Rental- and purchase price growth on the housing markets decelerated

Mid-year comparison: rental price decline in three cities

July 22, 2019

FRANKFURT, 22 July 2019

-       In the first half of 2019, the rental price development* in the Big 8 cities examined by JLL (Berlin, Hamburg, Munich, Cologne, Frankfurt, Dusseldorf, Stuttgart and Leipzig) lost momentum. On average, the increase in quoted rents still stood at 2.3 percent compared to the previous year and as such, is well below the five-year average of 5.0 per cent. In mid-2018, an average of 4.9 percent was registered compared to the previous year. Since mid-2014, rents have increased by a total of 30 percent across all cities.

-       At 6.7 percent, the purchase prices of the freehold flats* on offer increased significantly more on average compared to the rental prices, with a slightly weaker momentum. The annual average of the last five years (+8.3%) is clearly undercut. Only in Cologne double-digit purchase price growth is observed. By mid-2018, the increase across all Big 8 had been 8.4 percent. Since mid-2014, purchase prices in the Big 8 have increased by an average of 50 percent.

 “There is evidence to suggest that the apogee of the rental and purchase price increase is behind us” says Roman Heidrich, Senior Team Leader Residential Valuation Advisory JLL Berlin. The reasons for the reaction of the markets are complex: “In recent years, incomes have not risen to the same extent as rents. Especially in urban agglomerations the burden of housing costs has therefore increased significantly, which has led to a migration of demand to the surrounding areas. In addition, the increase in the completion volume in recent years has provided slight relief. Nevertheless, excess demand will continue to accompany us in the next few years, due to the still existing deficit in housing completions”. 

Sebastian Grimm, Senior Team Leader Residential Valuation Advisory JLL Frankfurt, adds: “It is clear that the willingness to raise high purchase prices for condominiums has also declined as a result of the slowdown in rental growth. This development is accompanied by a reduction in expected rental yields. Because the potential in city centres is increasingly exhausted, especially in new residential construction, supply and demand are increasingly shifting to the surrounding areas. In general, land prices there are lower, so that condominiums can be acquired at lower prices. The public debate about the housing shortage in general and the increase in strong housing policy interventions in particular, such as discussions to tighten the rent control and the rent cap in Berlin together with an economic slowdown, are leading to growing uncertainty on the part of developers and investors.”

THE CITIES AT A GLANCE:

Rental Housing Markets

In none of the eight cities examined by JLL did average rents still exceed the five percent mark in a year-on-year comparison. In a six-month comparison compared with rents in the second half of 2018, there were even slight declines in Munich, Dusseldorf and Stuttgart. “Just a few years ago, such a development in rents could not have been foreseen”, said Sebastian Grimm.

At 4.7 percent, Berlin recorded the highest annual growth, with the median rising from € 11.65/m²/month to € 12.20/m²/month. “The excess demand and the overall decreasing number of housing completions are responsible for the plus in the capital. However, the possible anticipatory effects of a possible tightening of rental regulations for existing properties cannot be ruled out as a cause”, says Roman Heidrich. Micro-apartments and the top segment in particular are showing an above-average increase in rents. In the area of the most expensive 10% share of the apartments on offer, the increase was as much as 6.9% year-on-year. On the other hand, there was no change in the rents for newly built properties. Heidrich: “It is possible that the increased new construction activity of the state-owned housing companies and the shift in demand to the surrounding areas will have a dampening effect on the rents for newly built properties, which display no change year-on-year”.

Roman Heidrich continues: “The discussion about the planned 'rent cap' may not have played such a major role in the rental price development yet. However, if the House of Representatives makes a corresponding decision, we expect a sharp decline in new construction activity on the free residential rental market and an increase in rents for new buildings. In order to anticipate possible future restrictions on rent adjustments, this increase should include a corresponding premium. The proportion of freehold flats in new buildings will continue to increase, and progressively more rented flats will be converted into freehold flats. The maintenance and modernization of rental housing developments will be reduced to a minimum. In addition, we assume that capital will be withdrawn from the rental housing market and that investor interest will shift to unregulated attractive locations”.

The increase in Munich and Stuttgart (+ 1%), Düsseldorf (+ 1.3%) and Leipzig (+ 1.4%) was relatively moderate at + 1% to + 3%. At the same time, rents in the most expensive segment have fallen year-on-year: in Munich by minus 7.5 percent, in Stuttgart even by minus 8.1 percent.

Compared to the second half of 2018, rents in Munich, Düsseldorf and Leipzig also declined slightly on average across the city. Nevertheless, Munich remains by far the most expensive metropolis for tenants. On average, tenants have to raise € 19.45/m²/month in the first half of 2019, € 4.40/m²/month more than in Frankfurt, the second most expensive metropolis. A stronger year-on-year increase was recorded in Cologne (+3.0%), whose top segment remained virtually unchanged from the previous year's level (-0.8%).

Hamburg, with a city-wide increase in the median of 2.4% year-on-year to € 12.45/m²/month and Frankfurt (+ 3.4% to € 15.05/m²/month) are the markets which, in addition to Berlin, have made a higher leap in the prime segment than in the city-wide average.

Condominium markets

Cologne (+10.3%), was the only city surveyed by JLL to report double-digit purchase price growth year-on-year. “Overall, we expect the purchase price dynamics to slow down. In Berlin, Munich, Frankfurt, Stuttgart and Leipzig, the cities with the highest purchase price dynamics over many years, we are registering a below-average increase and expect a market consolidation”, says Roman Heidrich. The year-on-year increase stood at 5.7 percent in Berlin, 5.9 percent in Munich and Leipzig and 6.8 percent in Frankfurt. At 4.9 percent, Stuttgart reported the lowest year-on-year increase and, in addition to Leipzig and Berlin, showed an even more pronounced deceleration in the purchase price increase compared to the second half of 2018. In Hamburg (+5.7%) and Düsseldorf (+7.9%) on the other hand, prices increased at a higher rate year-on-year than in the five-year average. Munich remains the most expensive market (€ 7,680/m²). “In view of the still low financing interest rates for owner-occupiers and investors, nothing has changed in the attractiveness of purchasing condominiums - on the contrary. With the exception of Hamburg and Munich, the lower price segment in particular is recording above-average purchase price growth, while we are seeing a significant slowdown in the prime segment in six out of eight cities”, says Sebastian Grimm.

 

Annotations

-       As part of its residential market reporting, JLL changed its data sources in H1 2019. Now, offers of the provider empirica systeme, which are characterised by a particularly broad market coverage, are evaluated. In this context, rental and purchase prices were slightly adjusted retroactively as from H2 2018. The methodology and coverage remain unaffected. Furthermore, all rental and purchase price offers of the free residential market closed at the respective time of observation are analysed and presented as median values, i.e. 50 percent of the values in a city are above this value and 50 percent below it. The respective 12-month periods are considered (i.e., H1 2019 compared to H1 2018). A total of 40,000 rental offers and 22,300 purchase offers for condominiums were received. The presentation of the analysed data sets reaches down to the city district level, differentiated into building age classes and apartment sizes. Further detailed analyses are available on request.

-       Additional information, including information on the residential markets of the individual cities, will be available from mid-September in the new JLL residential market overview at https://www.jll.de/de/trends-and-insights#research

-       Further information on the structure of the German residential market and a discussion on current economic and demographic developments and their impact on the German residential market can be found in the JLL Residential Market Report 2019 - Download already available at https://www.jll.de/de/trends-and-insights/research/wohnungsmarktbericht


About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries and a global workforce of nearly 92,000 as of June 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.de/en.