Germany: a nation of rental apartments

Text: Matti Schenk

For those seeking to gain an overview of the structure of the German apartment market, the 2011 census offers a good starting point. Despite being somewhat dated, the census provides comprehensive information regarding both the occupation and ownership structure of apartments. According to census data, there were around 40.6 million apartments in buildings with residential accommodation in Germany in 2011. Approximately 17.3 million apartments were occupied by their owners. Some 21.2 million apartments, approximately 52% of the apartment stock, were let for residential use. Almost 81% of apartments, or approximately 17.1 million rental apartments, were located in apartment buildings (3 or more apartments in a building). Around 1.9 million apartments were vacant at that time, while approximately 225,000 apartments were used as holiday homes or holiday rentals.

There is likely to have been little change to the fundamental structure of the German apartment market since this data was collected. The apartment stock only increased by approximately 3.5%, or 1.42 million apartments, between the effective date of the census and 2017, which is insufficient to precipitate structural changes. Around 200,000 apartment buildings, over 6% of the German stock, changed hands during the same period. This figure is also too low to cause any noteworthy change in the ownership structure of the rental apartment market. Hence, the census data still provides useful findings on the ownership structure and size of the rental apartment market. We discuss these findings in further detail below (in doing so, we refer to the census data from 2011 but write in the present tense for ease of reading).

Significant regional differences in the size of rental apartment markets
The German apartment market is a rental apartment market. However, this is by no means the case in all districts (in German: ‘Kreis’) of Germany. In the rural districts (in German: ‘Landkreis’) of Merzig-Wadern and St. Wendel in the Saarland, only around one in four apartments is let to tenants. The twenty districts with the relatively smallest rental apartment markets are exclusively rural districts in western Germany. Conversely, of the twenty districts with the relatively largest rental apartment markets, thirteen are in the federal states created from the former East Germany (excluding Berlin). These are also, without exception, independent cities (in German: ‘kreisfreie Stadt’) (see Table “Highest and lowest shares of rental apartments nationwide”). An average of 65% of all apartments in independent cities are rental apartments. In six independent cities, however, rental apartments account for less than 50% of the apartment stock. These are namely Salzgitter, Zweibrücken, Schwabach, Delmenhorst, Emden and Neustadt an der Weinstraße. In the rural districts, the average proportion of rental apartments throughout Germany is only around 40%. Only in 29 out of 294 rural districts are rental apartments in the majority. These include the Aachen city region and the region of Hanover, both of which are dominated by their respective core cities.

Two in three rental apartments belong to private individuals
Of the 21.2 million rental apartments in Germany, around two thirds belong to private individuals or a community of owners (see Graph “Ownership structure of the rental apartment market”). The members of communities of owners are also predominantly likely to be private individuals. However, professional investors can also be members of a community of owners by way of privatisation of individual apartments. A further fifth of the apartment stock is owned by the public sector and housing associations. Hence, private companies account for just 2.7 million rental apartments, representing a relatively insignificant proportion of the overall market.

The ownership structure of the rental apartment markets varies strongly
There are significant regional disparities in the ownership structures of the rental apartment markets. In 177 of the 401 rural districts and independent cities, at least 80% of all rental apartments are owned by private individuals or communities of owners (see Graph “Market share by owners and number of districts”). Conversely, there are 48 districts in which such owners hold less than half of rental apartments. Aside from private individuals and communities of owners, no other group of owners accounts for a market share of more than 50% in any district in the German apartment market. The public sector owns at least a fifth of all rental apartments in 64 districts, 52 of which are situated in eastern Germany. On the other hand, less than 5% of rental apartments are held by the public sector in almost half of all districts (195 out of 401). Housing associations account for market shares that vary between 0% and 36%.

Private companies: often in the spotlight, almost never dominant
One group of owners is a particular subject of debate surrounding the apartment market, namely private companies. The market share of this group of owners also shows a pronounced regional variation. Only in 31 districts do private companies own more than a fifth of rental apartments combined (Graph “Market share by owners and number of districts”). Private companies only have the largest market share among the various groups of owners in the cities of Salzgitter and Wolfsburg. Moreover, such companies only have single-digit market shares in 71% of all districts. These 286 districts are home to around 59% of the German population. Private companies primarily focus on independent cities in which their holdings account for an average of approximately 14.5% of all rental apartments. In the rural districts, however, their average market share is just 6.6%.

Six clusters to illustrate the significance of private companies
In order to assess the significance of private companies in various rental apartment markets, it is important to look at both their relative market share and the absolute size of their holdings. For each district, we have therefore multiplied the market share of rental apartments owned by private companies by the absolute size of their apartment holdings. The larger the resulting figure, the greater the importance of private companies in the respective rental apartment market. A market participant would have a significant role, for instance, if they held a relatively large proportion of the supply or if, despite not having an above-average market share, they still held a large number of apartments. The latter applies to Stuttgart, for instance, where private companies hold just 8% of all rental apartments but nevertheless own approximately 17,000 apartments. Based upon the range of different figures produced by these calculations, we have grouped the 401 districts into six clusters. The individual clusters are separated via defined thresholds. Clusters 1 to 4 comprise districts for which the calculated figure is higher than the median for all districts. Clusters 5 and 6 include all districts for which the calculated figure is lower than the median. In these cases, private companies have a low significance in the rental apartment market measured against their already relatively low significance compared with the German average. The geographical distribution of the clusters is illustrated in Graph “Significance of the private companies as owner of rental apartments”.

One cluster outperforms all others
Private companies in the 32 districts of Cluster 1 have by far the highest significance in the respective rental apartment markets. The average market share of private companies in this cluster is 24%. More than 1.5 million rental apartments, or around 57% of all apartments owned by private companies, are located in a district in this cluster. The cities of Berlin, Munich and Hamburg alone account for around 660,000 of these apartments.
In Clusters 2 to 4, the significance of private companies in the rental apartment market gradually declines. The average market share of these companies in a district in Cluster 2 is 17%, reflecting an average combined holding of around 10,400 rental apartments. Private companies in Cluster 3 have an average market share of 11% and an average combined holding of 5,400 rental apartments. In Cluster 4, the market share declines to an average of just 7% while the average combined holding is 2,800 apartments.

The average combined holdings of private companies in Clusters 5 and 6 are only around 1,740 and 830 apartments respectively, equating to average market shares of 6% and 4% respectively. Both of these clusters predominantly comprise rural districts with relatively small rental apartment markets. Districts in Cluster 5 have an average of around 30,400 rental apartments, while those in Cluster 6 have an average of around 22,800 rental apartments. By way of comparison, districts in Cluster 2 have an average of 73,300 rental apartments.

Small private-sector holdings mean limited purchase options for investors
Overall, besides the urban-rural divide described above, there is also a north-south divide. In southern Germany, private companies predominantly have a low or very low presence in the rental apartment markets. A very large proportion of apartments in this part of the country are owned by private individuals. The same is true of many rural districts in Rhineland Palatinate, Hesse and the Saarland. The districts in Clusters 5 and 6 situated in eastern Germany are characterised by above-average market shares of the public sector and housing associations. The districts with a low presence of private companies are also likely to offer little in the way of investment opportunities in existing property for interested private investors. Building a portfolio by acquiring apartments from many private individuals is theoretically possible. In practice, however, this is very complicated and associated with high transaction costs. Theoretically, the holdings of the public sector and housing associations also count towards the investable stock in a district. However, in our estimation, the current willingness of these owners to sell is primarily very low or non-existent. In terms of liquidity, therefore, the districts likely to be attractive to investors are those where private companies already have relatively large holdings and market shares.