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Prices of German apartments have risen by up to 60% over the past four years. Market watchers believe the boom is about to end.

Steffen Sebastian, Professor for real estate financing at the IREBS Institute of the University of Regensburg, has spent hours scrolling through the latest data on the residential apartment markets in Germany. What he has seen is reason for him to sound the alarm, he told PropertyEU. 'We are in the middle of a bubble. Sooner rather than later, these markets will go from boom to bust.'

Wealthy local and foreign private investors alike have flocked in numbers into the residential apartment markets of Germany's six largest cities which they have viewed as a safe haven in the rough capital market seas since the outbreak of the financial crises in 2008. Since then, the wall of capital has driven prices higher in Berlin, Düsseldorf, Frankfurt, Hamburg, Munich, and Stuttgart by up to 60%, almost three times more than rental increases over the same period. As a result, yields have fallen to record lows.

'Today, apartments in the metropolitan areas yield no more than 3 to 3.5% net,' according to Andreas Schulten, member of the board at real estate research centre BulwienGesa in Berlin.

Yield compression is not the only reason why experts believe the boom will end soon. 'Construction has picked up considerably and will continue to do so,' said Günter Vornholz, professor for real estate economics at the EBZ Business School in Bochum. According to the German Bureau of Statistics, Destatis, 96,000 apartments were built last year, up more than 13% from 2011. This year, according to the building permits issued in 2012, the number of new apartments in the metropolitan areas will increase by another 22.4%. 'The oncoming supply is enough to meet demand and will likely put a lid on rent increases and send prices lower in the years to come,' Vornholz predicted.

Even the German real estate agents association IVD is cautioning investors. 'The price and rent increases of the past years are not sustainable,' said IVD vice-president Jürgen Michael Schick. Early birds who snapped up apartments early on in the current cycle should consider taking profits now before the markets turn south, he recommends. 'Right now is the best time for an exit.'When reinvesting their money, investors should look at smaller cities, Schick claims.

Schulten of BulwienGesa agrees. 'Prices in smaller cities have barely risen in line with rents, offering buyers attractive yields of up to 7%.' So far, with local and foreign investors focusing almost entirely on the six main metropolitan areas, the boom has bypassed these markets, but that may change soon as buyers look more closely at new opportunities.
'Germany has a large number of cities with a population ranging from 50,000 to 200,000 which are experiencing economic growth and which will reward investors in the long run with rising rents and yields,' Schick said.

Take Lüneburg for instance: Only a 40-minute drive from Hamburg, the population of the university town has grown by 1.5% to 74,000 within the last five years. Large companies like food giants DeVauGe, Lünebest, and Pickenpack or electronics producer Impreglon have their headquarters in the city. 'Yet apartment prices are still so low investors can net 6.5% from the start,' Schulten pointed out.

Richard Haimann
Correspondent PropertyEU, Hamburg