Merkel’s migrants set to lift residential real estate in Germany

German chancellor Angela Merkel has been named Person of the Year for both the Financial Times and Time magazine. At the annual Congress of her Christian Democratic Union party, the first of her many standing ovations lasted 10 minutes. As nearly one million migrants flow through Europe, many heading for Germany, her insistence that ‘We will manage’ has struck a chord. It also marks a new economic reality.

If, as the OECD suggests, around 45% of migrant residency applications are successful, Germany will rapidly need to house 800,000 people in an estimated 300,000 new housing units. That is the same as the total number of apartments now being built each year. Doubling any country’s new build stock annually is a very big deal.

A gold mine for the real estate sector? Perhaps, but the opportunity is more nuanced than that. German authorities are determined not to repeat the mistakes of other European countries where mostly urban ghettos of migrant communities have stoked social and political tensions. Bavaria is currently hosting the highest number of new migrants, but inevitably residents will be re-distributed across Germany’s 16 federal states.

So far some 60% of asylum seekers in Germany are families, while 35% are single men. While an element of destination choice will remain, the aim will be to house single men in urban areas, where jobs and suitable accommodation are more available, and migrant families in rural areas and smaller cities. Official statistics actually indicate the highest number of job vacancies in smaller cities such as Memmingen, Schwerin and Coburg.

Although at present there is no housing shortage across Germany, the government is to earmark an additional €500m annually from 2016 to 2019 to fund temporary refugee accommodation. Census data from 2011 identified 1.7 million vacant apartments nationally, mostly in Western areas. Local authorities are now looking to use that capacity. Authorities in Berlin have already impounded four commercial properties. Hanover has passed a temporary law to enable councils do so, and other states are likely to follow suit.

Construction will have to be intensified and building codes relaxed to encourage both temporary and permanent development.  Germany has a highly active publicly-quoted, residential real estate sector, and private housing funds and housing companies have been quick to respond: LEG has already offered 450 apartments in Dortmund, Düsseldorf and Iserlohn for refugees, while Vonovia will make 300 apartments available in Dresden. Other companies we feel will be active in coming months are Adler Real Estate, Deutsche Wohnen, Grand City Properties Hamborner REIT and TAG Immobilien.

So we see a degree of momentum behind this opportunity in a sub sector of the real estate market, one of the five pillars of our Real Assets fund. We continue to monitor the situation carefully. Interest rates are likely to remain low, providing some support for developers. Some states recently moved to cap rent rises, with a slightly negative effect on the letting markets, mostly in urban areas. That could now unwind, or add to residential market pressures if it does not.

 

Mark Ebert is fund manager on the Argos Real Assets Fund

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