No end in sight for Munich's real-estate rush

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Munich, capital of Bavaria, is famous for its beer gardens, historic architecture and proximity to the Alps. Its powerful economy is home to six of Germany’s largest companies, including BMW, Siemens and Allianz.

More recently, however, Germany’s third-largest city has become notorious as the country’s most exorbitantly-priced housing market. Want a home in a prestigious development close to the historic center? Prepare to fork out €500,000 ($581,000) for a 40 square meter (m2) studio, and twice that for an 87 m2 apartment.

With promising sites few and far between in the city center, the attention of buyers and developers has turned to formerly unfashionable neighborhoods like Alt-Moosach, Alt-Perlach, Feldmoching and Milbertshofen. Districts reasonably close to the Englischer Garden – Munich’s much-loved 1.4 square mile city park – have seen massive demand for single and semi-detached houses, with price growth steady at around 10 percent per year.

Those priced out of the market can take small comfort in a slight slowdown in the Munich real estate upsurge. Last year, 17 of the city’s 25 boroughs saw double-digit increases in property prices. This year, that came down to just eight.

Construction costs spiral

Many feel Munich’s boom will just keep on booming. For one thing, supply is limited. There are sites available for no more than 61,000 new apartments, said Heike Piasecki from real estate analysts Bulwiengesa. Around 6,200 new dwellings are built every year – half of what the city needs for its growing population.

The new magic concept in Munich real estate is “densification” – basically meaning that apartments are getting smaller, as are sites for stand-alone houses.

But skyrocketing prices not only reflect simple supply and demand. Inflation in the construction sector is reaching new heights. In the first quarter of 2018, overall construction costs increased by 6 percent. But in some parts of the sector, prices even jumped 20 percent, as construction companies enjoy unprecedented demand.

Bernhard Hansen is CEO of the SSN Group in Germany, currently building “Covent Garden Munich,” a high-end apartment development. He said construction contractors have full order books, and are pricing to match. Where previously, developers would receive 10 to 15 tenders from construction companies, these days they are lucky to receive three. There is a general shortage of skilled tradespeople.

Last year, city-wide average prices went up 9.9 percent over 2016’s values, hitting €7,200 per m2. By 2020, experts expect this figure to reach €8,000. As recently as 2010, it was a comparatively inexpensive €3,000 per m2. Now, with development spreading across the city, prices are rising in previously disregarded neighborhoods, like Alt-Perlach, Feldmoching and Lerchenau West, where prices have hit €5,700 per m2.

Little left to gentrify

Gentrification is a familiar process, but there’s a crucial difference to Munich’s version: At this stage, the city has hardly any edgy neighborhoods left for hipsters and investors to move into. Already, a district like Neuperlach, a 1960s development of high-rise housing projects, once home to immigrants, hosts insurance companies like Allianz, Ergo and Generali. Average purchase prices have hit €6,100 per m2, with 9.7 percent increases last year, while rents have spiraled to €16 per m2 per month.

At the top end of the market, demand is steady, said Michael Reiss of Sotheby’s International Realty. But the city’s population of wealthy businesspeople cannot always find the properties they want. In prestige neighborhoods – the city center, and districts like Bogenhausen and Nymphenburg – the supply of luxury apartments is tight. “International customers are often looking for larger properties and better facilities than what we see [in the Munich market],” Mr. Reiss said.

Although optimism is widespread, some say the boom has gradually become a bubble, and expect a sharp correction. They point out that, while real estate prices have doubled since 2009, rents have only increased 50 percent in the same period. For most new landlords, in other words, margins have grown tighter over that time.

Although many are growing rich on the back of the Bavarian property boom, there is also frustration aplenty. Those saving to put down a deposit may well find that prices are rising faster than they can put aside money. On average, Munich households now pay between 35 and 40 percent of their income on housing – still below levels in London or Paris, but in the same league as traditionally expensive cities like Milan, in northern Italy.

Many property developers are frustrated too, forced into bidding wars for the few remaining prime sites. Reinhold Raster, of major developer Pandion, speaks for many: “We often think we’ve made a really ambitious bid for a site, only to find we were well below the winning price.”

Christian Schnell is a correspondent with Handelsblatt, usually covering the automotive industry. Brían Hanrahan adapted this article into English for Handelsblatt Global. To contact the author:

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