New build properties as an investment: solid or built on sand?
Living space — especially in sought-after locations and major cities — has been scarce in Germany for years and is correspondingly expensive. But the situation is even getting worse at the moment: On the one hand, demand for residential real estate is increasing, among other things, due to continued immigration. On the other hand, construction interest rates have more than tripled in just one year, the costs of building materials are exploding and craftsmen are scarce. Many private investors and housing associations are therefore putting their construction plans on hold or refraining from doing so altogether. Find out what effects the new construction crisis in Germany is having on the real estate market and investors.
Construction stop in Germany
In November 2022 alone, despite the prevailing housing shortage, the construction of 24,304 apartments was approved - a good 16 percent less than in the same period of the previous year. Many builders are currently holding back on projects or canceling them. On the one hand, because prices for the construction of new conventionally manufactured residential buildings rose by almost 17 percent in November and construction interest rates rose at the same time to around four percent (for 10-year loans, as of February 2023). On the other hand, because of climate regulations, which make energy-efficient new buildings even more expensive.
Germany has committed itself by law to become greenhouse gas neutral by 2045 at the latest. To this end, the use of fossil fuels for heating buildings should be completely stopped by 2045 at the latest. Already from In 2024, Minister Habeck plans to ban new oil and gas heating systems, which results in the mandatory installation of renewable heating systems that are comparatively expensive to purchase. Another example is Hamburg: From 2027 on, there will be a green roof requirement for new buildings in the city. 70 percent of the roof areas must then be green and at least 30 percent covered with solar systems, provided that this is technically and economically possible.
Federal Minister of Construction Klara Geywitz (SPD) has already acknowledged that the traffic light coalition Target of 400,000 new apartments per year is clearly missed for the reasons mentioned above. In view of the circumstances, the new KfW funding program “Climate-friendly new building” Just a drop in the bucket. The program promotes climate-friendly residential buildings with an EH-40 standard with up to 100,000 euros per residential unit with a low-interest loan. Buildings that achieve the Sustainable Building (QNG) quality seal will receive funding of up to 150,000 euros. But: For builders with a tight budget who can barely afford to build in the current situation, a subsidized loan of a maximum of 150,000 euros should still not be enough.
However, not only private builders are suffering from the overall situation, but also institutional providers such as Vonovia. The large real estate group, which rents out almost 550,000 apartments in Germany, Sweden and Austria, only wants to finish ongoing new construction projects, but does not want to start any more new ones this year. Vonovia board member Daniel Riedl said: “We have already had a significant number of construction starts this year, for example in Berlin or Dresden, and have postponed them — as most property developers are currently doing.” In this context, he too points to the sharp increase in costs and the resulting high rental prices: “For properties that we were previously able to offer for twelve euros in cold rent per square meter, we would now have to head towards 20 euros to recoup our costs of 5000 euros per square meter.” These rents are “completely unrealistic” in large parts of Germany. Rather, in order to meet the nationwide demand of 700,000 apartments, rents of eight or nine euros are also required.
Scarce supply, rising (rental) prices?
According to the national housing association GdW, the construction of every third apartment will be put on hold this year and next. Illustrated how gloomy the mood across the industry is now an internal survey by the Federal Association of Independent Real Estate and Housing Companies BFW. Instead of the planned around 150,000 new apartments, the medium-sized member companies probably only wanted to tackle around 65,000 this year; in 2024, the number will probably fall to a good 50,000.
Despite the shortage, real estate prices could temporarily fall by up to ten percent due to the difficult overall economic situation. After more than twelve years of rising prices, houses and apartments are now slightly cheaper again - but this does not apply to all properties. In the coming years, real estate buyers will pay more attention to CO₂ neutrality, functional floor plans and modern energy and heating systems. As a result, energy-efficient new buildings are likely to continue to be traded at high prices.
Auch Rents could rise in 2023. IW expert Voigtländer believes it is conceivable that the long-standing trend will change and that real estate prices will no longer divide rents. According to IW data, offered rents rose by 5.8 percent in the third quarter of 2022 compared to the same quarter of the previous year. Munich had the highest rental prices, followed by the metropolises of Frankfurt am Main, Stuttgart, Hamburg and Berlin.
We may now be entering a phase in which rents are growing faster than real estate prices. This development is driven by two factors: On the one hand, the shortage due to the construction freeze by Vonovia, among others. On the other hand, because of rising interest rates, some of which property owners transfer to their tenants. They, in turn, are currently unable to afford to finance their own home and are therefore staying on the rental market longer than planned.
New build properties as an investment
As difficult as the market is for homeowners and prospective buyers at the moment - especially Energy-efficient new construction properties can still offer attractive investment opportunities. Depending on various factors such as location, market demand and property design, real estate will continue to be considered as direct investments or digital shares in the coming years. Investors who currently do not have the necessary liquidity to purchase a property themselves have the opportunity to digital shares (tokens) in high-quality new construction properties to acquire in Germany's major cities. Starting at just 500 euros, they benefit like an owner from potentially increasing rental and sales revenues and can still offer their shares on the secondary market at any time.
