• No institutional investment capital available for residential projects
• High construction costs and rising interest rates make privately financed housing with affordable rents unfeasible
• Dieter Becken predicts a shortfall of around 2 million new homes by 2026
• Catella Residential Investment Management: significantly lower housing completions in 2024 and 2025
• Dr. Simon Kempf sees complexity of regional and state planning as an obstacle to construction of rental housing
• PREA sees risks to competitiveness of expensive cities
  

In Germany, there is a shortage of approximately two million new homes by the year 2026, and relief is not in sight, said Dieter Becken at a press conference titled “Does Germany need a housing miracle?” The conference was attended by companies such as Becken, Catella Residential Investment Management, DLE Land Development, and PREA, organized by the Berlin-based consulting firm Rueckerconsult. According to Becken, financial mathematics currently do not allow for the construction of affordable housing: “The high level of construction costs combined with persistently high interest rates can only be compensated by high rents with significantly lower returns.”

The real estate industry is unable to solve the housing issue on its own. “Due to the changed interest rate situation, institutional investors are withdrawing from financing new housing construction via forward deals,” confirms Michael Keune, Managing Director of Catella Residential Investment Management GmbH. Conversely, the development of land prices seems to be of lesser importance. “Even if land were free, the construction of new rental apartments would not be profitable due to increased interest rates and high construction costs,” says Dr. Simon Kempf, Managing Director of DLE Land Development GmbH.

Rental housing markets are responding with rising prices. In 124 out of 127 cities surveyed, the technology and real estate company PREA has observed increasing rents for existing apartments. The dynamics are particularly strong in new construction apartments in the top cities, where the pace of rent development has long been dictated by furnished apartments, with rents of up to 30 euros per square meter expected. These rental levels would affect the influx of workers and the competitiveness of cities, said Gabriel Khodzitski, founder and CEO of PREA at the event.

Construction of affordable housing is no longer economical

Dieter Becken, Managing Partner of Becken Holding GmbH, says, “The causes of the current housing construction crisis result from a mixture of still high land prices, very high construction costs, and the explosively rising interest rates. This high cost level for housing construction at all levels can only be compensated by developers with higher rents, which are simply no longer affordable for the user. In our calculations, we need 25 euros per square meter in cold rent to build with a small profit. We stop at 15 euros per square meter because the broad mass cannot afford more.”

“However, increased land costs are not the cause of the collapse in rental housing construction. It is the high construction costs, especially those imposed by the government, that stand in the way of affordability,” says Dr. Simon Kempf, Managing Director of DLE Land Development. He further explains with a highly simplified calculation example: “If a developer aims for a rent of 15 euros per square meter with a 5 percent interest rate, this corresponds to a square meter price of 3,600 euros. However, the share of construction costs alone is already 3,400 euros per square meter. If a buffer for unexpected additional costs of 10 percent is also included, the developer would need to receive the land for more than nothing in order for a construction project to be profitable. Such an investment would be deficitary.” Kempf adds, “The state would theoretically have an effective lever to make rental housing construction lucrative: If the 19 percent value-added tax on construction costs were eliminated in the same calculation example, the price of the land would be around 380 euros per square meter, which the developer could even pay including a buffer to achieve the targeted return.”

Lack of institutional capital exacerbates housing shortage

Regarding the investment sector, Michael Keune, Managing Director of Catella Residential Investment Management, says, “There is no longer any capital for forward-funding projects because the basic idea of institutional investments simply does not work at the moment. Capital providers such as large pension funds and insurance companies have actively withdrawn from real estate investments due to the changed conditions in the credit and capital markets. Investment capital seeks a return on investment of 3.5 to 4 percent, which corresponds to purchase price factors of 18 to 19 times the investment and construction costs. New housing cannot be realized at these prices.” Keune adds, “We are currently buying housing from the market at these factors from actors who must sell. But even this is a challenge for us in terms of profitability, especially since these are being brought into sustainable funds under Article 8 and Article 9, and we only acquire energetically sustainable projects.”

Due to the changed market environment and investor demand, Catella Residential Investment Management will see significantly fewer completions of apartments in 2024 and 2025: “In 2024, about 1,000 new apartments will be completed through project developments in our funds, and in 2025, there will only be 500 residential units. The latter corresponds to only one-sixth of the 3,000 completions in 2023,” Keune continues.

Call for government support for affordable housing

“We need an emergency plan to boost housing construction because we are heading towards a housing shortage of unprecedented proportions in the next three years,” warns Dieter Becken. “The previously often rather restrictive policy in housing construction must evolve towards support. The housing industry must no longer be seen as a supplicant but must be viewed as a solution partner. The government has failed to act in time. Now it must act. Taxes are an important lever, as is land procurement. The state must subsidize the procurement of land, and housing finance institutions must subsidize the high interest rates. Administration must be completely restructured to reliably support housing projects in the shortest possible time. All of this is necessary to move housing construction forward, but I see no approaches to this at all.”

However, a change is necessary not only at the federal and state levels but also at the municipal level, which is crucial for approval figures, confirms Dr. Simon Kempf. He particularly calls for more cross-municipal thinking and action in planning and approval processes in Germany: “In about a third of our project developments, the complex structures delay the zoning plan process. We estimate that the ‘fear’ of further influx, both on the part of the population and the politicians, significantly hampers approval processes for about 20 percent of our projects.”

Where housing is scarce and expensive

A particular scarcity, affecting households with moderate incomes by now, exists in German metropolises. Since early 2022, PREA, the technology and real estate company, has observed a significant dynamism in new contract rents in Berlin, Hamburg, and Munich. Until early 2023, these rents for new buildings increased by 24.1, 19.1, and 9.3 percent respectively, averaging 8.9 percent across the A-cities.

A significant driver of the recent rental price growth is the influx of international professionals. “Those familiar with rental levels in other European and non-European countries are more willing to pay higher rents than local workers,” says Gabriel Khodzitski, CEO and founder of PREA. In addition, the market for furnished living in major cities has evolved from a niche segment to an established presence in the residential real estate market. For example, in Berlin, every second apartment listing is already in this market. This market is significantly less regulated than the traditional rental housing market. Accordingly, square meter prices in Berlin (33.60 EUR), Frankfurt am Main (32.20 EUR), Hamburg (30.00 EUR), and Munich (32.20 EUR) are already on par with those in other European metropolises such as Amsterdam (32.90 EUR), Milan (29.20 EUR), or Lisbon (35.70 EUR). Only in Paris are rents per m² significantly higher at 44.00 EUR. A large portion of Berlin households (32%) with a household income between 1,500 and 2,600 euros can no longer afford a two-room apartment in new buildings, assuming a maximum rent burden of 40%.

“The significantly increased rental prices have long-term negative effects on the competitiveness of cities and inhibit the attractiveness for new workers,” says Khodzitski. As a result, the limited housing supply causes stagnation. “Innovations and technologies could make housing construction in Germany more efficient and sustainable: AI-based analyses, for example, allow for a more effective use of subsidies. Clustering of locations can identify the neediest regions and allocate resources more targeted.

Effects of the birth collapse

This is absolutely necessary because urbanization and demographic development are causing a birth collapse in many regions of Germany, posing investment risks, in addition to rental default risks due to productivity declines in regionally significant industries. Particularly affected by the possibility of rental defaults are the urban districts of East Germany with their high risk of poverty and extensive rental housing stocks. Conversely, population declines of up to 60 percent in the next 20 years and vacancies threaten mainly rural regions such as the Saale-Holzland district. The rural states of Saxony (-9.5%), Saxony-Anhalt (-17.2%), and Thuringia (-14.9%) are particularly affected by the decline in younger populations, where, apart from larger cities, an oversupply of housing is looming.

Press Contacts

Becken

RUECKERCONSULT GmbH

Christiane Schacht // Susanne Franz

Wallstraße 16, 10179 Berlin

+49 (0) 30 28 44 987-47 // +49 (0) 30 28 44 987-64

becken@rueckerconsult.de

Catella Residential Investment Management GmbH

Stine Zöchling

Head of Marketing and PR European Residential Office

Telephone: +49 (0)30 887 285 29 76

Mobile: +49 (0)151 544 51 005

stine.zoechling@catella-residential.com

DLE Land Development GmbH

Kleiststraße 21, 10787 Berlin

030-88626740

presse@dle.ag

PREA

RUECKERCONSULT GmbH

André Schlüter

Wallstraße 16, 10179 Berlin

M +49 151 276 165 67

schlueter@rueckerconsult.de

About Becken

The owner-managed real estate and investment company Becken has been active in the leading German metropolitan regions since 1978. Becken combines 45 years of dynamic development experience with the solidity and financial strength of a family business. The Becken Group pursues an integrated business model with its business areas of Development, Asset, Rental, and Investment Management, successfully combining expertise at all stages of the investment process. In addition, INDUSTRIA, a specialist in private and institutional investments in residential real estate in economically strong locations, is part of the Becken Group. INDUSTRIA offers a comprehensive range of services in asset and property management, complementing Becken’s business areas, especially in the field of regulated capital market products. In addition to its headquarters in Hamburg, Becken has offices in Berlin, Frankfurt am Main, and Munich. Becken stands for a growth-oriented family business, led by a management that acts flexibly and thinks sustainably. The company’s entrepreneurial ambition is to master the challenges in project development, revitalization, sales, investment-grade structuring, and real estate management in a future-oriented manner. www.becken.de

About Catella Residential Investment Management GmbH (CRIM)

Catella launched its first European residential real estate fund in 2007. In 2013, the team also launched the first specialized pan-European student housing fund. CRIM is a subsidiary of Stockholm-based Catella AB Group, and its residential real estate business includes portfolio management consulting, acquisitions and sales, and asset management. CRIM manages and advises several funds and mandates with assets under management of over €7 billion in ten European countries.

About DLE Land Development GmbH

DLE Land Development GmbH is part of the DLE Group AG. The company is an internationally operating investment manager based in Berlin and has expertise throughout the real estate value chain. DLE develops individual solutions and concepts for projects and for fund shareholders, usually institutional investors, including many pension funds and pension schemes from Germany, while also taking into account the respective urban planning and landscape planning aspects. Here, DLE combines its many years of real estate expertise with extensive market knowledge, particularly focusing on sustainability, social impact, and an ESG-based corporate culture, thereby promoting the individual needs of each city.

About PREA

PREA is a consulting and service company that creates value increases in the real estate and energy sectors using artificial intelligence. With its in-house developed data analysis system mercury, PREA is able to measure, evaluate, and forecast market activities for every micro-location in Germany. The company uses insights from around 3.8 trillion relevant data points* to advise investors, owners, and users. Advisory services for all asset classes include commercial transactions and leasing, research and strategic planning, financing and investments, architecture and project development. Throughout the real estate cycle, PREA’s analysis system generates a statistical picture of different future scenarios, thus achieving the greatest leverage in fulfilling socio-cultural, ecological, and economic aspects. This technological approach creates value for real estate and pension funds, banks, insurance companies, family offices, foundations, and other investors while meeting their corporate social responsibility. Since its founding, PREA has managed a project volume of approximately €4.7 billion with its agile project teams, consisting of investment and finance consultants, data scientists and engineers, architects, and project developers. PREA is a registered trademark of PREA Group GmbH.

*As of Q1, 2023