Residential property in Germany: West has best investment prospects nationwide

Real estate markets with the most potential in Germany are Hamburg, Munich, Oldenburg and Stuttgart according to Postbank, a German retail bank. Tranio investigates what characteristics make these cities so attractive.

A report by Postbank, one of Germany’s biggest banks, names Hamburg, Munich, Oldenburg, Stuttgart and Bonn as the cities with the greatest potential for long-term residential property growth, ranking highest of 402 municipalities in terms of macro and socioeconomic indices as well as forecasts for development until 2030. Ingolstadt, Ludwigshafen, Regensburg, Cologne and Heilbronn also made the Top 10 while the country's capital, Berlin, ranked only 26th. Prices of property for sale in Germany have been rising by 2–3% per annum on average since 2010 but economic integration is still lagging as the majority of Germany’s top cities for investment remain located in the West.

The potential attraction of a particular market is affected by many factors: demographic growth, unemployment, purchasing power, property affordability, prices and rental rate dynamics, infrastructure, etc. For the most part, cities in the Top 10 exceed Germany’s average rates for these indices; the consumer purchasing power index, proportion of tenants and population growth rates are higher and price growth is faster.

Positive demographic trends

The larger the population, the faster property demand and prices grow. Postbank's top cities have had positive demographic dynamics for the last three years and higher population growth than the German average.

Concern over Germany’s demographic health has been growing as the baby-boom generation reaches retirement and slowing birth rates in younger generations: the birth rate among the native German population remains low and migration is the main source of growth. According to the estimates by Statistisches Bundesamt, the Federal Statistical Office of Germany, between 2014 and 2030 Germany’s population will shrink by 2 million from 81 million inhabitants to 79 million. Nevertheless underneath this general trend, cities like Munich, Ingolstadt and Bonn will grow — particularly in districts closest to the city centre (see chart below).

Higher employment

Low unemployment is equally as important when evaluating future investment health as it indicates a favourable economic situation. Employment is a stimulus for real estate purchases, rental rates and occupancy. Unsurprisingly, unemployment in Ingolstadt and Regensburg in July 2015 was the lowest in the country (see chart below) according to the Federal Employment Agency of Germany. Both of these towns are located in Bavaria, one of the country’s most prosperous federal states.

However, unemployment rates in Hamburg and Cologne considerably exceed the country's average but are still lower than in the East where they reach 11–13%. Large German cities, with the exception of Munich and Stuttgart, are characterised by higher unemployment rates as they attract more internal and external immigration, both from the other regions of the country (especially those in the East) and from abroad. There is 7% unemployment in Frankfurt am Main, 9% in Düsseldorf and 11% in Berlin.

Growing property prices

Stable price growth at above average rates is a good indicator of the market's attractiveness, as it usually the result of high demand. Between 2011 and 2014, flat prices in Postbank’s Top 10 cities grew faster than the nationwide average (see chart below), with the strongest growth in Munich (9.8%), followed by Heilbronn (8.7%) and Ingolstadt (8.4%).

Currently, Munich has the highest property prices: a 60 sq m flat costs over €6,600 per square metre on average. In other top-ranking cities prices per square metre are lower: €3,800/sq m in Hamburg, €3,700/sq m in Stuttgart, €3,200/sq m in Cologne. Nevertheless, nationwide prospects for price growth are positive according to Postbank experts who forecast that local markets will remain stable or grow by at least 1.5% annually for the next 15 years in 77% of the observed municipalities.

Purchasing power and affordability

Along with population and employment, market potential is influenced by local consumers and their financial health. Purchasing power in the Top 10 (see chart below) is higher than the nationwide average: inhabitants of Munich, Ingolstadt and Stuttgart for instance have more disposable income to spend more on goods and services, including residential property.

According to Numbeo, a global database of user-contributed data, property is less affordable in big cities, particularly Munich and Hamburg, and this because of high demand. At the same time, these cities also have stronger prime real estate markets, which raise the average property value.

Among the ten given cities, Ludwigshafen and Oldenburg are the leaders in affordability where the proportion of mortgage repayments is less than 35% of the total income for all segments of the local population (singles, families, senior citizens, etc.) according to Postbank research. They are followed by Heilbronn, where it is not more than 35% for the employed and 35–40% for pensioners. Munich has the least affordable property with the share of mortgage repayments over 50% of total income for any category of household. In cities with low affordability, there are higher potential gains from rental property for investors.

“Land of tenants”

In cities where there are more tenants than property owners, investing in commercial apartment buildings and flats for rent is particularly beneficial. Germany could even be called "the land of tenants": about 54% of residents rent property and, in city centres, this percentage is even higher. Stark examples are Munich’s borough of Altstadt-Lehel and the centre of Bonn where tenants constitute over 84% of the population.

Rental rates have been growing since 2011 in Postbank’s Top 10 cities. The most significant growth has been observed in Stuttgart where the rates have almost doubled. Here the number of households in the city and their respective income have been increasing rapidly while property supply in the top districts is low and land for construction is lacking. This also means that rental rates in Stuttgart will continue to rise in the near future.

Generally, rental rate growth in the large cities like Stuttgart, Munich and Cologne can be attributed to higher property demand spurred on by internal and foreign immigration.

Diversified economic development

Qualitative factors also influence investment prospects. These cities have strong economic development and multiple industries (goods, services, etc.) stimulating investor interest. For instance, Bonn is home to strong metals, textiles, porcelain, furniture and printing industries. Hamburg is both the largest German port and the city of aerospace, machine and brewing industries. Ludwigshafen is an important industrial and economic hub and a leader in the German chemical industry. Stuttgart specialises in advanced technology, the machine industry and has its own stock exchange, second only nationwide to Frankfurt’s exchange, the largest in Germany.

Each of the ten cities has reputable universities and institutes of higher education. Cologne has one of Germany’s largest and oldest universities (Universität zu Köln) with over 40,000 students. Hamburg has 17 universities and a total of 70,000 students. Munich and Stuttgart have several large institutes of higher education too. Universities are also crucial for cities with less than 200,000 inhabitants like Ingolstadt, Ludwigshafen, Oldenburg and Regensburg as the thousands of incoming students from other regions and abroad create additional demand for property.

Germany is famous for its high quality healthcare system and many cities have excellent clinics and university medical centres. Their presence stimulates demand for rental property near reputable medical centres. For example, there are university clinics in Hamburg (Universitätsklinikum Hamburg-Eppendorf), Munich (Klinikum der Universität München) and Regensburg (Universitätsklinikum Regensburg) among others.

In brief

If you are considering investing in German residential property, the following characteristics will help you get a clear idea of local market prospects:

Yulia Kozhevnikova, Tranio