What makes the German rental market different?

The owner-occupier rate across the developed world averages at 71%, with the highest level in Spain of 85%. The country with by far the lowest level of owner occupation is Germany with around 41%. Well in fact the rate of 41% for Germany hides a number of “abnormalities” between regions. To the former western states, owner-occupation can be a good deal higher, but rarely above 60%. On the flip-side, states in the former east can have owner-occupation rates down to as low as 13%. Indeed the capital city Berlin has an owner-occupation rate of around 15%. Why is this and what effect does this have on the housing and rental markets?

Well, from my time working in Germany as an investor and consultant, I would say the lower levels of owner-occupation actually change EVERYTHING. Lets look at some of the features of the market due to this phenomena:

•The average resident time for a tenant in Germany is between 3-7 years, depending on their age and the size of apartment in the main. This is completely different to other developed countries, where much more transient tenancies are common, perhaps less than 1 year on average. The figure should not be a surprise, just because they are tenants, Germans do not make more moves than owner-occupiers in other countries. The usual forces of age, family size, downsizing etc are exactly the same. This really is the key difference.

• On from the point above, it is more common for tenants in Germany to treat their rental as their home. They are there for so much longer, and a community exists within the housing estate or apartment house just as it would with owner-occupiers. You see this effect in the way that the common parts of the property are cared for, for example.

• Tenants move lock, stock and barrel! It is usual for a tenant in Germany to move into an apartment or house as a “shell”. The walls will fresh painted [by the outgoing tenant] and there maybe flooring [or maybe not!], nearly always there is a bathroom suite in place. But that’s it. Most tenants move in with their own kitchen, treating in much like furniture, and all lighting. This is a real shock for international investors.

• Commensurate with their long residence time, tenants enjoy appropriate laws to protect them from landlord wrong-doings. Rental increases for example are usually capped at 20% in any given 3 year period, unless the rent falls far below the market rate. Additionally, a landlord cannot simply evict a tenant with no reason. Of course, if a tenant falls behind in rental payments, then due process kicks in after 1 month, leading to court proceedings just like in most markets. However, a landlord may only take occupation of a property if he is to take up residence himself, or one of his close family. A notice period of 6 months is usually needed in this case, but varies.

• Tenant contracts are usually “rolling” so after an initial period of 1 year, the contract can be noticed by the tenant with 3 months written notice to leave.

• A landlord is obligated to put in place proper procedures for cleaning and maintenance of the common parts of a property, and making sure it is insured and ground tax paid. The good news here is that whilst this is the landlords responsibility, it is effectively paid for by the tenant out of the “warm rent” or ancillary costs, so not coming from the cash flow of the property.

So, what’s the effect of all of this?

In the first instance, landlords notice the increased stability of an investment in Germany. With much fewer tenant moves, the rents become more predictable and easier to control. Additionally, the cashflow from an investment is far easier to predict. Without the need to furnish apartments, and with all the ancillary costs of ownership being paid by the tenant, it is non-routine maintenance that is the only draw on cash flow. Maintenance tasks such as replacement of boilers or roof tiles etc can be planned for and a separate “sinking fund” set up or just provisioned by the investor as part of their plan.

You can see that this type of investment really lends itself well to “hands off” investors, with the features of ownership very much like owning a commercial property. With this in mind, the manager of the property and the tenancies will often be very much closer to the investment that the investors themselves. This can be a little different to other markets, with the manager sometimes assuming a gradient of power over the investor if things do not go to plan! The key of course is choosing a manager well, and working with them in a productive manner to achieve good results for all.

I would make the final point that the very low levels of owner-occupation are somewhat of a temporary feature of the states to the east of Germany. The aspirations of the new generation who grew up in the re-unified country are no different from east to west, north to south. So we should expect rates to rise to more like 40% over the coming generation. This will have huge impacts on the market and capital values, as you can expect.