Real Estate

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

While Berlin hasn't quite turned into London-on-Spree, Germany's residential property market is having a moment.

Germans' fondness for renting homes instead of buying them, fairly flat house-price growth plus rather dismal demographic trends all made the country's property market look distinctly pedestrian for many years. 

But with mortgage rates plunging, foreign buyers looking for a safe haven and -- more recently -- more than one million refugees arriving in the country, that received wisdom has been turned on its head. The European Central Bank's move to negative interest rates may fuel that trend even further.

Can it last?

House prices have increased 5.6 percent a year over the past five years, according to UBS, which is double the average annual rate of increase since 1970. Some catch-up is overdue as in real terms German house prices didn't rise over the past 40 years, according to Green Street Advisors. 

Rise and Shine
German house prices went nowhere for years. Recently they've grown faster than the UK
Source: UBS , Eurostat, OECD, Bundesbank

Prices are rising particularly fast in urban areas, where young people increasingly want to live. A gauge of advertised apartment prices in seven major cities including Frankfurt and Berlin rose 14.5 percent in 2015, the most since 2000, according to Empirica, a research institute. 

Boom Towns
Asking prices and rents have been rising fast in large German cities like Munich and Berlin
Source: Empirica Immobilienpreisindex
Nb. Shows top 7 cities: Hamburg, Duesseldorf, Cologne, Frankfurt, Munich, Stuttgart and Berlin

So far the biggest beneficiaries have been Germany's listed residential landlords. Cheap debt has enabled them to snap up housing portfolios and smaller rivals, thereby achieving cost savings through scale (such as by providing services to tenants). 

Last year some 23.3 billion euros ($26 billion) in residential property portfolios and large residential complexes changed hands in Germany, almost three quarters more than in 2014, according to CBRE, a commercial real estate services and investment firm.

Block Party
Large German residential property transactions surged to a record high last year
Source: CBRE
Nb Shows portfolio transactions involving 50 or more units

Combined with rising property values and rents, this wave of dealmaking has caused the market value of listed residential landlords to balloon. Vonovia, which owns or manages about 370,000 residential units, has become so large it has been admitted to Germany's Dax index.

Through the Roof
Consolidation has driven the share prices of listed residential landlords higher
Source: Bloomberg data

Because they own large portfolios of low-cost housing, residential landlords stand to benefit from the arrival of refugees, according to Thomas Martin, analyst at HSBC. LEG Immobilien has already let about 1,300 apartments to refugees, for example, and it said this month that immigration had become "an important additional demand driver".

Deutsche Wohnen and ADO Properties could benefit most as they hold large amounts of property in Berlin where lots of asylum seekers have settled, UBS analysts argue. Trying to estimate how many refugees will ultimately stay in Germany, where they will choose to live and how many will bring their families to join them is a difficult task. 

Yet, on any measure, Germany needs to do more to meet the housing needs created by the bump to its population. The country built around 270,000 new apartments in 2015. But because apartment construction was inadequate in the past, that figure needs to rise to about 430,000 a year until 2020 to meet the shift in demand, according to an estimate by the Cologne Institute for Economic Research (IW).

 

Doing that won't be easy. Building homes in urban areas makes the most sense because that's where refugees stand the best chance of getting a job and thereby integrating. But land costs have been rising fast in major cities and building regulations (eg those on energy efficiency) make building cheap housing difficult.

The German government is poised to increase funding for public housing as part of its 2017 budget plan, according to Bloomberg News. There is also talk of relaxing building rules but some of the government's other policies aren't exactly helping. In response to an outcry about rising rents, the German government introduced a cap last year limiting increases to 10 percent above comparable local rates. Although new apartments are exempted, interventions in the housing market unnerve investors and hardly promote more construction.

Could limited supply cause the market to overheat? As more Germans discover the pitfalls of stashing cash in low-yielding savings accounts (rather than in equities or property), the lack of new buildings may run up against a pickup in demand for homes in some cities. 

Renters no More?
Germany's low home ownership rate could be given a boost by plunging interest rates
Source: Eurostat

There is already plenty of frothiness. The average asking price for an apartment in Berlin rose almost twice as much rents, according to CBRE. Around one fifth of the price increase for city properties since 2009 may be attributed to the fall in interest rates, the Bundesbank believes. 

But with no sign that interest rates will rise, low unemployment and a short-term population boost, Germany's property boom may yet have further to run.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net