, energy-efficient homes is an added incentive to repurpose office buildings into residential, even in secondary locations, or to upgrade existing older apartment blocks.

“The energy transition offers a huge potential for brown-to-green strategies in the residential sector”, said Cieleback. “Large portions of housing stock was built in the post-war period and during the demographic boom in the 1960s, ‘70s and ‘80s, so quality leaves much to be desired, especially as tenants are increasingly sensitive to energy efficiency despite the tight market. There is a huge task ahead.”