2.2 | The one with interesting data about cities you probably know

Of course you have heard of Berlin, Munich and Frankfurt - but how much does your Oktoberfest knowledge really help you when making big financial decisions? Fret not, we are here to help …

Feb 10, 2022

I am sorry, I am leaving behind my geography teacher alter ego. Turns out, even an imaginary reddish beard is scratchy and I am just more comfortable not being an older German dude. Last week’s post did however prompt me to dig out my school yearbook and, man, let me tell you … what a trip. Utterly fascinating how I could still recall both my art teacher’s name before and after she was married (her maiden name rhymed with her first name, so clearly, we were baffled on how you would ever give up something THAT COOL) while completely forgetting about the entire existence of some other people that walked the halls of that very average German high school with me. Despite my departure from the hero of last week’s post - don’t think for a minute that we are leaving the topic of German geography, though. We are 100% trucking along with our clustering of possible real estate locations. And have been going DEEP into the research (and yes, this is also an obvious play to show you what you would be missing if you don’t decide to get the paid subscription for weekly posts starting in March).

As I said last week, I don’t think the standard clustering of real estate locations according to number of inhabitants is sufficiently in depth for Germany and, more specifically, our purpose. That does not mean that we are reinventing the wheel on the first cluster, though. Called the “Top-Standorte”, this group is seven cities ranging from 3.6 million to a mere 320,000 - possibly “socks in sandals” wearing - inhabitants and they are …. Wait. Popquiz: how many of the biggest seven German cities can you actually name? Bonus points if they are ordered by size (and yes, it is not that easy to shake a teacher's personality!). Exactly, they are Berlin, Hamburg, München, Köln, Frankfurt am Main, Stuttgart and Düsseldorf, in that order. What’s real interesting (and a bit sad really) - all of these are in the former West of the country (with the first Eastern contender, Leipzig, in 8th place) and they have been growing to the tune of 1 million additional peeps in all of these 7 combined over the course of the last decade - which, you guessed it, is urbanisation in action. Düsseldorf grew the least with 7%, Frankfurt the most at a rate of 16%.

Photo by Florian Schmidinger on Unsplash

So what do the Super Seven (I just made that up) have in common? Let’s get to it. In no particular order, I think these are the headlines about what’s going on in Top-Standorte as it pertains to real estate.

How big these seven really are in terms of real estate? So big that in 2021, 55% of the entire real estate transaction volume was located there. That’s quite insane - more than half of all real estate sold and bought in just seven cities. So really no way past them. Or is there?
Because property in top-rated locations is super expensive, rent will almost never cover your investment volume (patting myself on the back for being a very rare exception to this rule). As such, real estate investments in these A locations will most likely not be a way to generate cash flow - instead, these are long term investments that bet on an increase in property value. In the short- to mid term you might actually lose money on a monthly basis, eventhough top locations are considered relatively safe investments given there will always be demand for a top spot in a big city
We know that rents are rising, but purchasing prices for property are rising faster in this cluster. To illustrate the massive gap between rents and property costs even further: at this point, prices for buying a flat in one of those top cities are actually rising at about double the rate of rents
It’s been a few years now that the insane acceleration of rising rents has been stopped - since 2017 to be exact. Cities generally are not growing as fast anymore (a change from 1.5% in 2015 to just 0.6% in 2019 for example) - but the biggest contributing factor is additional housing supply that has taken the edge of a very heated market

You want examples you say? Sure, give me a minute and we’ll look a little closer at some of these places.

Take Frankfurt for example: you might have heard that it is Germany's financial capital, rumored to play an even bigger role in Europe’s money shenanigans since Brexit has made London a bit into the friend that everybody deems “difficult”. With the likes of Deutsche Bank and the European Central Bank headquartered here, no wonder rents are pretty hefty: on average you would have to pay 15.75 Euro per square meter if you were in the unfortunate situation of looking for a new flat in Frankfurt in 2021. On average that’s 1.52 Euro more than two years ago, and the above mentioned headlines apply (just to prove to you that we are not making this shit up) … Relatively safe investment - check - the number of inhabitants has grown by 4.57% since 2015 and the quota of empty real estate sits at a record low of 0.2% (gasp), one of the lowest numbers in all of Germany. Nevertheless, while rents increased by between 12.9% and 15.8% over the last five years, property prices increased by between 51.2% and 53.7% over the same time period.

And if you thought things couldn't get crazier for renters than Frankfurt, think again. Because there’s always Munich, the queen bee of real estate records, the most expensive city to rent in by far. In just four years between 2016 and 2020 rents rose 12.4% to an average 18.48 Euro per square meter in Q1 of 2021. Newly built properties are even more expensive with an average rent of 21.26 Euro. What the banks are to Frankfurt, internationally known industrial giants like Siemens and BMW are to Munich - behemoth employers that draw skilled workers with good salaries. And so far, it looks like the bet on increased prices for those owning Munich's real estate pays off: in the last five years, the value of your owned flat would have increased by more than 50%.

If I was still a teacher, this is the summary I would write on the whiteboard: Like pretty (and very expensive) toys that you saw in the store as a kid - real estate in the seven biggest German cities is for others to play with. Yes, there will most likely always be demand, rents are continuing to rise and the investment risk is low - but it is almost impossible to enter the race at this point. For one it’s unlikely that you’ll even find an object worth your attention: When polled, 40% of (potential) buyers said that they had to abandon their investment objectives in these places which means we are in good company, having looked for another house in Berlin or Hamburg for years. Secondly, objects are insanely pricey and will almost never be able to cover costs through rent, meaning your return of investment will likely be subpar for many years. Not the game we are playing here.

The ray of sunshine at the end of this depressingly long tunnel of bad real estate news: investors are naming a second set of cities almost as often as the top seven when asked about their real estate strategies. Cities like Dresden, Leipzig or Nürnberg that you might have heard less of and that certainly don’t sport beer fests of international renown are so closely following the lead of their bigger cousins that you might actually be able to shrug off Hamburg and the likes and still be totally fine. And the even better news: those are the places that we will have a closer look at next week. You are welcome.

Next week, on Rente aus Stein: Less flashy but actually making you money - I’d say we need to take a closer look at some lesser known German locales as we prepare to make 2022 a steller real estate year. Make sure to subscribe to not miss this!

Disclaimer: We are not lawyers (sadly) and as such can’t give you legal and/or tax advice. We are simply telling our story in the hope that it’s inspiring to you.