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, a topic that has been under discussion for some time but gained substantial attention since the past year. This surge in attention coincides with a noticeable decline in housing construction, driven by higher financing costs, increased material prices and a shortage of skilled professionals. In this challenging environment, EXPO REAL offers an opportunity for exchange, discussion, and guidance on all aspects of residential real estate.
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.
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.
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.
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.
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 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.
Conditions for purchasing residential property have also significantly worsened. Since 2010, prices for condominiums have risen steeply—from an average of €1,300 to €3,400 per square meter. It wasn't until 2022 that prices began to decrease, with the first quarter of 2023 seeing an average decline of around 6.8 % compared to the previous year. This is primarily attributed to declining demand. Potential property owners benefited from low mortgage interest rates for an extended period, but these rates surged from around 1 % to nearly 4 % since 2022.
Since the 1990s, the public sector has increasingly withdrawn from the housing market, leaving the field predominantly to the private sector. Public housing corporations were privatized, giving rise to profit-oriented private housing companies. International investors and fund companies also entered the market. While investments in the years from 2015 to 2020 averaged around €16.6 billion annually, the transaction volume skyrocketed to a record €49.1 billion in 2021. The acquisition of Deutsche Wohnen by Vonovia accounted for €22.3 billion of this figure. However, even excluding this deal, the results remained well above average. Nevertheless, in 2022, the volume dropped to only €13.1 billion, and investments in residential properties during the first half of 2023 totaled €2.63 billion, marking a 63 % decrease from the previous year. Behind this transaction volume stand two sales by Vonovia—a 30 % minority stake in the so-called Südewo portfolio valued at around €1 billion and the sale of 1,350 residential units in Frankfurt, Berlin and Munich to CBRE Investment Management for about €560 million.
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.
Sustainability considerations will likely lead to different construction approaches in the future. “Serial construction” is a buzzword, where structural elements are pre-produced based on prototypes and then assembled on site. Serial construction has always existed, but the materials will change because the previous method of construction with reinforced concrete is no longer profitable and is rather critical from a climatic point of view. This shift has already been observed in single-family homes and is extending to multi-family buildings. However, this still leaves the problem of the lack of building land or the expensive building land, especially in cities.
Densification is often proposed as a solution to land scarcity. Buildings can be expanded vertically or through rooftop conversions to create more living space. However, whether it is necessary to close every gap between buildings is another question in view of climate change and increasing periods of heat. Areas for more greenery and water are also needed to prevent cities from becoming heat islands.
Changing living standards are also a factor. This doesn't merely refer to increased living space per capita—the average area consumption is around 48 square meters. It also means designing apartments to be flexible, adapting to users’ life situations. To give an example: working at home is on the rise, but this requires a workstation in the home. The same applies to the question of whether an apartment can still be occupied if its user is subject to physical limitations. Designing barrier-free living space is a necessity in view of the demographic shift toward an increasingly aging society.
Digital control of house technology, or the “smart home”, will also rise. This not only translates into a higher level of convenience but can also contribute to the wise use of energy in the long run.