Profitable investments in existing residential real estate keeps getting more demanding in the markets of German A- and B-Class cities. In the Class A markets, yield rates have long dropped below 3 %. For the time being, the rise in price-to-rent multiples continues, suggesting a further rise in purchase prices compared to rents. But the curve might soon start to level out.

For our “5 %” survey of lucrative investment destinations (“5 % Studie 2019 – Wo investieren sich noch lohnt”), we checked the various residential and commercial real estate markets (to be discussed at length in this blog in a few days’ time). In this Chart of the Month, we take a look at the price-to-rent multiples of multi-unit dwellings in A- and B-Class cities.

To determine price-to-rent multiples or multipliers, the relationship between rents and prices needs to be analysed. Rents on the housing market still followed an upward trend in the conurbations in 2018, despite the so-called rent freeze. While growing at a much slower pace than in 2017, re-letting rents did go up year on year – by around 4 % in Class A cities and by nearly 3 % in Class B cities. With a current passing rent average of nearly 17 euros/sqm, Munich remained at the top of the letting market, followed by Stuttgart and Frankfurt, where square-metre rents exceed 13 euros in either city. Among the Class B cities, Bochum, Duisburg and Leipzig show a moderate rent level of 7 euros/sqm or less on average.

Compared to the rent rates, price increases for condominiums in existing buildings reflected a noticeably faster dynamic in 2018 with growth rates of 10 % in Class A cities and 7 % in Class B cities: During the analysed period of 2009-2023, condominium prices in Germany’s Class A cities nearly doubled. Like other lists, this ranking is topped by the Bavarian state capital – where prices have almost tripled over the past few years.

As far as residential accommodation goes, supply and demand remain at odds. In Berlin, a total of 49,135 flats were completed between 2013 and 2017, yet the city's population grew by 123,720 households during the same time. The ratio (increase in dwellings versus increase in households) was roughly 1 to 1.7 in Frankfurt and was 1 to 1.4 in Munich. The number of planning consents issued makes it safe to assume that the strain will not ease within the foreseeable future.
Meanwhile, the price-to-rent multiples are also rising for multi-unit dwellings. The growth is motivated primarily by the attractive market environment as well as by very strong demand on the investment market. The average factor of 29.0 that is the going rate in Berlin now compares to a factor of 37.0 in Munich.

Prices in the Class B markets have also ascended to a very high level – although it should be added that structural differences among the cities come into play here. While the price-to-rent multiples in Münster (25.5) are on the same level as the Class A city of Stuttgart, the figure for Duisburg (15.0) remains on a very low level.

What about the Future?

We predict that the coming years will see the curve gradually level out or decline. To be sure, the situation on the housing markets will remain strained; in fact, prices will keep going up, especially in Germany’s “Big Seven” cities. But as the market cools off, we assume that locations and assets with qualitative deficits will need to be re-priced.
Then again: The demand for housing continues to go unmet, which is why rents will keep going up. But selling price increases at the pace seen in the past, which far exceeded income growth and interest savings, are unsustainable in the long run. Interest rate hikes or a lateral phase alone will suffice to slow down the selling price performance.

Note: The text above represents a slightly expanded excerpt from the “5 % Survey 2019.”

Contact persons: Sven Carstensen, Head of Branch Berlin at bulwiengesa and author of the “5 % Survey”, carstensen [at] bulwiengesa.de und Robin Cunningham, economist at bulwiengesa, cunningham [at] bulwiengesa.de