a negative forecast of household growth
of minus 1% and a comparatively high
vacancy rate of 3.2% for Wuppertal, in-
vestors apparently view the market risk as
much higher compared to Erlangen with
its extremely low vacancy rate and a pro-
jected household growth of 3%. Cities in
the medium-risk range like Kiel, Lübeck,
Würzburg and Brunswick offer investors
good overall conditions at returns of up
to 7%. All four cities show below-average
supply rates, such as Lübeck at 92.7%, for
example. Combined with positive house-
hold forecasts and low vacancy rates, this
represents ideal conditions for investors. B
cities that have already registered strong-
er residential real estate demand in recent
years are positioned in the lower returns
segment and harbour the same risk level
as the top seven. These cities include Pots-
dam, Dresden and Karlsruhe with poten-
tial average returns of 5.0%.
PUTTING B-CITIES MORE ON A PAR WITH THE
A CITIES
Even though these real estatemar-
kets are less fungible than those of the big-
ger cities, medium-sized cities in particular
offer good investment opportunities. As a
result, a growing number of investors have
been interested in B cities for quite some
time and have been making investments.
Thus, returns in these medium-sized cities
have declined in the past 12 to 24 months,
practically in step with those of the big
cities. However, there is still a considera-
ble return spread between A and B cities.
Investments in medium-sized cities will
continue to see a perceivable increase as a
result, which will further squeeze returns
in the sought-after B cities in the long-
term, putting themmore on a par with the
A cities. Anyone who invests in the right
B cities now will probably see an increase
in value – if the market continues this way.
But who can say for sure?
ble risk. Inmany cities, moreover, the legal
cap on rents (Mietpreisbremse) has also
not yet been enforced, which offers greater
scope for rent increases. A large number of
B cities are also attractive business and/or
university locations. If, in addition to this,
the population rises and the residential
market shows favourable supply and va-
cancy rates, this represents excellent con-
ditions for investors and portfolio holders.
MEDIUM-SIZED CITIES SCORE HIGHER WITH
GREATER RETURNS – AT COMPARABLE RISKS
The risk-return profiles for residential real
estate at Wüest Partner provide a good
overview of the investment opportunities
and risks that German medium-sized cit-
ies and large cities offer. Criteria including
the general levels of rents, the residential
market, the economy and population are
taken into account when determining the
specific investment risk of a particular
location. Accommodation cost load and
the unemployment rate are also meaning-
ful sub-criteria in terms of the economic
analysis, and can be taken into account in
addition to the supply and vacancy rate
when determining the specific invest-
ment risk. In order to adequately reflect
the population aspect, the development
in the number of households as well as
the population growth are also included
in the calculation. The specific investment
risk derived from this is compared to the
average gross returns. What stands out
is the fact that almost two-thirds of the
medium-sized cities in the chart, with a
few exceptions, are on a par with or are
even below the risk level of the top seven
cities – at considerably higher returns in
some cases.
FORECASTED GROWTH IN THE NUMBER OF
HOUSEHOLDS
Assuming that Munich is
the city with the lowest investment risk
among the top seven at 2.88, almost 20 of
the B cities including Bonn, Ulm and Pa-
derborn, have a comparable or lower risk.
Bonn, for instance, offers investors the best
conditions where returns of more than 5%
can be generated – at similarly low risk to
Munich – thanks to its low vacancy rate
and general rent levels combined with a
forecasted 6% growth in the number of
households. Ulm and Paderborn, both
university cities, fared equally well. A low
unemployment rate and a positive devel-
opment in the number of households indi-
cate that Ulm and Paderborn have a lower
risk than Munich. While returns generat-
ed in Ulm are slightly lower compared to
Bonn, returns of more than 6% are feasible
in Paderborn.
Returns vary widely in the medi-
um-risk range especially. Take Erlangen,
Regensburg and Wuppertal, for exam-
ple. While an average return of just 5.5%
was generated in Regensburg in 2016,
this figure was 6% in Erlangen and 9%
in Wuppertal. These differences are re-
flected in the investors’ assessment of the
market risk, whereby Regensburg is more
favourably rated compared to Erlangen
and much better than Wuppertal. With
Potential returns in Munich are
only 3.2 percent on average.
This forces investors to broaden
their scope to include “smaller”
big cities
«
Karsten Jungk, Managing Director and partner
of Wüest Partner Deutschland
41
RESIDENTIAL PROPERTIES
