German residential property: signs of a pick-up in prices

1. The advent on the market of influential, largely international investors is of key importance for the imminent pickup in real estate prices. In the past few years in particular, the German real estate market has increasingly moved into the sights of these investment companies. According to research by Thomas Beyerle, head of DEGI-Research, real estate packages with a volume of some 250,000 to 300,000 housing units changed hands in both 2004 and 2005, i.e. more than half a million housing units in total. Estimates suggest that between one-third and one-half of the 9.8 million housing objects currently under municipal or commercial ownership will change hands in the coming years. This means that over 10% of the total 39 million housing units in Germany will be up for sale in the near future. This fresh demand will push up property prices.

2. Building costs are another key factor behind property price trends. Property prices naturally tend to move in tandem with building costs as by far the largest single cost block (ahead of land costs or ancillary costs). New construction orders are therefore an important leading indicator. In this regard, the Allianz economists have identified clears signs of stabilization over the last two years.

3. On the world stage, Germany is the only country to have recorded a modest increase in the rental yield (ratio of achievable rent to purchasing price) of 2% over the base year 1995. In the UK the rental yield in 2004 stood at only 40% of its 1995 level, in Sweden at 56% and in the USA at 72%. The marked drop in yields in these countries reflects a jump in property prices with which rents have not been able to keep pace. The steady decline in rental yields in other industrial countries is certainly a major determinant of the German residential property market’s growing appeal for international investors. According to Allianz estimates, the average pan-German rental yield stood at 5.4% in early 2005.