Investing in German Real Estate

1 Macroeconomic Structure of the German Real Estate Market

Daniel Piazolo, Utku Cem Dogan

This chapter focuses on the geographic and economic structure of the German real estate market and examines the attractiveness of various characteristics for an international investor.

Due to the longevity of the core product, i.e. buildings, the real estate sector is decisive for the long-term structure of cities and countries. Combined with the stable momentum of the overall German economy, this highlights the need for fundamental analysis of the German real estate market. Short-term developments will be faded out in this contribution. The chapter investigates the contents and aspects of the German real estate market that make Germany an interesting destination for international investors. This chapter discusses macroeconomic key indicators of the real estate market and analyses advantages of the German real estate structure.

1.1 German Macroeconomic Key Indicators

Germany is one of the most important economic nations in the world and is the largest economy in the European Union. According to many indicators, such as the health of public finance, the qualifications of the workforce, labour productivity, integration into global trade flows, the stability of the political and juridical system and transportation infrastructure, Germany offers significant benefits for investors. However, some German and international investors complain about high tax rates, restrictive employment laws, slow (albeit thorough) bureaucracy and restricted access to financial capital.

As an index for the overall size of an economy and thus a rough approximation of investment opportunities, gross domestic product (GDP) allows a first comparison with other large European countries (as set out in Figure 1.1).

Fig. 1.1: GDP across Europe 20191

The German labour market situation remains robust and is an important indicator of German economic wellbeing. In 2019, the increase in employment led to 45.4 million employees, the highest level in Germany since reunification. In February 2020, the German unemployment rate was 5.3 %2. The economic impact of the restrictions due to Covid-19 on German GDP, employment levels and tax income is severe. However, relative to other European countries, Germany is performing quite well. In the following paragraphs, the overall indicators of the German real estate markets will be examined. The relative comparison of the indicators allows valuable insights that are relevant even in an economic environment affected by the Covid-19 pandemic.

There were 83 million people living in Germany in 2019 (as depicted in Table 1.1). The capital, Berlin, is the largest city with more than 3.6 million inhabitants. Three further cities have more than 1 million inhabitants - Hamburg, Munich/München and Cologne/Köln. Within the German real estate sector, the investment focus is frequently on the seven largest cities. Consequently, three further cities - Frankfurt am Main, Stuttgart and Dusseldorf - have joined the club of the so-called »A-cities«.

City Population Population Population by age group (1.1.2018) (1.1.2019) (1.1.2018) < 18 years in % 18-65 years in % > 65 years in % Berlin 3,644,826 3,613,495 588,459 16.3 2,330,755 64.5 694,281 19.2 Hamburg 1,841,179 1,830,584 302,867 16.5 1,191,397 65.1 336,320 18.4 Munich 1,471,508 1,456,039 228,340 16 968,939 66.5 258,760 17.8 Cologne 1,085,664 1,080,394 174,061 16.1 718,276 66.5 188,057 17.4 Frankfurt 753,056 746,878 125,674 16.8 504,272 67.5 116,932 15.7 Stuttgart 634,830 632,743 97,711 15.4 421,947 66.7 113,085 17.9 Dusseldorf 619,294 617,280 98,303 15.9 399,104 64.7 119,873 19.4 ø A-cities 1,435,765 1,425,345 230,774 16.2 933,527 65.5 261,044 18.3 Germany 83,019,213 82,792,351 13,538,146 16.4 51,544,494 62.3 17,709,711 21.4

Tab. 1.1: Demographic segmentation in the largest German cities3

The analysis by age group shows that on average 65.5 % of the population within the A-cities are of working age, i.e. between 18 and 65, whereas the overall percentage of this age group in Germany is 62.3 %. There is a higher percentage of people above the age of 65 in the smaller cities and the rural areas of Germany than in the seven A-cities. For the whole of Germany, 21.4 % of the population is over 65, whereas this age group represents only 18.3 % of the population in the A-cities. Frankfurt am Main, with 15.7 %, has the lowest share of people over the age of 65 out of all the A-cities.

Until the end of 2019, Germany saw a very favourable development in the job market. The unemployment rate in Germany dropped to 4.9 % (see Table 1.2). For the seven A-cities the unemployment rate was 6.2 %. All seven A-cities experienced a strong growth in jobs in the previous five years. On average, the total number of employees grew by 15.1 % for the A-cities in the five years before.

Total employees (2018) Change over five-year period in % Computer balance Addition through Commuter Unemployment rate in % (12/2019) Berlin 1,476,248 20.2 135,496 9 % 7.7 Hamburg 974,482 11.5 225,059 23 % 6.0 Munich 874,099 15.7 207,723 24 % 3.4 Cologne 568,635 14.0 152,427 27 % 7.6 Frankfurt 584,220 13.2 277,744 48 % 5.0 Stuttgart 416,667 12.2 156,005 37 % 4.2 Dusseldorf 419,244 11.6 173,412 41 % 6.5 ø A-cities 759,085 15.1 189,695 25 % 6.2 Germany 32,868,611 11.0 4.9

Tab. 1.2: Job market characteristics in the largest German cities4

Where all German cities are concerned, the employees commuting from other cities are important additions to their own employees for the workforce. On average, one in four employees in an A-city does not live in that city. In Frankfurt am Main, almost every second employee (48 %) does not live in Frankfurt.

The inflation rate in Germany is low. The average increase in harmonized consumer prices was 1.4 % in 2019, which was less than aimed for by the Central Bank. Since Germany is part of the European Monetary System and shares the Euro currency with 18 other countries, overall monetary policy is set by the European Central Bank. The financing conditions in Germany are favourable for investors with good credit ratings, since the expansionary orientation of monetary policy keeps the interest rate low. As in previous years, the financial market in Germany faces low interest rates, because monetary policy will continue in an expansionary mode as long as several Euro countries struggle in economic terms and as long as the inflation rate remains low.5

1.2 Geographic Structure of the German Real Estate Market

In Germany, the country's federal structure means that there is no one dominantmetropolis like London in the UK or Paris in France. Rather, the important real estatemarkets are spread over several metropolitan regions including the above-specifiedA-cities, frequently referred to as the »Big Seven«.

In addition, cities like Hanover, Dresden, Leipzig, Nuremberg, Essen and Dortmundrepresent promising second-tier real estate markets.

Fig. 1.2: Major real estate...