Residential properties exhibition sector: a market with challenges

Rising rents and prices, coupled with housing shortages, have long been the defining aspects of the residential property market. Another significant factor is the energy-efficient renovation of existing housing stock. However, at the same time, residential construction is significantly declining, due to higher financing costs, rising prices for materials, and a shortage of skilled labor. In this challenging environment, EXPO REAL provides an opportunity for exchange, discussion, and orientation on the topic of residential properties

What does EXPO REAL have to offer in the field of residential properties?

The international trade fair for property and investment offers a platform for all those professionally involved in the subject of housing to find out about trends and developments, innovations and requirements and to exchange ideas with other experts.

What exhibitors are at EXPO REAL in residential property sector?

Around 50 housing companies have registered for EXPO REAL 2023. The spectrum ranged from Germany's largest private housing company, Vonovia, to publicly owned housing corporations, major companies like BASF and non-profit housing associations. The event also featured providers of student housing, micro-living, co-living, and serviced apartments—these fully furnished accommodations are available for varying durations. And finally, there were many municipalities, i. e. those that have to designate building land for residential purposes. It was also worth it taking a look at those exhibitors who offer digital solutions for planning and building, and those who deal with the climate impact analysis of real estate.

Program highlights covering residential real estate

The conference program also focused on affordable housing. This applies to housing in general, but also to offerings for seniors, whose numbers are steadily increasing. They are the group that consumes the most space on average, as they often find downsizing to be more expensive than maintaining a larger home they have lived in for years and decades.

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Press conference at EXPO REAL 2023 on the subject of "Planning quality. Building the future." with Klara Geywitz - Federal Minister for Housing, Urban Development and Construction (2nd from right) in Hall A2 at BPD's stand A2.220.

Residential properties—a diverse asset class

A residential property is a building primarily intended for living. Housing is a fundamental human need and living space enjoys a special protection as privacy.

Types of residential properties

However, the term residential properties conjures different images for different people. A residential property could be a standalone single-family or duplex house with surrounding gardens, a townhouse or an apartment building—the latter being more common in cities, where the individual units are either rental apartments or owner-occupied. In Germany, most people reside in such multi-family houses, with only a third of the population living in single-family homes. A distinction also exists between home ownership and rental apartments. In 2021, over half of Germany's population lived in rented accommodation, and the demand for affordable housing predominantly pertains to the rental market.

A unique form of housing is the tiny house, with living areas ranging from 15 to 45 square meters. The concept originated in the U.S. and is embraced in Germany by proponents of minimalistic living. However, these houses also serve as guest houses, weekend getaways or student accommodations.

Another distinct housing arrangement is multi-generational homes, where people of varying ages and life situations have their individual living spaces while sharing communal areas as meeting places.

And finally, there is “assisted living”, providing barrier-free living spaces that can be rented and accompanied by specific assistance, services and care options.

Until 2022, the residential real estate market only knew one direction in prices and rents: upward. Especially in rental apartments in cities, the supply is becoming increasingly scarce, while demand remains consistently high. Causes include increasing urbanization – the percentage of people living in cities rose from around 70 % in 2000 to over 77 % last year – a growing population – in 2023, approximately 84 million people lived in Germany, around 4 million more than in 2011 – and an increasing trend towards single-person households – around 41 % of all households have only one person.

Although the stock of housing has grown by around 3 million units since 2010, residential construction has been sharply declining since 2022. According to the ifo Institute, 245,000 housing units were completed in 2023, and this year the number will drop to 210,000 apartments, with only 175,000 new apartments coming onto the market in 2025. The situation is even more tense for "affordable housing". Here, the federal government aimed to create around 100,000 new housing units annually, but instead, only 22,545 social housing units were completed, while the number of such housing units decreased by around 14,000 because the social ties expired. However, despite continuously rising rents, the vacancy rate fell further in 2023 to an average of less than 3 %.

While rents continue to rise, the market for homeownership experienced a significant price decline. According to a study by the Kiel Institute for the World Economy, condominiums decreased in price by 8.9 %, single-family homes by 11.3 %, and multi-family homes by 20.1 %.

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Model "SAWA" City of Rotterdam - at the Holland Metropole stand in hall A2.

Current developments in the residential real estate market

Until 2022, the residential real estate market saw prices and rents moving in one direction: upward. Especially in urban areas, the supply of rental apartments became scarcer while demand surged. For instance, between 2002 and 2022, rents in Berlin increased by over 150 % and in Stuttgart by 111 %. Factors like Berlin’s status as Germany’s capital and previously lower rents might have influenced this trend, but Stuttgart was already relatively expensive before the enormous increases. Hamburg, Cologne and Dortmund are still around 70 %, followed by Leipzig (64 %), Essen (63 %), Munich (58 %) and Düsseldorf (53 %). Frankfurt saw the lowest increase at 45 %.

Contributing factors included increasing urbanization, with the urban population rising from around 70 % in 2000 to over 77 % in the past year. The population also grew, with around 84 million people living in Germany in 2022—4 million more than in 2011. Additionally, the trend towards single-person households grew, accounting for roughly 41 % of all households. While the number of new housing units increased steadily over the past two decades, the government's target of 400,000 new units per year, including 100,000 social housing units, remained unmet, with 2022 seeing a peak of 295,300 units under construction, including around 25,000 subsidized apartments. Furthermore, building permits for residential structures experienced a significant decline (-28.4 % compared to the previous year) since the past year. Consequently, a relief in the rental housing market is not anticipated in the near future, and the issue of “affordable housing” will continue to top the agenda.

Residential property investment market

While rents continue to rise, the housing market experienced a significant decline in prices. According to a study by the Kiel Institute for the World Economy, condominiums decreased by 8.9 %, single-family homes by 11.3 %, and multi-family homes by 20.1 %.

This is primarily due to declining demand. While potential homeowners could benefit from low mortgage interest rates for a long time, these rates have increased from around 1 % to around 4 % since 2022.

Since the 1990s, the public sector has increasingly withdrawn from the housing market, leaving it largely to the private sector. Public housing companies were privatized, giving rise to profit-oriented private housing companies, and international investors and fund companies entered the market. Corresponding investments averaged €16.6 billion annually from 2015 to 2020. However, in 2023, the investment volume for residential portfolios with over 30 units dropped to €5.23 billion. It was mainly smaller investments (up to €25 million) that significantly increased and contributed to over a quarter of the transaction volume (the average share over the last ten years was about 14 %).

The structure of investors has also shifted: US capital accounted for 24 % of the transaction volume, significantly more than in the past, while the share of German investments dropped to 68 % – it was averaging at 76% in the past.

Challenges for residential construction and housing markets

Both housing construction and property markets face challenges. On the one hand, rising construction costs, high land prices, skills shortages and increased financing costs dampen housing construction. On the other hand, the myriad of regulations and rules, which make building more complicated and expensive, also pose a challenge. Streamlining and simplifying these regulations have been advocated for years by those engaged in the residential property sector, particularly concerning affordable housing.

Added to this is the demand for more sustainability, also and especially in residential buildings. While new buildings are increasingly built with sustainability in mind, the existing housing stock lags behind. Here, the rate of energy-efficient renovation remains at around 1 % per year, which equates to about 500,000 housing units. However, this rate needs to double to achieve climate goals—the target is climate-neutral buildings by 2045. Rising material and financing costs, coupled with a shortage of craftsmen, slow down rather than promote these efforts. However, the energetic condition of residential buildings will be a decisive factor in the valuation of a residential property in the future.

Navigating the financing of residential projects, be it new construction or renovation, has also become a balancing act. For developers, construction financing has become more expensive, leading to questions about the feasibility of recovering increased costs through pricing or rent. The era when homebuyers queued up for properties has passed. And general political and economic uncertainty, as well as inflation and rising interest rates, are making potential buyers more hesitant and/or at least negotiating harder. The scope for passing on the costs of modernization and renovation to rents is also limited.

The impact of Environmental, Social and Governance (ESG) requirements on housing companies remains uncertain. The “Social Responsibility” aspect, in particular, requires further clarification as it encompasses not only employees but also tenants, who are stakeholders, as well as the common good.

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