Real estate is still considered the non-plus-ultra when it comes to preserving capital. But the current development casts doubt on it.

Buying condominiums is becoming less and less worthwhile as an investment.

SIn the past ten years, residential properties were in as much demand in Germany. Investors can’t seem to go wrong with this. Last year, too, rents rose significantly, reports the real estate analyst Bulwiengesa in a study presented on Thursday.

Despite the rental price limit, rents in the so-called A cities, i.e. Berlin, Munich, Cologne, Düsseldorf, Stuttgart, Frankfurt and Hamburg, have risen by an average of almost 9 percent when they are re-let. In the so-called B cities, which include Duisburg and Leipzig, for example, they have increased by more than 6 percent compared to the previous year. In Munich, however, tenants pay an average of 16 euros per square meter, in Stuttgart and Frankfurt more than 13 – still more than twice as much as in Leipzig and Duisburg.

Too little is being built

At the same time, the discrepancy between supply and demand is growing: 39,533 apartments were built in Berlin between 2012 and 2016. But in the same period, the population grew by 128,206 households. There were 3.2 new households for every new apartment. In Frankfurt the ratio was still around 1 to 2, in Munich 1 to 2.2. And the number of building permits suggests that there will be no easing in the foreseeable future.

What at first glance might seem like paradise for real estate buyers, has a big catch. Because in such a boom, prices also rise sharply. Existing condominiums were 10 to 12 percent more expensive. Since 2008 the prices for condominiums in the A-cities have almost doubled, in Munich they have more than tripled.

Increasingly higher multipliers are paid for multi-family houses. In Berlin, an average of 26.5 times the annual rental income is paid, in Munich 33.5 times as much. However, the situation is very different in B-cities. While Nuremberg is 22.5 times at the same level as Cologne, Duisburg is at a very low level with a factor of 14.

At least in the big cities, the current price level will continue to stabilize, believes Bulwiengesa. While rising prices are obviously good for sellers, they are not for buyers. And this is where developments in residential real estate seem to be slowly reaching their limits.

Residential investments hardly offer any protection against inflation, write the analysts. In the B cities, the average yield level for residential real estate slipped below the 3 percent mark for the first time. Typically, between 2.8 and 3.3 percent can be achieved here. In the A markets, the figure is only 1.9 to 2.6 percent for good locations. Given that the inflation rate is picking up again, the minimum target of value retention is questionable. Even in university towns, the achievable return fell by 13 percent compared to the previous year to 3.2 percent. Yields have been falling continuously since at least 2015.

This is also noticeable in the German Hypo Real Estate Climate Index. Even if the overall picture is still positive, the momentum has lately decreased. The investment climate is largely responsible for this – the players in the German market see fewer and fewer opportunities to make economically viable investments due to the sharp price increases. According to Bulwiengesa, it cannot be ruled out that locations and properties with quality deficits will have to be re-priced in a cooling market.

For tenants, it sounds like an end to the ever-increasing rents is in sight. In the short term, however, rising purchase prices and falling yields with higher inflation can put even greater pressure on rents. And even when real estate investments become less interesting, it is not that easy. If the real estate investment climate wanes, this can also affect new buildings. And a slackening of construction activity in a situation where, in overheated areas, demand rises faster than supply, would be counterproductive.

Ultimately, more construction activity helps both investors and tenants. With a larger supply, the rise in rent decreases, while the yield level can stabilize at the same time.