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German residential investment market remains fragmented

The transaction volume in the German residential investment market (transactions for at least 50 apartments) totalled approximately €6.16bn during the first half of the year, which is approximately 36% lower than in the first half of 2018 according to Savills. “The decline in transaction volume is not a sign of lower demand but rather a consequence of the limited supply of larger portfolios,” says Karsten Nemecek, Managing Director Corporate Finance – Valuation for Savills Germany, adding: “Many investors even want to further increase allocations to residential property within their portfolios. However, since larger portfolios are scarce, they either have to acquire medium-sized residential portfolios or development projects.”


Approximately 43,800 apartments changed hands during the first six months of 2019, which is around 46% less than in the corresponding period last year. This decline may also be partly attributable to the large volume Buwog acquisition in March 2018. A total of 165 transactions (for at least 50 apartments) were completed, which is 18% less than in the first half of 2018. This takes the total for the last twelve months to 238 sales, which is the lowest figure since September 2013. The average transaction over the last twelve months comprised 399 apartments, which is the third lowest figure in the current market cycle.

With regard to the regional distribution of investment activity, the federal states of North Rhine-Westphalia and Schleswig-Holstein stood out in the first half of the year, accounting for 22% and almost 13% of all apartments transacted respectively. This compares with five-year averages of around 20% and 8% respectively. Berlin was once again leading among the federal states during the first half of the year with around 10,300 apartments (25% of all apartments transacted).

In terms of the transaction volume, the institutional residential investment market remained strongly focused on the seven A-cities, Berlin, Cologne, Duesseldorf, Frankfurt, Hamburg, Munich and Stuttgart, which have been responsible for around 52% of investment, or approximately €3.2bn, since the beginning of the year. With a transaction volume of more than €1.8bn, around 30% of the overall volume, Berlin was also by far the most sought-after location for residential investment. “The high level of economic momentum and continued attractiveness of the capital are likely to ensure that the apartment market remains strained going forward. This is all the more likely in view of the continued low levels of new-build activity. As a result, investors have priced further rental growth potential into their investments,” says Matti Schenk, Senior Consultant Research Germany for Savills, adding: “However, with the rental cap on the table, the leveraging of this potential is likely to be significantly restricted regardless of the issue of constitutional validity. A period of legal uncertainty and consequently a deterioration of the investment climate in Berlin's residential investment market is currently looming on the horizon.”

The average price of apartments transacted in the last twelve months stands at almost €120,000 for existing apartments while an average of around €289,000 per apartment has been paid on development projects. This represents an increase of 21% year-on-year on the average price of existing apartments transacted while prices of apartments in development projects have stagnated. “The stagnation of average prices in development projects is a consequence of the increase in acquisitions outside of the A-cities,” says Schenk, adding: “Smaller cities also frequently have strained rental apartment markets, meaning that new-build apartments in such locations also represent interesting investment opportunities.” Acquisitions of development projects accounted for around 22% of the transaction volume in the first half of the year. Around 40% of apartments transacted in development projects were located in A-cities, which is significantly below the five-year average (55%). In contrast, around 16% of apartments transacted in development projects were in D-cities compared with a five-year average of less than 4%.

German investors accounted for approximately 95% of the transaction volume, which is even higher than the five-year average (78%). “While foreign investors are highly interested in the German apartment market, they are often unable to secure direct investments,” says Schenk, adding: “In addition to the already relatively complex legal framework, the discussions regarding additional regulations are likely to further impede the market entry of investors who are unfamiliar with the German apartment market.”

However, investor demand for residential property in Germany is likely to remain high, particularly from risk-averse German investors. “Housing requirements will increase in many regions over the long term, meaning that vacancy rates are likely to remain low in the long term and rental income is likely to be uninterrupted. This matches the search profile of many long-term investors perfectly,” says Nemecek. “It remains to be seen whether the discussions of the planned rental cap in Berlin will produce a regional shift in investment activity and how pronounced this might be.”