Real estate

Small and Perfectly Formed?

Inside A Henderson Land Micro-Apartment Show Home
Just don't go swinging any cats. Source: Bloomberg

In the last few years, the digital boom has not only made our lives more virtual, it has also changed the way we live – literally. So-called Millennials, the young and affluent generation of digital natives spawned from Silicon Valley and Manhattan, increasingly eschew cooking for online delivery services, rely on mobility providers such as Uber to travel and are happy to consume media wherever they are.

This means kitchens, commuting and living rooms are no longer deal breakers, resulting in a serious shift in the housing market: Location is becoming more important than square footage or amenities.

The trend has spread to Germany, with investors adding to the general real estate boom by piling into the market for so-called micro-apartments, small, furnished apartments with a bare minimum of facilities targeted at students, graduates and weekend commuters. But the rush into the market has possible implications.

It wasn’t so long ago that a one-room or studio apartment in the country was considered difficult to rent. “At the beginning of the 2000s, the supply of smaller apartments was still being cut by joining them together or demolishing them,” says Stefan Brauckmann, the director of the Moses Mendelssohn Institute, which specializes in the analysis of real estate markets. But since then “a reversal in trend is evident,” he says. In a current study, his firm looked at housing construction activity in Germany and found that micro-apartments are booming.

“Many people would rather live in their own little apartment than in communal flats, whose main reason for existing is to save money.”

Stefan Brauckmann, director, Moses Mendelssohn Institute

The study shows that 28 percent of all apartments approved between 2010 and 2014 in German cities with populations over 500,000 had either one or two rooms. The rate was only 22 percent in already existing apartments. “In the largest cities, the percentage of apartments with three or more rooms is being reduced in new constructions,” Mr. Brauckmann said.

This should make investors prick up their ears. Developers are having few problems enticing people to buy new micro-apartments, which typically have less than 25 m² (270 sq ft) of floor space containing just a sleeping area, bathroom and kitchen. Storage space, laundry and communal living space are often provided separately.

Developers claim there’s an urgent need for such small and low-rent apartments, and are certainly keen on building them. There are presently about 25,000 micro-apartments in Germany, and several thousands more are set to be built by the end of 2018. Most are priced from €100,000 ($112,000) and up.

But is supply now being increased to such an extent that there is a danger of oversupply on the rental market? This question is particularly pertinent when it comes to the large student market. Residential complexes specifically tailored to students are increasingly springing up in small college towns as well as big, in-demand cities such as Munich, Hamburg and Berlin. From Aachen to Potsdam, blocks with often more than 100 micro-apartments are becoming a common site.

But whether this growth will be sustained is dubious, with student numbers stalling. The real estate consultancy Savills recently found that: “On the whole, it can be assumed that the number of cities with declining student numbers will increase.” According to their data, the number of people studying at German universities in winter 2016/17 rose by only 1.8 percent over the previous year, the lowest increase in 10 years. Savills believes there will be no more increases. Contrast that with the fact that there will soon be six times as many beds in private student apartments than in 2007.

Developers are covering their backs by ensuring that new student blocks do not just appeal to the target market. To be successful in a weaker market environment, apartments “must not only have good quality furnishings and a quality location, but also be distinctive,” says Michael Ries, a member of the board at Pantera. His company is a partner in the building of 260 student apartments in Wildau (near Berlin) and 106 in Esslingen (near Stuttgart), with the latter being offered for sale to private investors.

Such defensive measures are particularly applicable to the top end of the market. According to Savills, the monthly rent, including all ancillary costs and utilities, is more than €450 in around half of private student apartments, a princely sum for those studying. “A saturation of the expensive segment of the micro-apartment market can’t be ruled out,” warns Mr. Brauckmann.

On the whole, however, the percentage of one-person households will continue to grow. According to Mr. Brauckmann, it continues to be worthwhile to build tiny, space-optimized apartments. “Many people would rather live in their own little apartment than in communal flats, whose main reason for existing is to save money,” he said.

 

Christian Hunziker is a freelance journalist working for Handelsblatt. To contact the author: hunziker@handelsblatt.com

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