Property investors eye German residential market

German residential properties are some of the cheapest in the developed world, yet rent prices are expected to surge in the near term. As a result, Germany’s residential property market looks like a promising investment option.

PMM Partners says: “After decades of underperformance, the German residential property market has seen a resurgence in both rental growth and capital values over the last 18 months in contrast to other European markets, which reportedly haven’t performed that well over the last few years.”

PMM Partners has been managing German residential portfolios for UK investors since 2005. In the past two years, it has seen the net asset value of its funds increase by around a third.

Other managers are also seeing the benefit from exposure to Germany’s rental market. Aberdeen Asset Management launched the latest fund investing in German residential real estate, with an initial seed amount of €115m.

Hartmut Leser, Aberdeen’s head of distribution, Germany and Austria, said: “The progress we are making in Germany is also reflected in the BVI statistics: Back in 2010, we ranked 8th in terms of inflows to property funds whereas currently we have moved up to pole position (as of July).”

PMM Partners’ Mike Hilton attributes the strong performance of PMM’s funds to rental growth, particularly in the firm’s core Berlin market, where rents have risen by 7% over the last twelve months.

One of the key drivers of these rental increases is demographic growth. Apart from that, the existing low rental prices in Berlin, where an average two bedroom apartment still costs less than €400 per month, are attracting young people from across Europe to the city.
Property investors seeking to profit from this trend have recently focused on Germany’s core cities.

An example is Vienna-based residential property investment firm Conwert Immobilien Invest. The firm has expanded its property portfolio in Berlin by roughly one third to about 5,350 units. The latest acquisition, made in August, brings a yield of 8.3%.

Johannes Meran, chairman of Conwert’s administrative board, said: “This transaction is a further step in our strategy to increase the average yield of our portfolio by acquisitions in inner-city locations with high appreciation potential.”

PMM’s Hilton said: “Germany is now one of the cheapest residential property markets in the developed world, with prices standing 20% below fair value, in sharp contrast to the markets such as France which are considered to be 40% overvalued.”

So far property prices in Germany have not enjoyed the boom witnessed in other markets. Between 1996 and 2010, they rose by just 8%, in contrast to the UK which saw a 210% rise.

But this year has seen prices in Germany increasing significantly, due partly to low interest rates, which have made mortgages more affordable.

PMM still sees a huge amount of scope for further significant rent inflation.” Hilton says: “There are strong compelling reasons which lead us to believe that we will continue to witness some significant price appreciation movements in the German property market for the rest of the decade.”

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