‘Safe haven’ Germany extends its lead over European residential investment in 2018
With house price and rent growth expected to remain strong through 2018, Germany continues to be Europe's top pick for overseas property investors.
Germany's real estate boom has been building momentum since 2009, with apartment prices in some cities having more than doubled in that time. As urban populations and employment continue to rise in the major cities, growth in property prices and rent aren't expected to end any time soon – although the lack of new supply means investment opportunities may become more scarce.
Residential transactions in Germany totaled €17 billion (HKD 155 billion) in 2017, almost a 25 percent increase from the previous year, according to research from Jones Lang LaSalle (JLL). What's more, Germany accounted for nearly 40 percent of total residential volume in Europe. Five of its cities – Berlin, Hamburg, Düsseldorf, Dresden and Munich – were among the top 20 on the continent, with capital Berlin maintaining pole position as the international favorite.
Although the supply shortage remains a significant hurdle, Germany's robust economy, comparatively stable politics and continuing inward migration give overseas investors plenty of reasons to feel positive about the country's residential markets in 2018 and beyond.
Europe's safe haven
While London is still a traditional favorite for overseas property buyers, uncertainty over the United Kingdom's decision to leave the European Union and stamp duty increases for UK property have benefited Germany in the last few years, as many investors and global businesses have sought out a more stable alternative. The Brexit effect was a common reason cited by investors who placed Berlin and Frankfurt top of PwC's Emerging Trends in Real Estate: Europe 2018 report earlier this year.
Although the majority of residential investment in Germany comes from domestic buyers, foreign investment accounts for a significant share and is growing rapidly – from less than 20 percent in 2016 to more than a quarter in 2017, according to JLL figures. Most foreign capital originates in other European nations, such as France and Switzerland, but investment from further afield is on the rise as Germany's residential markets receive greater exposure overseas.
With a limited supply of existing housing stock, forward purchase deals are on the rise as buyers stake a claim for properties still under construction that are likely to sell out before completion. Asset and fund managers are also helping investors to diversify their portfolios for optimal yield performance.
Where to invest in Germany?
While there are significant differences between cities, Germany's metropolitan areas are characterized generally by growing demand and insufficient supply. Rising urban populations are seeing vacancy rates decline and rental growth accelerate, in some areas more than others.
Berlin continues to dominate, reaching €3.7 billion (HKD 33.6 billion) in residential investment last year, more than any other European city. Berlin's property markets are extremely diverse, with higher-end city center apartments and suburban properties enjoying greater price and rent growth than the more competitive affordable property brackets. Condominiums are a special area of interest for Berlin property buyers, with average prices having more than doubled since 2010.
Outside the capital, price growth and net yields are even more impressive in some of Germany's other major cities. Investment in Hamburg grew by 63 percent last year to reach a total of €1 billion, while Düsseldorf investment grew by a more substantial 126 percent to €560 million. Forward purchases accounted for more than half of transactions in both markets. Frankfurt is another appealing option for investors and migrants alike, due to its large international population, booming economy and higher net yields than other major cities at 2.9 percent.
Like much of Europe, Germany's property markets are constricted by a lack of new builds to meet the high demand. This is especially the case in Berlin, where the government's focus on affordable housing means construction permits are severely limited.
This pressure is expected to ease in the next few years as population growth slows and more projects currently in the planning pipeline enter the market, but for now, most investors are content to play the waiting game with forward purchases. With price and rent growth likely to continue for the next several years, residential investment in Germany can offer lucrative long-term gains at comparatively low risk.