– PREA study “Germany Stress Test” examines resilience of housing markets against the backdrop of an impending recession
– The risk of rental defaults is particularly high in major cities in eastern Germany
– Households with low income and industrial regions are particularly affected by payment difficulties
– Investments in German residential properties are currently less attractive
What is my rental default risk? And what rental income can I expect in the future? These questions are gaining international relevance in view of a long-term high inflation and an impending recession in Germany. Germany has the highest tenant rate in Europe alongside Switzerland, and has been an important target country for international residential investment in recent years. In order to analyze the macroeconomic influences on rental income for all districts in Germany, the technology and real estate company PREA has conducted a multidimensional study “Germany Stress Test”. The study primarily focuses on the rental-related impact of increased energy costs for households and industry.
Low-income households have no buffer:
The accumulation of low-income households in the eastern federal states is particularly in focus. “Rising consumer prices affect people in Germany differently,” says Juri Ostaschov, Chief Data Scientist (CDS) and Partner at PREA. “Households at the lower end of the income scale have, on average, a higher rental default risk, because they spend a higher proportion of their income on essential goods, which can only be substituted to a certain extent.”
In addition, energy is a significant component of additional costs. The authors of the PREA study conclude that the higher the proportion of low-income households per district, the lower the buffer to bear the high additional costs. The rental housing share, and the heating demand of the building sector per household are also determined to be significant factors.
Major cities in Eastern Germany, including Chemnitz, Leipzig, and Rostock, are particularly affected by very high rental default risks. This is due, among other things, to the larger rental market and the proportion of low-income households. Berlin is the only city among the Top 7 cities with a very high rental default risk. Düsseldorf, Cologne, Munich, and Stuttgart have a moderate rental default risk, while Hamburg and Frankfurt am Main have a high rental default risk. The lowest rental default risk is in the districts in the Munich or Frankfurt suburbs, namely Rhein-Pfalz, Ebersberg, and Starnberg.
Energy-intensive industrial sites have a high growth risk:
In addition to the increased risk of rental losses, the energy crisis in many regions of Germany has also led to a dampening of growth prospects. PREA assumes that a higher share of energy-intensive and inefficient industries leads to a higher recession risk and thus lower rental growth.
Chemical and metal industries, coking and petroleum processing, as well as the production of glass, ceramics, paper and cardboard are particularly affected. “For these industries, there are few options to continue to save energy: Either they have to close individual plants or production lines or relocate some of their production abroad,” says Ostaschov, adding: “Moreover, the situation will not improve in the medium term. Due to the increasing demand for LNG imports, the energy price will remain above pre-war levels.”
On the other hand, productivity has a corrective effect, leading to higher margins and thus a higher buffer to compensate for higher costs. As a result, PREA lists relatively low recession risks for the productive automotive cities of Wolfsburg and Ingolstadt. The state of Rhineland-Palatinate is particularly affected by the energy crisis. In over half of the districts, there is a high or very high risk that the energy crisis will lead to a structural increase in the unemployment rate and thus to a high vacancy risk.
Interest rate hike interrupts the correlation between bond and multifamily residential yields:
Inflation and rising interest rates are putting pressure on the German real estate market as a whole. For example, the yield gap between bonds and existing investments shrank with the interest rate hike. Compared to US Treasury bonds, it is even negative. “With less risk and more market liquidity, US Treasury bonds currently offer higher returns than German residential real estate. Therefore, the asset is currently not attractive for investors, which also explains the current downturn in portfolio transactions. In order for purchases to become attractive again for institutional investors, yields for residential real estate in Germany must rise by about 250 basis points,” explains Ostaschov. Based on current rental levels, this would be equivalent to a price correction of about plus 40 percent.
