Private real estate investors face competition

Restored houses

The reason for the continued price increase is the low supply. Some experts therefore warn of price bubbles.

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Frankfurt Investors looking for a rental house these days have little to smile about: the right property is difficult to find, and the price for the property is rising and rising.

Not even the corona crisis will stop it – on the contrary: Covid-19 had no negative impact on the housing markets, says Felix von Saucken, the manager responsible for the asset class at the real estate consultancy Colliers International. “On the contrary: investors are even more interested in investing in residential real estate.”

This no longer only applies to wealthy private customers who have always liked to buy so-called apartment buildings, but also to institutional investors such as insurers, pension funds or fund companies.

Since March, Colliers has been asking real estate investors who manage at least 500 billion euros in assets over the phone about their investment preferences. Accordingly, more and more are flirting with the purchase of residential property: While around 40 percent of the investors surveyed were interested in this usage class in the time before Covid-19, it is now 47 percent.

Less return, but more security

“Residential real estate is becoming increasingly important as an addition to a fund,” says von Saucken. A few years ago, many would have expected more returns from other asset classes without great expense – albeit at a higher risk.

“I may still be able to rent out a house built in 1950, even if it is no longer the most beautiful,” explains von Saucken. “An office property from the same year is more difficult to sell.”

However, the management of residential properties is more complex because, for example, not just one tenant has to be looked after, as is the case with an office property, but several. “Ultimately, however, income from residential property is more stable,” he explains. In phases in which prices in the market are generally rising, this aspect may not be the focus of investor interest. “When times become uncertain, that is exactly what is needed.”

Smaller cities in view

The real estate expert is convinced that the prices for residential property will continue to rise. In a report that is exclusively available to the Handelsblatt, Colliers International has analyzed and assessed developments in 42 German cities.

“There was no city where we are really skeptical,” says von Saucken now. “Although we do not expect the price jumps as large as in the past five years, we do expect a continuous, moderate increase in both purchase prices and rents.”

In 2019, 9,230 residential and commercial buildings with a transaction volume of 20.6 billion euros were sold in the cities examined – after 19.8 billion euros in the previous year, this corresponds to an increase of 4.1 percent compared to 2018. The cities of Berlin, Hamburg, Munich, Cologne and Frankfurt alone accounted for 11.3 billion euros – more than half. As in the previous year, Berlin had by far the highest turnover with 4.8 billion euros.

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The cities of Aachen (plus 132 percent to 414.6 million euros), Fürth (plus 79 percent to 119.2 million euros) and Munich (plus 77 percent to 1.9 billion euros) recorded the strongest increase in sales volume From Collier’s point of view, this is a clear indication that secondary locations such as Aachen and Fürth are becoming increasingly attractive for investments due to the more attractive returns and greater development potential and are becoming the focus of investors.

Other locations apart from the seven major cities with significant growth in investment volume compared to the previous year were Offenbach (fourth place), Mainz (fifth), Wiesbaden (sixth) and Darmstadt (seventh), especially in the Rhine-Main area.

Too little new building

The reason for the continued price increase is the low supply. Even if a stroll through many German cities currently gives the impression that construction is going on everywhere: in 2019, around 293,000 apartments were completed, two percent more than in the previous year. However, around 400,000 apartments are needed annually to meet demand. A fact that many in the real estate industry criticize.

But according to the experts, a significant increase in the number of new buildings is also unlikely in the coming years, even if almost four percent more building permits were issued in 2019 than in the previous year. “You just have to look at how much is being built – and then how many people are moving to the cities,” says von Saucken. For Germany as a whole, experts forecast an increase in households by 2.8 percent by 2035. “The demand for living space will continue to be high, especially in the cities,” concludes Colliers.

Some experts therefore warn of price bubbles. The investment bank UBS recently published a study in which she saw clear signs of overheating in Munich and Frankfurt. “No other city in the world is as exposed to the risk of a real estate bubble as Munich and Frankfurt,” explained Maximilian Kunkel, UBS chief investment strategist in Germany.

25 metropolises around the world were considered for the analysis. For their “Global Real Estate Bubble Index 2020”, the experts calculated index values ​​of 2.4 and 2.3 for Munich and Frankfurt – at more than 1.5 points, the experts recognize the risk of a price bubble.

This puts them ahead of world cities like Paris and London. With the economic boom and a doubling of housing prices in a decade, Frankfurt is a “victim of its own success”. The corona crisis is now becoming the litmus test of whether the high prices are justified. In Munich, the strong local economy and solid population growth continued to fuel the real estate markets, while too little new living space was being created.

Bubble – or not?

Colliers manager von Saucken does not see the risk of price bubbles forming. Conversely, however, there are practically no more properties at prices below the market level. What looks like a bargain usually has a catch – such as poor transport links. “Then the question is: Do you want that?”

Colliers is not alone in his optimistic assessment of the German market. “Living is the winner of the corona crisis”, says Peter Schürrer, who as managing director of the Deutsche Anlage-Immobilien Verbund (Dave) represents twelve real estate consulting companies. “It has just become clear how important your own four walls are, whether owned or rented.”

More: Attractive cities, best location: Where residential real estate is worthwhile despite Corona.

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