For international real estate investors, the primary destination in Europe is London, with all other places trailing far behind. Judging by the investment volume, this has been the reality on the ground for a long time, and sales on the British investment market always used to top those of the German market. More than that: In 2016, the value of commercial buildings traded in London was higher than the value of commercial properties that changed hands in the Germany’s “Big Seven” metropolises of Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart combined. But according to a survey published by the PwC business consulting firm on occasion of the Mipim real estate fair in spring of 2017, the total real estate volume traded in Germany in 2016 amounted to 60.2 billion euros, compared to 59.9 billion euros worth of sales in the UK.
Residential real estate claims a growing share of the lively transaction business. In 2020, residential portfolios worth 20.3 billion euros were traded in Germany, which implies a growth rate of eight percent and the fourth consecutive increase, bringing the residential market share up to about 25 percent. According to estate agents and sales organisations, the pandemic has not dampened buyer interest except for private sales to international buyers. “The dip is not likely to be permanent. Because within the general investment context, the urge to invest in real estate in different target markets is growing, especially among mobile HNWIs,” said Rainer Schorr, Managing Director of PRS Family Trust GmbH. “And Germany’s metro regions are a great choice for this sort of undertaking.
This is true despite the admittedly considerable incidental acquisition costs in Germany, which can range from nine to twelve percent of the recorded purchase price, depending on the state. Moreover, residential real estate in a number of growth regions promises a sustainably stable performance. This is assured, in addition to the robust economy, by the fact that standard financing arrangements in Germany tend to include a high equity capital share and fixed long-term interest rates, and by the permanently short supply of real estate. For one thing, the country is undergoing a sustained trend toward urbanisation and suburbanisation while, on the other hand, housing construction in the greater areas of major cities represents a complex and time-consuming enterprise.
“Although the Federal Government intends to complete 400,000 apartments a year in future, this does not necessarily mean that such construction activity is actually possible in the years ahead,” said Rainer Schorr. “You need to bear in mind that capacities in the construction industry and in essential trades can only be expanded at a slow pace and not at will.” This is where industry experts currently perceive severe bottlenecks, since no end of the shortage of skilled labour is in sight, given the small generational cohorts and the low number of apprentices. Add to this the fact that land prepared for construction is now scarce anywhere in the country. “Development land has lately become the needle’s eye in German housing construction, mainly because it cannot be increased at will.”
The need for building land is at odds with the political intention, inspired by conservationist ideas, to reduce soil sealing and with the fact that development rights are approved on the municipal level. “Local councils are often characterised by strong differences in opinion as to who should get to build what and where,” said Rainer Schorr. “As a result, it can sometimes take several years, not least because in the course of the local development planning process, every public interest body and the citizenry must be integrated and heard, all of which is subject to minimum periods and set procedures.” Schorr went on to say that the issue is compounded by the understaffed municipal administrations, a situation that has motivated local governments to fall back on the support of private businesses.
Once the zoning process is completed, it tends to be quite easy to find buyers for the respective plots of land. After all, demand among contractors and institutional investors is enormous. Moreover, owner-occupied homes are still considered the best kind of retirement scheme and the most effective safeguard against the inflation-driven erosion of wealth in Germany. Ever since the hyperinflation of 1923, at the end of which a single US dollar cost 4.2 trillion mark, and mortgage loans were paid back in no time at all, Germans have considered houses and homes as the ideal protection against inflation. “Accordingly, the fact that the inflation rate is currently heading for the five-percent mark will cause the property price trend to shift gears,” said Rainer Schorr. “We also need to remember that the ongoing low-interest cycle has more or less stripped the eurozone of any investment alternatives.”
But even without the inflation, property pricing is following a sustained upward trend. According to the estate agency portal ImmobilienScout24, house and apartment prices increased by 7.8 percent in Germany in 2020, significantly faster than in previous years, while building plots actually became eight percent more expensive on average. And as far as the parameters go, there is plenty of evidence suggesting that this development is here to stay, which means inversely that Germany will continue to offer optimal conditions for international real estate investors.