Germany Residential Real Estate Market - Growth, Trends, COVID-19 Impact, and Forecast (2023-2028)

The size of Germany Residential Real Estate Market is USD 361.7 billion in the current year and is anticipated to register a CAGR of over 6% during the forecast period.

Key Highlights

• Sales of homes in Germany reached EURO 337 billion (USD 328.99 billion) in 2021, a 14.5% annual growth and twice as much as it did ten years earlier. During the real estate market boom that followed the Covid lockdowns, people sold their apartments to purchase homes in more remote locations, but it was also a catch-up move. With a potential slowdown and decline, real estate in Germany could not be a good investment. However, a lot will depend on future central bank policies and the health of the energy market.
• Germany's housing market remains vibrant amid improving economic conditions. The average price of apartments rose by 12% in the fourth quarter of 2021 compared to the same period of the previous year and denoted the most significant price increase since records began in 2000. The price increase can be seen since the pandemic started. It increased by 8.25% till Q3 2021, following Y-o-Y rises of 8.38% in Q2 2021, 7.95% in Q1 2021, 8.8% in Q4 2020, and 7.38% in Q3 2020.
• At the end of the first half of 2021, the transaction volume for residential properties and portfolios in the German residential investment market totaled around EUR 10.3 billion (around 57,300 dwellings and 257 transactions), with around EUR 3.9 billion of this sum changing hands in the second quarter (21,900 houses). The transaction volume is significantly less than in the first three months (EUR 6.4 billion; 35,900 dwellings). Nonetheless, the five-year average transaction volume between April and the end of June was exceeded by double digits (+20%), and this is also the case (albeit in single digits) when compared to the corresponding quarter of the previous year (+8%).
• German rental markets are regulated in areas with competitive housing markets. The state government must approve the conversion of rental apartments into owner-occupied apartments. The "rent brake," which has been in place, limits rent increases by landlords to 10% over the local market level. The green transition is one trend that will also affect the German real estate market in the future. Since the building sector accounts for roughly 16% of all greenhouse gas emissions in Germany, the German government is actively encouraging energy-efficient homes. Five billion euros more will be made available under the "Immediate Action Program 2022" to promote the construction of new, energy-efficient structures, including social housing, and the renovation of existing ones. Political support, however, might also present a problem.

Germany Residential Real Estate Market Trends

Strong Demand and Rising Construction Activities to Drive the Market

The demand remained strong in 2021 for the residential sector, buoyed by low-interest rates, urbanization, and healthy household finances. In recent years, the migration crisis and strong economic growth have added to the already strong demand in the country. Despite the pandemic, residential construction activity continues to rise. In the first three quarters of 2021, dwelling permits rose by 4.8% Y-o-Y to 282,420 units, following annual growth of 2.2% in 2020, according to the Federal Statistical Office. Consequently, foreseeable structural changes, such as demographic effects, are also perceived as important drivers of demand. Most recently, the supply side was the main obstacle to further growth. However, the political uncertainty regarding new government constellations and the high investment pressure of many market participants have tempted some portfolio holders to bring products to the market in the second half of the year.

The status of the public finances has a significant impact on civil engineering, and infrastructure investment is crucial. Due to decreasing business investment in commercial, retail, and office buildings, the non-residential segment's performance has remained modest. Over the past twelve months, most German construction companies have reported stable or marginally better results. Given the benign demand environment, the prognosis for profit margins is stable for the time being, and price wars are being avoided. But persistent material shortages and unstable input prices continue to be a problem. Without contract escalation clauses, builders find it challenging to pass price hikes on to clients. Future profit margins may suffer as a result.

Rising House Prices in Germany Affecting Demand in the Market

A price increase of 14.5% was recorded for houses and apartments in Germany's seven largest cities: Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart, and Dusseldorf. Prices have been skyrocketing in cities; the cost of buying a house has also been increasing in rural areas. In densely populated rural areas, the price of single and two-family houses rose by 12% in the third quarter of 2021, compared to the same period last year. The cost of condominiums in these areas increased by 12.3%. In less densely-populated rural areas, prices for single and two-family homes rose by 15.5%, while the price of condominiums rose by 11.2%.

Experts have identified several reasons why house prices continue to rise so rapidly. Over the past decade, low-interest rates, increasing demand, a lack of investment opportunities, and a strong economy have contributed to Germany's rising house prices. Construction cost has also increased significantly, with prices rising for building materials such as wood, concrete, and steel. The construction industry is facing labour shortages.

Germany Residential Real Estate Market Competitor Analysis

The Germany residential real estate market is fragmented in nature and has become increasingly competitive. The increasing spending on infrastructure, new government initiatives to drive investments, and new project announcements are expected to bring an overall development in the real estate sector, which may further enhance the interest of more investors. Some of the major players in Germany include Vonovia SE, Deutsche Wohnen SE, SAGA Hamburg, LEG Immobilien SE, and Consus Real Estate.

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