News | Press Release

Structural crisis on the residential real estate market
continues

Berlin, November 29, 2023

• No more institutional investment capital available for residential real estate projects
• Freely financed residential construction with affordable rents is no longer feasible due to high construction costs and increased interest rates
• Dieter Becken forecasts a shortfall of around 2 million new apartments 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 rental housing construction
• PREA sees risks for the competitiveness of expensive cities

Germany will face a shortage of around two million new apartments by 2026, and there is no relief in sight, said Dieter Becken at a press conference titled “Does Germany Need a Housing Miracle?”, organized by the Berlin-based consulting firm Rueckerconsult and attended by the companies Becken, Catella Residential Investment Management, DLE Land Development, and PREA. From Becken’s perspective, the financial math currently does not allow for the construction of affordable housing: “The high level of construction costs, combined with persistently high interest rates, can only be offset by high rents with significantly lower returns.”

The real estate industry is not capable of solving the housing issue itself. "Due to the changed interest rate situation, institutional lenders are withdrawing from financing new residential construction via forward deals," confirms Michael Keune, Managing Director of Catella Residential Investment Management GmbH. In contrast, the development of building land prices appears to be less important. "Even if building land cost nothing, the construction of new rental apartments would not be profitable due to the rise in interest rates and high construction costs," says Dr. Simon Kempf, Managing Director of DLE Land Development GmbH.

The rental housing markets are responding with rising prices. In 124 of 127 cities surveyed, the technology and real estate company PREA recorded rising rents for existing apartments. The momentum is particularly strong for new-build apartments in the top cities, where the pace of rental development has long been set by furnished apartments, rents of 30 euros per square meter are to be expected in some cases and the rent levels would impair the influx of workers and the competitiveness of the cities, said Gabriel Khodzitski, founder and CEO of PREA at the event.

Building affordable housing is no longer economically viable
Dieter Becken, Managing Partner of Becken Holding GmbH, says: "The causes of the current housing crisis result from a mixture of persistently high
land prices, very high construction costs and the explosion in interest rates. Project developers can only compensate for this high cost level for residential construction at all levels by charging higher rents, which is simply no longer affordable for users. In the calculation, we need a basic rent of 25 euros per square meter in order to build at a small profit. We stop at 15 euros per square meter, because the masses can't afford more."

"However, increased land costs are not the cause of the slump in rental housing construction. It is the high construction costs, especially those imposed by the state, that are preventing housing from being affordable," says Dr. Simon Kempf, Managing Director of DLE Land Development. He goes on to explain using a highly simplified calculation example: "If a project developer aims for a rent of 15 euros per square meter with a 5 percent interest rate, this corresponds to a price per square meter of 3,600 euros. However, the construction costs alone amount to EUR 3,400 per square meter. If a buffer for unexpected additional costs of 10 percent is also included, the project developer would have to be given the land more than as a gift for construction to pay off. Such an investment would be loss-making." Kempf adds: "In theory, the state would have an effective lever to make rental housing construction lucrative: If, in the same calculation example, the 19 percent sales tax on the construction costs were eliminated, this would result in a price of around 380 euros per square meter for the property, which the project developer could even pay including the buffer in order to achieve the targeted return."

Lack of institutional capital further fuels housing shortage
With regard to the investment sector, Michael Keune, Managing Director of Catella Residential Investment Management, says: "There is no more capital for forward funding projects, because the basic idea of institutional investments simply no longer works at the moment. Capital providers such as large pension schemes and pension funds have actively withdrawn from real estate investments due to the changed conditions on the credit and capital markets. The investment capital is looking for a 3.5 to 4 percent distribution yield, which corresponds to purchase price factors of 18 to 19 times the investment and construction costs. No new residential space can currently be realized for these prices." Keune adds: "We are currently still buying residential space on the market at these factors from players who have to sell. But this is also a challenge for us in terms of profitability, especially as these are placed in sustainable funds in accordance with Article 8 and Article 9 and we only acquire energy-sustainable projects."

As a result of the changed market environment and demand behaviour on the investor side, Catella Residential Investment Management will record significantly lower completion figures for apartments in 2024 and 2025: "In 2024, around 1,000 new apartments will be completed via project developments in our funds; in 2025, there will only be 500 residential units. The latter corresponds to just one sixth of the 3,000 completions in 2023," Keune continues.

Call for state funding for affordable housing
"We need an emergency plan to boost housing construction. Because over the next three years, we are heading for a housing shortage of unprecedented proportions," warns Dieter Becken. "The often restrictive policy in housing construction to date must evolve towards promotion. The housing industry must no longer be seen as a supplicant, but as a solution partner. The state has failed to take countermeasures in good time. Now it must act. Taxes are an important lever, but so is the procurement of land. The state must subsidize the procurement of land, the housing credit institutions must subsidize the high interest rates. The administration must be completely restructured in order to reliably deliver housing construction projects in the shortest possible time. All of this is necessary to bring housing construction forward, but I don't see any signs of this happening."

However, Dr. Simon Kempf confirms that a jolt is needed not only at federal and state level, but also at municipal level, which is decisive for the approval figures. He calls for more cross-municipal thinking and action in Germany, particularly when it comes to planning and approval: "In around a third of our project developments, the complex structures delay the B planning process. In our estimation, the 'fear' of further immigration, both on the part of the population and politicians, also significantly hinders approval procedures for around 20 percent of our projects."

Where living space is scarce and expensive
There is a particular shortage in Germany's major cities, which has long affected middle-income households. In Berlin, Hamburg and Munich, the technology and real estate company PREA has observed a significant increase in new contract rents since the beginning of 2022. By the beginning of 2023, new-build rents had risen by 24.1, 19.1 and 9.3 percent respectively, and by 8.9 percent on average in the A-cities.

A key driver of the recent rise in rents is the influx of international skilled workers. "Those who are familiar with rent 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 accommodation in large cities has developed from a niche segment into an established player in the residential real estate market. In Berlin, for example, every second apartment advertisement is already in this market. This market is significantly less regulated than the traditional rental apartment market. Accordingly, prices per square meter in Berlin (EUR 33.60), Frankfurt am Main (EUR 32.20), Hamburg (EUR 30.00), and Munich (EUR 32.20) are already on par with those of other European cities such as Amsterdam (EUR 32.90), Milan (EUR 29.20), and Lisbon (EUR 35.70). Only in Paris are rents per square meter significantly higher, at EUR 44.00. A large proportion of Berlin households (32%) with a household income of between EUR 1,500 and EUR 2,600 can no longer even afford a two-room apartment in a new building, assuming a maximum rent burden of 40%.

"The significant increase in rental prices has a long-term negative impact on the competitiveness of cities and inhibits the ability to attract new workers," says Khodzitski. As a result, the low housing supply is causing stagnation. "Innovations and technologies could make housing construction in Germany more efficient and sustainable: AI-based analyses, for example, allow more effective use of subsidies. By clustering locations, the regions most in need can be identified and funds deployed in a targeted manner.

Effects of the birth rate collapse
This is absolutely essential, as urbanization and demographic trends are causing a birth rate collapse in many regions of Germany for investment risks, as well as the risk of rent losses due to declining productivity in key regional industries. The possibility of rent losses particularly affects the independent cities of eastern Germany with their high risk of poverty and extensive rental housing stock. According to PREA, population declines of up to 60 percent over the next 20 years and vacancies are a particular threat in rural regions such as the Saale-Holzland district. The rural federal states of Saxony (-9.5%), Saxony-Anhalt (-17.2%) and Thuringia (-14.9%) are particularly affected by the decline in the younger population, where an oversupply of housing is emerging away from the larger cities.