Peak of a cycle

Rents in many German cities are leveling off after years of rising

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Tenants rejoice. Rents are no longer rising like they were. Source: Picture Alliance.

Tenants in Munich, Germany’s most expensive city in terms of rent, may want to rejoice. Rents in the city, which have been steadily rising for years, appear to be leveling off – even dropping slightly.

Landlords are, of course, not so thrilled. But the change in Munich is emblematic of an apparent trend reversal underway in many German cities. Across Germany, rents are hardly rising, and in some cases, they are even beginning to fall.

In Munich in the final quarter of last year, the average monthly rent on a 75-square-meter (807-square-feet) apartment constructed approximately 10-years ago was €13.20 ($16.50) per square meter, a drop of 10 cents per square meter over the previous quarter. That drop might not sound like a lot, but analysts say it may herald a fundamental market shift. Landlords, experts say, will have to begin to lower their price expectations.

Bernd Leutner, head of the Hamburg-based analysis specialist F+B, which regularly publishes comparisons of quarterly data, says the “peak of a price cycle” is near. Mr. Leutner is not the only observer to see signs of a turnaround. Analysts at the international property consultancy JLL report that rents stopped increasing in five of the eight German cities that the firm analyzed during the second half of 2017.

In Munich and Cologne, for example, prices fell during the second half of last year. In Düsseldorf, rent levels stagnated. In Frankfurt and Stuttgart, rents continued to rise, but at slower rates. Overall in German cities, growth in rents was at its weakest since 2010, according to Roman Heidrich, an expert in Berlin’s residential property market at JLL.

Although this may be good news for tenants, it’s a warning to investors to be cautious. Despite slowing rent increases, purchase prices for apartments are still going up as buyers are apparently undeterred by lower earnings prospects. Sebastian Grimm, an analyst at JLL, attributes this to the fact that interest rates are still low. “It means that the trend towards rising prices for owner-occupied apartments is likely to continue,” he said.

Given the new uncertainties, some investors might consider altering their strategies.

Reiner Braun, a housing-market expert at the property research institute Empirica, is warning buyers about substantial price drops. “In the top seven German cities, the potential for a setback owing to the gulf between purchase prices and rents is 30 percent,” he said. Even in regions where the population is shrinking, properties are overpriced by about 5 percent in relation to earnings prospects, Mr. Braun added.

Whether prices actually fall, he explained, would depend on several factors: the rate at which new buildings are completed, a decline in Germans’ willingness to move, lower immigration from abroad, a possible interest rate reversal or potential government intervention in the market, for example in the form of subsidies.

Given the new uncertainties, some investors might consider altering their strategies. Mr. Leutner at F+B said it would not be a bad current approach to cash in on gains in property values and to hold back when it comes to acquisitions.

Anne Wiktorin is an editor at Handelsblatt, reporting on finance and real estate from Düsseldorf. To contact the author:

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