After years of stagnation, the German residential property market is showing signs of life. Rents and prices are on the rise. Listed landlords are outperforming the stock market and IPOs are in the pipeline. But investors should not get carried away. This market has major pitfalls.
For years, German housing has been known for its high overall quality and stagnating prices. The latter is changing. In such major cities as Munich, Hamburg and Berlin, demand for residential property currently massively outweighs supply. Rents and prices are soaring, as are the share prices of listed residential landlords. Deutsche Wohnen AG, GSW Immobilien AG, TAG Immobilien AG and Gagfah SA all significantly outperformed the wider market last year.
Goldman Sachs wants to cash in on this trend. The majority shareholder of LEG Immobilien GmbH, which owns 91,000 flats, wants to float the company in the first half of 2013. Deutsche Annington, owned by Guy Hands’ Terra Firma and landlord of 190,000 German households, is aiming to be ready for the capital market in the third quarter.
The good news for owners is that attractive urban centres are growing, despite Germany’s dismal demographics. Germans are flocking to the cities, where the supply of new housing has been limited. Tenants’ ability to pay is fostered by rising incomes and falling unemployment. Moreover, low interest rates and inflation paranoia are driving up demand of buyers. The Bundesbank has already started to worry publicly about the possibility of a housing bubble.
Investors, however, should not get too excited. Some trends in German real estate are indeed positive, but neither LEG nor Deutsche Annington is particularly well placed to benefit. Both operate in the lower tier of the letting market, where rents are low and profit margins thin. Large chunks of their property portfolios are located in the Ruhr area, which has been in economic decline for decades. Double-digit unemployment and a shrinking population create the opposite of the perfect area to possess tens of thousands of flats.
Even in economically prosperous regions, landlords’ ability to increase rents is limited. German law is highly protective of tenants, who account for a higher proportion of the population than in most developed economies. Politicians are starting to discuss a crackdown on rising rents.
Residential landlords in Germany will earn steady but low returns. Not risky, but not particularly exciting.
(This article was initially published as a Reuters Breakingviews comment on 15 January 2013.)