There are strong underlying fundamentals in Germany providing significant potential for rental growth across local property sectors, driven by higher wages, disposable income and private consumer spending and Germany’s continued strong exports. This economic strength amongst its European peers has resonated with international property investors, resulting in the highest property transaction volume in Europe, underscoring the deep liquidity and opportunity in the German property market.
Christian Schulte Eistrup, managing director at Optimum Asset Management, notes: “That market is characterised by high occupier demand for commercial and residential space, with chronic undersupply of new additions to existing stock. “Given that 1-2% of existing stock becomes functionally obsolete every year, demand for space is expected to continue pushing rents upward. Substantial domestic migration and increasing urbanisation in Germany is creating additional tenant demand for property in some markets, such as the ‘Big 7’ – especially Berlin, Hamburg and Munich – as well as some additional key markets, including Dresden and Leipzig.”
Market opportunities in Berlin
Berlin remains one of the most compelling opportunities and appealing cities in Germany for investors, Schulte Eistrup continues. The capital recently retained its title as the top city for property investment and development for the fourth year in a row, following PwC’s Emerging Trends in Real Estate, Europe 2018 report. “The property market is booming, offering value to business, and is touted as one of Europe’s most dynamic destinations for technology companies.
Residential prices have been rising but remain good value compared to other major capitals, such as London and Paris. It remains a high-growth, supply-constrained city. The economic fundamentals are strong, with one of the highest per capita GDP levels in the country, low unemployment and healthy wage growth.” The population is set to grow by more than 250,000 by 2019 according to forecasts from Berlin’s Senate in 2015. “This increasing demand, particularly for home ownership, is putting pressure on the occupier supply/demand imbalance and the potential for real estate value growth is significant.”
Proactive approach to asset management
Schulte Eistrup says that to capitalise on these opportunities, investors need to tap into a proactive approach to management. This is to make best use of, for example, mismanaged properties, where local operators can drive an uplift of up to 100 basis points in yield.
Hands-on managers with local market knowledge using strategic analysis rather than short-termism also represent a better approach to local property he adds. It is also important to find the investments that sit above the reach of private investors, but that are too small for institutions, say, in the €10-50m range. “Property in selected cities is beginning to match the capital as the best source of attractive returns with low underlying risk. Potsdam, Dresden and Leipzig offer modest risk but with even more affordable prices and attractive yields.
These cities are growing centres of technology, education and industry and offer investment opportunities comparable to Berlin, specifically with regards to mismanaged but high-quality properties. They also exhibit a strong occupier supply/demand imbalance.” Schulte Eistrup continues: “The property markets in Cologne, Düsseldorf and Hamburg offer further opportunities, on a selective basis, to participate in the positive macroeconomic and property fundamentals.
“Property is one of the largest industries in Germany, with over 800,000 companies employing around 4 million people – 10% of the national workforce. Its contribution to German GDP is 5x that of the automobile industry. As such, the property industry figures prominently in government considerations. Another, very important reason for government interest is the desire to support the availability of affordable living space for the population.”