Warren Buffet, popularly referred to as ‘The Sage of Omaha’, has built a reputation over many years of seemingly uncanny appraisal of investment opportunities. While it’s obviously more an honorary title than one based on objective criteria, Buffet’s legend has reached the stage he is regularly dubbed ‘the greatest investor in the world’. Arbitrary titles aside, it’s safe to say that when Buffet backs an asset class or market it’s worth closer inspection. In that context, news that Buffet’s real estate agency, Berkshire Hathaway HomeServices, earlier this year inked a franchise partnership with a partner in Berlin, Rubina Real Estate, is a development worthy of further investigation.
Germany’s unusually stable residential property market has long been a favourite of international investors looking for low risk assets. Germany’s residential property market has a unique character that sets it apart from others in the developed world and mean it largely avoids the boom and bust cycles that we are so used to in the UK and are also the norm in the USA and most other wealthy nations.
Germany is second to only Switzerland in Europe when it comes to the percentage of the population that rents rather than buys (around 67%). Tight controls on tenant rights and the freedom landlords have to raise rents, consistently high employment, stricter mortgage lending criteria and limited supply of new construction combine to create a market that is seeing strong price growth while avoiding the risk of bubble territory.
“Germany has never exhibited the sort of boom-and-bust housing cycles prevalent in markets like the UK or the US”. – Angela Talavera, chief Eurozone economist for Oxford Economics, Financial Times.
Despite that, and with the key caveat that most analysts believe it is a catch-up effect and a housing price bubble is not a real risk, Germany’s residential property sector is in the midst of a boom. Deutsche Bank research sums the current market dynamic up with:
“Metropolitan areas in Germany are booming. The current real-estate cycle started in 2009 and has led to significant price increases for residential property in many cities. Prices for apartments have as much as doubled in some cities. Strong population and employment growth and declining unemployment rates are driving demand, and supply elasticity is low. New construction is slow to pick up, and vacancy rates are declining. As a result, rent growth is accelerating. Regulatory measures are unlikely to provide sufficient relief. House prices and rents look set to rise markedly in 2018”.
Within that context it is perhaps no surprise that an investor of Buffet’s higher risk to reward profile has joined the traditional presence of insurance and pension funds by seeking exposure to Germany’s residential property market.
The Future: Supply Constraints and Low Starting Point Leave Room For Further Growth
The growth cycle of Germany’s residential property market is now into its tenth year. Despite that, the very low starting point of prices within the wider international context, inelastic supply, growing population, strong wage growth and mortgage lender criteria still stricter than elsewhere means that market experts believe there is still quite some way to go.
A government drive to boost construction means that residential pipeline is finally increasing and is expected to reach a record high of 335, 000 new units being completed in 2018. However, with government and independent analysis indicating that between 350,000 and 400,000+ new homes per annum are required, the gap between supply and demand is actually continuing to widen. Deutsche Bank research indicates that supply shortages will continue to fuel dramatic prices rises over the next decade, leading to what could eventually become the country’s first house prices bubble if supply does not continue to be dramatically increased.
There is a shortfall of c. 1 million residential units in Germany as a whole.
It is expected that the current uptrend will remain in place until:
- Supply is massively increased and vacancies rise. This scenario is predicted to be at least several years away.
- Demand for housing declines. However, with 300,000 new immigrants expected to arrive in the country in both 2018 and 2019, there is no obvious trigger that might lead to this scenario.
- Prices rise to a level that prices renters interested to buy out of the market.
- Interest rates rise significantly.
For now, only the 4th factor is a realistic possibility. The ECB is winding down its programme of bond purchases which is expected to lead to rising interest rates over the next few years. However, recent statements from the ECB suggest that rate increases will be managed very gradually to protect the Eurozone economy from any sudden shock.
Buffet’s logic looks sound and the German property market appears to have several years of strong price growth underpinned by supply shortage for the foreseeable future.