Frankfurt property boom not dependent on Brexit
Above-average residential growth in Germany's finance capital benefited from Britain's EU referendum, but Brexit isn't the only reason behind Frankfurt's success.
The United Kingdom's landmark EU referendum in the summer of 2016 saw a mini exodus of international businesses and investors leaving London in search of other European powerhouses considered more secure. Germany's financial hub Frankfurt was tipped as one of the major beneficiaries of Brexit, and the growth of its property markets since then would seem to bear that out. But there are other factors behind the city's continuing success.
Long before Brexit, Frankfurt's strong economy was attracting the best and brightest from across Europe and further afield. More than half of the population was born abroad, making English and other languages more widely spoken than in other German cities. With Frankfurt Airport being one of the busiest in Europe, the city is a convenient base for international companies and entrepreneurs. Ranked top ten in the world for quality of life by Mercer, it's also a popular place to live.
Property prices in Frankfurt have been on the upswing since 2006, and the increasing demand and high income growth give landlords and property sellers more pricing power in one of Germany's most expensive cities. Other perks such as no capital gains tax for property investment make Frankfurt a compelling option for overseas buyers.
Brexit may not have ignited Frankfurt's residential success, but it did fan the flames. The relocation of major financial groups from London to Frankfurt has been speculated to create between 4,600 and 10,000 jobs in the next few years. The Brexit effect saw Frankfurt jump to joint-second place (behind Berlin) in PwC's Emerging Trends in Real Estate report released earlier this year, which reported that a record €2.8 billion of real estate changed hands in the first six months of 2017 alone.
According to Deutsche Bank, price growth in the housing markets was relatively subdued until last year, when prices jumped 15 percent for existing apartments and almost 17 percent for new builds. Research by Jones Lang LaSalle (JLL) found that the average purchase price for a new build condominium in Frankfurt reached €4,830 (HKD 44,000) per square meter by the end of 2017, while asking rents for new apartments in the city center reached €15 to €16 per square meter per month (HKD 136–146) – more expensive than Berlin and most other major cities.
Population growth also spiked to 13,000 new arrivals in 2017, many being drawn by the expectation of more jobs being created in a city with a low unemployment rate of just 5.6 percent. While population growth is slowing down in Berlin and other cities, Frankfurt is growing faster than ever, with the City of Frankfurt expecting the population to exceed 750,000 by the end of 2018 and 800,000 by 2027. This is putting increasing pressure on the already constrained housing market.
Development activity is at an all-time high to meet this rising demand, but it's far from sustainable at current levels. Frankfurt's population has grown by over 62,500 since 2011, but only 14,200 new apartments have been built in that time. JLL estimates that 7,000 new units will be needed every year to meet the demand, a target that's simply not achievable with the land currently available.
This hasn't escaped the notice of local government, which is exploring a number of solutions to the problem. These include the creation of new city quarters, converting public and commercial buildings to residential units and adding new stories to existing apartment buildings. A proposal to develop land in the Rhein-Main metropolitan region and create 92,000 apartments may be held back by infrastructure costs.
Even with a significant increase in constructions and redevelopment, Frankfurt's supply shortage will continue to put high pressure on the market for much of the coming decade at least. As challenging as this can be for residents, the supply imbalance works in favor of residential investors who can get their feet on the Frankfurt property ladder, with further dramatic price increases being likely in the years ahead.