Germany: Lower housing supply in Top 7 cities contrasts with high demand

• Average basic net rents for apartments in Germany on the rise, declining purchase prices in the Top 7 cities
• USA remains an investment location with considerable potential thanks to its excellent economic development, rising rents and commensurate purchase prices

The Empira Group, an investment manager for institutional real estate investments in the German-speaking regions of Europe (DACH) and the USA, has published its quarterly study on the current macroeconomic situation and the real estate markets in various countries both within and outside of the DACH region. In a large number of western economies it is assumed that economic growth will be low in this current year. Growth for Germany in 2024 is estimated to be 0.1 per cent. Inflation, in contrast, is decreasing noticeably. In January 2024 the consumer price index declined to less than three per cent, and thus reached its lowest level since mid-2021. For 2024 as a whole a moderate rate of inflation of 2.3 per cent is expected, whereby a resurgence of inflation is less likely and the economic focus is being shifted to reviving the economy. For the USA, in contrast, it is assumed that economic growth will be 2.5 per cent.

“A large number of western economies experienced a recession in 2023. In this respect the development of the fundamental data in the USA compared to the DACH region is considerably more positive. Viewed across all markets, the United States stands out as a promising investment location thanks to its economic dynamism, a high level of transparency and the comparatively low level of regulation,” comments Prof. Dr. Steffen Metzner, Head of Research at the Empira Group.

Rising costs and rigid standards leading to a reduction in supply of housing with simultaneous high demand
The real estate markets often react to economic developments with a delay, something which was reflected in the past year by a significant downturn in new housing construction. After 2022 had seen as many as 304,323 approvals for units, this figure declined to 214,088 in 2023, which corresponds to a delta of about 30 per cent. Thus the political objective of building 400,000 apartments each year is currently unrealistic. Housing construction is primarily in the form of multi-family residential buildings and is the domain of professional investors. Some two thirds of the approved apartments are to be found in buildings with at least three residential units (corresponds to 19 per cent of the approved 67,931 apartment buildings). Forecasts through to 2026 reveal a further decrease in construction completion – in Germany from an expected 270,000 units completed in 2023 to 175,000 units in 2026.

“Among the obstacles to an increase in housing construction are the high costs of building land, materials, wages and financing, exacerbated by long approval processes and more rigid construction standards. The resulting excess demand, and especially in the Top 7 cities, offers very good opportunities for value appreciation in the long-term and stable cash flows,” explains Prof. Dr. Steffen Metzner, Head of Research at the Empira Group.

Rising rents at the Top 7 locations and falling purchase prices – real estate market displays divergent trends
The sparse offering on the German housing market contrasts with rising demand, which itself has been bolstered by a significant increase in immigration numbers. In Germany the average basic net rents increased in February 2024 by 2.2 per cent year-on-year, while purchase prices in the majority of cities fell, and particularly significantly in Hamburg, where they went down by 8.3 per cent. Prices remained stable in Stuttgart, and in Munich they declined by 1.5 per cent, which corresponds to the trend seen in other European countries.

US real estate market: Strong economic growth meets with a positive development in terms of rents.

In the USA widely differing developments can be observed on the real estate markets in the various metropolitan areas. The quoted rents vary significantly, ranging from an increase of nine per cent in Johnstown, Pennsylvania, to a decrease of eight per cent in Punta Gorda, Florida. Particular dynamism is displayed by three metropolitan areas in New England and two in the Midwest. For 2024 it is expected that purchase prices in the USA will stagnate on the whole, with a possible spread of 0.7 per cent to growth of 2.8 per cent. Rents in general are forecast to increase by 1.1 per cent. Sales figures are set to rise slightly, with figures of 5.3 per cent for new construction and 15.2 per cent for existing portfolio properties.