Market Insights: Suburban Living
Commuter belts surrounding Germany’s largest metropolises are increasing in popularity, a response to urban sprawl and the rising cost of city-centre housing.
Background
Urbanisation and international migration have brought Germany’s largest cities to life, bringing forward emerging talent, new enterprise, and progress. Nowhere has this been more apparent over the past 15 years than in the capital Berlin, which has experienced a transformational rise to become one of the most vibrant and competitive cities in Europe.
Housing markets have been at the forefront of this change, with population growth in urban areas creating new demand for rental accommodation. However, this increase in demand has often not been met by a corresponding increase in the supply of new homes. The impact of this across many large cities has been to drive down residential vacancy rates to generational lows, which has subsequently placed upward pressure on rental values. Commuter belts have been the principal beneficiary of this excess demand, with more renters searching for housing at affordable price points, the supply of which is now increasingly found in the towns and suburbs that surround cities.
Net Migration from Berlin to its Commuter Belt by Age in 2021
Source: QSix analysis; Berlin-Brandenburg Statistics Authority.
Suburban Living Themes in Berlin
Population The commuter belt surrounding Berlin is known as the Brandenburg Speckgürtel. As a direct consequence of people moving outwards from the city, the towns and suburbs that make up this ‘bacon belt’ recorded an average population increase of 12,000 people per year between 2017 and 20191.
By 2021, this had increased to over 13,0002:
- 76% of people leaving the city for the commuter belt were aged 45 years old or younger.
- 31% or just over 4,000 individuals were aged 18 years old or younger. This supports the hypothesis that growing families with children are amongst the most likely to benefit from suburban living, particularly given their relative sensitivity to the daily cost of living.
- More 30 to 45-year-olds moved to Brandenburg than any other age group. In Berlin, those aged between 18 and 30 were the most popular new residents. Unsurprisingly, more university aged 18 to 25-year-olds left Brandenburg than arrived.
- While Berlin lost some of its inhabitants to the periphery, the capital city continued to demonstrate positive population growth, adding more than 16,000 new residents in 2021. This increase was principally driven by the resumption of international migration to the city following the pandemic.
Affordability Relative improvements in affordability, higher living standards, and more space are major socio-economic factors supporting suburban living.
- Residential rental values in the commuter belts surrounding Germany’s six-major cities were an average of 25% below city centre rents in 2020. The difference was even wider around the most affluent cities of Munich and Frankfurt, where suburban rents were up to 33% cheaper1.
Proximity to Work The Mittelstand corridor on the fringes of Stuttgart, and the technology and automobile factories established around Berlin are both examples of how industrial growth can create new and sustainable residential demand outside large cities.
- The Tesla Gigafactory that opened on the outskirts of Berlin earlier this year currently employs over 5,000 engineering and operations personnel and is reported to grow to 12,000 employees by the end of 20223.
Transport The ongoing expansion of science and technology parks, as well as the new Berlin Brandenburg International Airport in the south east of the city, are particularly notable for their impact on improving transport infrastructure.
- Towns and suburbs with fast rail or motorway connections that transport people to their place of work within a one-hour commute time are likely to be the most popular destinations, in our opinion.
Rent Control Policies designed to formally place legal limits on the level of residential rent have become a growing political theme across European capitals in recent years. In February 2020, the implementation of the Berlin Mietendeckel created a rent ceiling for tenancies within the city, at levels that were often below free-market values.
These controls that manipulate the market mechanism invariably result in unintended consequences, in this case, tightening the supply of homes just at the point when they are needed the most.
- Research by the German Economic Institute (DIW) 4 found that following the introduction of the Mietendeckel, there was significant empirical evidence to suggest (i) an increased conversion of homes from the rental to the owner-occupied sector, (ii) a fall in the supply of new build dwellings for rent and, (iii) a fall in the advertised number of homes available for rent.
- The combination of these factors led to a tightening supply of rental homes within the market. While some of the consequences may be short-lived, the substitution effect between the rental and owner-occupied sectors could result in long-term scarring. This could occur through the permanent loss of rental housing stock while simultaneously removing the incentive for the private sector to replace those homes with new development.
- As supply within the city limits was constrained, housing demand naturally flowed outwards. This has resulted in rapidly growing rental markets in the suburbs and commuter belts that sit outside the rent control legislation.
- In summary, we find that suburban locations are underpinned by similar economic and market fundamentals to capital cities, and currently represent a substantially reduced exposure to extreme political and regulatory intervention.
The Impact of the Pandemic
In 2021, we surveyed over 2,400 individuals in the United Kingdom, Germany and the Netherlands to understand how the pandemic may have altered consumer attitudes toward housing.
- 44% of respondents wanted their next home to be in a city following the pandemic, equivalent to an 8% reduction compared to the number wanting to live in a city pre-pandemic.
- Suburban living was a beneficiary of this shift, with 41% of respondents looking to the suburbs for their next home, compared to 39% of people before the pandemic, an increase of over 5%.
- Dedicated quality of life and amenity factors featured highly in wish lists: 66% wanted a home office, 38% wanted a separate children’s playroom, and 46% wanted a conservatory or garden room. More than 88% of respondents wanted their next home to have a private or shared garden.
QSix in Germany
QSix has been managing portfolios and advising investment funds in the German residential market since 2006. We have a seasoned investment team with an outstanding track record and understanding of the market and operating environment.
Phoenix Spree Deutschland, our flagship German Residential Fund, achieved a 197% total shareholder return5 since listing on the London Stock Exchange in 2015.
We have investment professionals based in London, Berlin and Amsterdam. We would be delighted to discuss how we might work together with you.
ENDNOTES
1. Savills Residential Research, February 2022.
2. Berlin Brandenburg Statistics Office, August 2022.
3. Teslarati, Tesla Giga Berlin to add a third shift by July 4, published 27 June 2022.
4. Deutsches Institut für Wirtschaftsforschung, Forward to the Past, discussion paper, 2022.
5. Phoenix Spree Deutschland Financial Statements, Total Shareholder Return (TSR), 2015-2021.
