Furnished Apartments in Berlin, the Answer to Growing Demand and Tighter Regulations

The Demand for Furnished Apartments

In the ever-changing world of work, often involving flexible locations, it is becoming more and more important that we can easily find a fully-equipped living space, ready to move into and easy to call home. Furnished living concepts are a response to this growing trend. Providers of this concept say that in 2016, every 5th space was occupied by a ‘commuter’ – someone who might only live in Berlin during the working week. In addition, fixed term contract jobs have significantly increased with this defined time span a matching comfortable living space in a given location is needed. Who wants to go find an apartment, furnish it, only to dismantle everything after 6 or 12 months? Providers of such accommodation are flexible regarding the rental period from 1 month to a year or more, and some contracts can be open ended. There is a growing preference for a furnished apartment solution over serviced apartments or hotels.

 Recent projects were developed in the light of the fact that there is an urgent need for affordable living space in Berlin. It is expected that around 250,000 people will be relocating to the city by 2030. Already, 83 percent of New Berliners live alone or in pairs. The rise in single households is twice as large as in comparable large cities.

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The Ideal Location for Furnished Apartments

For the concept to be successful avoiding longer vacancies the location is a key factor:

• Close proximity to professional clusters with sufficient demand
• Well connected by public transport;
• Shops, restaurants at least for daily needs.

The Best Planning Concept

To achieve the best cost/benefit ratio for the users as well as for the owner these planning parameters should be adhered to:

• Compact, affordable living space with a choice of apartment size of 1.5 to 2 rooms
• Apartment sizes from 30m² to 60m²
• Fully equipped kitchen
• Modern “clean” furniture and decorations
• Smart TV, Wifi and smart metering.

Recommended Operational Concept

For an investor, it could turn into a long and in parts painful experience to try to achieve a smooth set-up and operation of a furnished apartment unless he lives “around the corner” and is flexible regarding availability. A service concept from the outset is important. It should cover these items:

• Furniture concept, delivery, and installation
• Service for rental, management during the occupation and most important handover from the tenant
• Maintenance and replacement of furniture and equipment.

In order for a service provider to be efficient and successful, they should have a number of managed apartments in the vicinity.

Example for a Suitable Location for Furnished Apartments

One such area ideally suited to furnished apartments is the vicinity of the Science and Technology Hub Berlin Aldershof, an important science, business and media centre in Berlin. It includes ten non-university research institutes, six institutes of the Humboldt University. and some 1,000 additional companies, where ca. 16,500 people are employed and more than 8,000 students are registered.

In addition, the area has attracted 146 companies in the media sector, employing another 1,763 people.

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Furnished Apartments in Berlin, the Answer to Growing Demand and Tighter Regulations

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German Housing Market Study Spring 2017

Investors have to expect a further rise in rent levels, as otherwise an acceptable yield could not be expected despite the low interest rates.

Berlin is currently losing its swarm town position

The immigration from inside Germany to Berlin, Hamburg and Munich has weakened considerably and is no longer enough to compensate for the increasing suburbanization. This is not the end of the swarm behavior, but the swarm continues to move into relatively more favorable cities such as Leipzig, Rostock, Erlangen or Regensburg.

"Lucky" sequence of different immigration waves

The cause for Berlin, Hamburg and Munich nevertheless experiencing almost constant immigration, is due to a "lucky" succession of different immigration waves from abroad. These, however, have reached their climax. If there is no further immigration wave from abroad, the three cities are expected to experience a sharp slump in the growth of housing demand.

Falling demand with increasing supply.

At the same time, as the "housing construction machine", especially in Berlin, is increasingly taking off and larger and larger projects are being planned, under construction or near completion, the housing supply will be expanded strongly in the near future. As a result, the rise in the new contract rents will soon come to a halt.

A free summary version of the study is available at this link:

http://www.zia-deutschland.de/fileadmin/Redaktion/Pressemitteilungen/Downloads/Fruehjahrsgutachten_2017_Zusammenfassung.pdf

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German Housing Market Study Spring 2017

Trend Barometer for the Property Investment Market in Germany 2017

The EY Trend Barometer for the Property Investment Market in Germany 2017 predicts a moderate decline for the second year in a row due to lack of offers:

Demand for German real estate will remain high through 2017, led by the search for good office space in Berlin, Stuttgart, Hamburg and Munich – while in the residential sector, Frankfurt will see the strongest demand, according to the latest Real Estate Trend Barometer published at the beginning of the year by EY Real Estate.

EY partner Christian Schulz-Wulkow comments in the survey that "all the lights are still showing green in Germany", with real estate valued at between €60bn and €65 billion expected to change hands this year, still well ahead of the average of the last 10 years (€44.3 billion), but down on the €79bn seen in the peak year of 2015 and down marginally on last year.
However, the EY researchers add the proviso that much of this is dependent on the political climate, both in an election-filled year in Europe, and in the United States after the advent of Trump.
For one thing, interest rates in the US are expected to rise faster than in Europe making the US more attractive – important for Germany, given that 43% of all commercial real estate transactions last year were made by foreign investors. The EY consultants are recommending to their clients to boost their liquidity reserves, in case interest rates rise faster than expected, resources are withdrawn from the market, or tenants experience problems.
The Brexit effect is most clearly to be seen in Frankfurt, where the residential market shows little sign of cooling down. Schulz-Wulkow comments in the report that this has to do with the narrowness of the market, with the office market not quite as sensitive, given both available vacancy and the attraction of alternative centers such as Paris or Dublin.
Co-author of the study Paul von Drygalski comments that despite the danger of overheating in certain segments, the German market has lost little of its attraction for international investors. If anything, Germany is still seen as economically and politically stable, with real estate benefiting from the low interest-rate environment, which 98% of respondents viewed as unlikely to change noticeably in 2017.
Another factor causing optimism among German investors is the likely smaller transactional size expected in 2017. Here, 91% of respondents agreed this could be an advantage for German investors, as the big Asian competitors tended to focus on very large transactions – for example, the purchase of the Commerzbank Tower in Frankfurt by Samsung in 2016 for €660 million and the takeover of the BGP residential portfolio from the biggest Chinese sovereign fund CIC for €1.118 million.
Leading the drive among investors are the insurance companies and pension funds, among whom the survey found that 96% rated the German market 'attractive' or 'very attractive'. However, high demand is being met with constrained supply, meaning deal size is getting smaller. The most sought after assets are parking houses, healthcare properties, student apartments and micro apartments, in addition to the classical hotels, retail properties, offices and residential apartments. Offices and residential in the better locations are expected to get even more expensive particularly in cities like Berlin, which is still benefiting from the dynamism of its startup sector.
Germany's recent real estate boom reached its zenith in 2015, when real estate volume of €79 billion was transacted. This compares with the €13.4 billion transacted in 2009, after the onset of the financial crisis, and the €65.7 billion transacted in 2016, where the figures were flattered slightly by giant takeovers such as Blackstone's taeover of OfficeFirst and Vonovia's takeover of Convert.

In the German residential and office sector in 2016, German buyers were the dominant force. Of survey respondents, 80% expect rising prices in residential, as well as in logistics and hotels. Yields in the office segment have fallen to 3.3% in Berlin and Munich. Banks are becoming more generous in providing financing, with loans of 80 to 90% of the purchase price no longer an exception – well up from the 60% of only fairly recently.
The EY survey shows that 90% of respondents view project developers to be the likely main winners from the current market situation. Likewise, 90% believe that investors are increasingly likely in the future to secure properties via forward deals – in contrast to three or four years ago, where German institutional investors such as insurance companies shunned any involvement with project developments. Now, given the shortage of available product, investors are prepared to take on higher risk and to expand into other geographical territories that offer higher yields.
When questioned which investor groups were most likely to be on the selling side in 2017 respondents were of the majority opinion that opportunity and private equity funds along with other international funds would be among the most active sellers. They are selling for profit-taking and for portfolio optimization. According to Schulz-Wulkow, "it is now a market for exiting, with many opportunity funds having already sold."
However, with 1/3 of all respondents saying they plan no exit this year, even from individual assets, supply is likely to remain very tight for primarily insurance companies and pension funds as well as open-ended funds and family offices most looking to buy.
Adding to the shortage of supply, unrealistic price expectations and the reassessment of risk exposure are acting as brakes on transactions. EY cite the example of asbestos, which in the past would have led to the immediate break-off of discussions, but now it might be accepted at an appropriate discount. A further example of how sellers at the moment have the upper hand, the report suggests.
Respondents expect retail properties to show a sideways price tendency at best, even in fairly prime locations. 62% of respondents believe that office property will be the hottest segment and the preferred asset class, up from 49% believing that last year. Berlin property is particularly in demand, while overall residential is falling out of favor with investors, down to 28% from last year's 65%. The key reason for this is what is viewed as excessive political regulation, with 94% of respondents expecting even tighter rental constraints.

The report is in German and available at this link.

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Trend Barometer for the Property Investment Market in Germany 2017