Micro-apartments: the hottest new trend sweeping the German real estate market
Germany has been overtaken by the micro-apartment construction boom. A micro-apartment is an apartment with a floor area of 20–30 sq. m. Microhousing is often a turnkey furnished unit with a bedroom, a bathroom, and a small kitchen. Most micro-apartment buildings contain self-storage units, laundry facilities and communal lounge areas to accommodate for the lack of space in each flat.
Despite their Spartan conditions, micro-apartments have proven incredibly popular among a certain demographic in Germany — so much so that developers are scrambling to expand the market. All across Germany, cumulative investment into micro-apartments rose by 70% in 2018. In 2020, despite the COVID-19 pandemic, investors continued capital injections into student housing and microunits with a total of €563M invested. According to JLL Germany, the demand in this housing segment has been only slightly disrupted by the COVID-19 pandemic and remains consistently high. There are now about 340,000 micro-apartments in Germany.
Where is the demand for micro-apartments coming from?
The target market profile for micro-apartments in Germany is students, single occupants, and commuters coming to big cities to earn their living — over 30 million people all in all.
Microhousing now sees growing demand, and one-person households (Einpersonenhaushalte) are on the year-on-year rise amounting to 17,560,000 in 2019 against the overall 41,510,000 households in Germany.
The dwelling units occupied by one person have grown from 20.6% to 42.3% over the last 60 years, whereas the units for the greater number of people have remained almost the same. This trend is attributable to a declining birthrate, decreased marriage rates and a general increase in the popularity of living alone.
Micro-apartments primarily target students, young professionals, season workers, commuters from small provincial towns or expatriate workers that rent micro-apartments to return to at the end of the workday and go back to their families for the weekend. This target audience is currently getting bigger to encompass some other categories, such as senior singles and other singles seeking cheaper rents to save money.
As micro-apartments are small, rental payments average €500-700 per month. It is difficult to find equally affordable alternatives in large cities, so microhousing options are in high demand. What is more, German lessors are often prohibited to lease housing for the short term. To illustrate, lessors in Berlin would have to obtain a special permit from the local authorities for this, and individual lessors are highly unlikely to get such approvals. Micro-apartments are administered by management companies that may lease housing for the mid-term.
Such housing is generally more attractive for the tenants that like new equipped apartments with individual bathrooms and kitchens unlike the shared facilities in hotel accommodations. What’s more, a range of apps now exists that enable tenants not only to choose their apartments but to outfit them with a custom selection of dishware, home appliances and furniture — all from their mobile phones.
Demand for micro-apartments in Germany is expected to rise in the long run, especially in cities like Berlin, Hamburg, Munich, Frankfurt am Main, Leipzig, and Cologne, where the population is growing each year.
Why invest into micro-apartments
Buyers appreciate the true value of this new and popular investment format. Income-producing commercial real estate in Germany is interesting for more than 50% of Tranio’s clients. Opting for this scenario, our clients get:
- low barrier to market entry (investments start from €100,000);
- availability of instalment payment plans or cheap financing from German banks;
- investments into new housing developments;
- yield above the residential market average.
The tight living space squeeze does not just make the rent prices attractive for the prospective tenants but also lowers the downpayment to be made by investors. Besides, the buildings constructed using modern technologies for energy saving (the KfW standard) are covered by special mortgage subsidies (with the mortgage rates at about 1% per annum). A borrower in such a mortgage transaction would get a low mortgage rate and state subsidies to get certain loan principal refunds.
Developers are also on a good wicket selling micro-dwelling metres at higher prices than in more spacious residences. This is market law at work: the smaller the apartment is, the more expensive a metre in it is.
One more advantage of such units is that microhousing is usually leased for the mid-term (three to six months). The owner alleviates almost entirely the tenant eviction risk as compared to traditional long-term or indefinite lease, which is important for foreign investors.
The owners of micro-apartments do not have to dive into the intricacies of property management, as a management company deals with move-ins and move-outs, administration, pre-payments, insurance, maintenance, and sometimes even repairs.
Micro-apartments in Germany yield about 3–4.5% (after deduction of management fees, but before taxes). This is higher than what an ordinary apartment would yield in a long-term rent (about 2–3%). Micro-apartment investors get guaranteed occupancy: once a property with microunits is commissioned, 100% of it may be considered already rented out.
There is potential for price growth in Berlin and some other German cities. The average housing prices in Berlin doubled from 2015 to 2020.
Micro-apartment rental rates are adjusted to the market growth, unlike with the long-term rents that might be subject to restrictions. For example, residential rental rates in common cases in Berlin may not be increased by more than 10% of the average upper rent level in the given neighbourhood and by more than 20% over three years.
There is one disadvantage of investing in micro-apartments: such investment properties are difficult to find. Micro-apartments in the completed buildings have already been sold out, so all the micro-properties on sale in 2021 will be commissioned only in 2022–2023.
Thus, everyone has something to gain on the German micro-apartment market: tenants get inexpensive and quality accommodations and investors can earn solid yields with a low market entry threshold.
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