Market Insights: Europe’s Largest Rental Market
36 million people choose to live in a privately rented home in Germany, that’s more than anywhere else in Europe
Background
Northern and Western European housing markets represent one of the best examples of market failure, with supply and demand almost perpetually out of sync and failing to converge toward equilibrium. Secular trends in population and demographics have resulted in a growing number of new households. However, the development of new homes has been sticky in response, and across many markets, has consistently failed to offset the increase in demand.
Decline of Homeownership The 2007-2008 financial crisis symbolised a structural inflection point. On the demand side, the subsequent tightening of mortgage lending conditions constrained borrower affordability. On the supply side, rising levels of household formation contributed to inflationary pressure on land values, which has consequently driven the cost of delivering new housing in cities even higher. These imbalances have not only resulted in increasing housing density but have also caused homeownership rates to decline across more than 66% of mainstream European markets.1
Distribution of Population by Tenure in Mainstream Markets, 2020
Source: QSix analysis; Eurostat.
The Expansion of Private Rent
The decline in homeownership has conversely led to the expansion of the private rented sector. Between 2012 and 2020, the share of Europeans renting their home increased by over 9%, from 18.7% to 20.4% of the population.
Germany has the Highest Population of Renters in Europe In 2020, 43% of Germans lived in a privately rented home, equivalent to a gross market of 36 million people. Hamburg and Berlin have the highest concentration of renters, where more than three-quarters of all homes are leased.2
Private Rent is Outpacing Population Growth Between 2016 and 2020, the share of the German population housed in the privately rented sector rose from 39.8% to 43.2%, equivalent to an 8.5% increase in aggregate demand. By contrast, population growth over the same period totalled 1.1%.
Residential Demand Drivers in Germany
Household Formation is Rising In 2019, there were 41.5 million households, almost 3.4 million or 9% more than in 2000. Growth is forecasted to continue over the next two decades, with projections estimating that 1.2 million new households will be created by 2040.
Driven by Organic Growth Factors An aging society and a rising number of people living alone have supported organic demand for housing. These factors have effectively resulted in a natural reduction of market supply and led to increasing levels of household formation, over and above any impact from population growth and urbanisation.
Households are Getting Smaller Between 2000 and 2019, the average household became 8% smaller. A home now typically contains just two people. A maturing population pyramid has influenced this decline, caused by an aging society and falling long-term birth rate. In addition, changes to living patterns that include later marriage and increasing labour market mobility have also created new demand for smaller homes.
More People are Choosing to Live Alone Government projections suggest a continued decline in household size over the next 20 years. This decline is precipitated by a fall in the number of homes occupied by large families, which is more than offset by a rise in homes occupied by a single person.
Household Size and Projection, 1991-2040
Percentage of Households
Source: QSix analysis; German Federal Statistics Office.
According to forecasts, by 2040, 24% of the population will live alone, up from 21% in 2018. This change in the socio-demographic structure of the country will create additional demand for up to 2 million new homes by 2040 that are designed for solitary living.
Urbanisation The world is becoming more urban as national populations have continued to migrate toward metropolitan centres. The United Nations forecast that by 2050, large urban areas around the world will experience population development of 2.5 billion people, equivalent to around 2 in every 3 of the world’s population living in urban areas. The share is even higher in Germany, where 84% of the population will live in urban areas by 2050, a 9% increase relative to 2020.3
A Growing Population Germany’s population has increased by 1.9 million over the past 12 years, overwhelmingly supported by international migration. A high-income differential, an enhanced standard of living, and labour market mobility have led to a positive aggregate net migration balance. In addition to those moving for work, approximately 415 thousand international students are studying in Germany.4 People moving across countries and borders have a higher propensity to rent a home for several years before purchasing one.
Germany’s Largest Cities are Growing Faster
Large cities are engines for economic growth, and in Germany, they represent the highest concentration of people, capital, and opportunity.
Between 2004 and 2020, the population of Germany’s seven largest cities grew by more than 860 thousand people or 6.3%, outpacing national population growth in the same period by 8x.
- Frankfurt and Munich grew the most in percentage terms. Both of these cities saw their populations increase by 18-19%. However, over a third of the total nominal increase was concentrated in Berlin, which added more than 280 thousand new residents.
- Residential rents have risen by 41% on average in these large cities.5 Growth in Berlin was the strongest, where the cost of living has historically been well below national and international levels. Population growth and demographic factors have facilitated a significant degree of price convergence in recent years.
In our view, metropolitan regions will continue to outperform national population growth rates, particularly if tailwinds from urbanisation and international migration continue.
The Evolution of Residential Rents and Population in Germany’s 7 Largest Cities, 2004-2020
Source: QSix analysis; German Federal Statistics Office; ImmoWelt.
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 return since listing on the London Stock Exchange in 2015.6
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. Eurostat, Home Ownership Rates in Europe. Note: Decline calculation period is 2012-2020.
2. German Federal Statistics Office, Owner Occupier Rates, 2018.
3. United Nations, 2018 Revision of World Urbanisation Prospects, 2018.
4. Erudera, International Student Statistics, 2022.
5. ImmoWelt Group, Market (asking) rents, 2004 – 2020.
6. Phoenix Spree Deutschland, Financial Statements: 2015-2021.
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