Grant Reynolds has been with IP Global for over 15 years. He's seen us enter 28 new cities and how the markets have evolved since our first few properties. Today, we interviewed him about his recent trip to Berlin and Leipzig, markets that continue to provide a compelling case for investment.
I shared with my colleague David that actually I first went to Berlin in 1978, way before he was born! Back then it was a divided city, poor and on its knees, an inner beauty but mixed with much pain and despair – when I returned in 2015 the Berlin Wall had been down for over 20 years and the city was in the midst of an economic revival.
Berlin, Germany - June 10, 2013
From the minute I landed at the new Berlin Brandenberg Airport I was blown away by the transformation. The shiny, bright new airport absolutely personifies the new Berlin – within 30 minutes I was in the centre of the city and new infrastructure littered the skyline from fancy new apartments along the River Spree to the glistening buildings of Europa City and Berlin Hauptbahnhof Central Station.
Great question! It's fair to say that in both cities the west sides very much still reflect "old money", classic architecture intertwined with modern landmarks. In Leipzig, the glistening Red Bull Arena is home of the successful RB Leipzig FC and in Berlin the modern architecture along the Ku Damm mixed amongst period buildings.
On the east side of Berlin, a city once divided is now re-united with tons of regeneration and an environment brewing for creatives. Leipzig’s east side is also up-and-coming, young professionals are moving east given great transport links and better value real estate.
Indeed, I did! For me this was one of the best parts of my trip, engaging with the locals - from those in our hotel to those eating out by the Brandenberg gate, Ku Damm, and central Leipzig. Certainly, Leipzig and Berlin are very much international cities, and I was pleased that the Germans I spoke to could comfortably speak English as my German is a bit rusty since I lived there many years ago. Those who I spoke to were proud of their city – young Berliners confident of the future after a challenging past – those in Leipzig embracing unified Germany and seizing the economic opportunities presented to them since high-level long-term planning was set in motion over 20 years ago now.
I also got the sense that locals feel that Leipzig is very much a hidden gem, given its beautiful architecture (see below Leipzig train station for example) to the large corporates based here, you can truly see why this city is the fastest growing in Germany.
The rents -rents are moving upward fast! Germany has a very open-door policy for immigration – lots of skilled jobs are being created in Berlin and Leipzig and there simply isn’t enough property. The incredible modernisation of both cities and the amazing transport infrastructure provides a strong platform for future growth. I was also surprised that Leipzig is only 1 hour and 15 minutes from Berlin by train. It’s also very cheap to get around, EUR8 will provide you a day ticket all-round the city of Leipzig.
Getting enough property for the growing population has to be the biggest issue. Both cities are in danger of becoming a victim to their own success. There is an accute undersupply of housing and, like the UK, with so planning rules and regulations, it is a difficult obstacle to overcome. It is a big positive for potential investors though, and the number one reason IP Global is so active in this market. The tax advantages (no capital gains after a 10-year hold) also go hand in hand with attracting property investors.
I came away from Berlin and Leipzig extremely excited about the next decade of growth opportunity – a lot has changed since my last visit in 2015 and I won't leave so long before I am back again.
Our specialty lies in finding pockets of value on a global scale. But in times of world-wide uncertainty, these are notably more challenging to source.
Europe’s strongest contender for crisis-resilience is, without a doubt, Germany. It has the largest economy in Europe at USD4 trillion and operates as a renowned safe-haven for investment. IP Global has been active in this market since 2008 and it has proven to be a very fruitful venture for our investors, who’ve not only seen strong capital appreciation but also achieved on average 112% of IP Global’s rental estimates upon development completion. It is with this experience that we are excited to announce our latest investment opportunity in the promising city of Leipzig.
Today, the booming economy and strong population growth underpin Leipzig’s housing market. The population has already increased by 24% since 2000 and is expected to rise by a further 25% to 750,000 residents by 2035, making it Germany’s fastest growing city. While demand for housing has expanded rapidly, housing supply has been slow to respond with a mere 13,510 units completed in the decade up to 2017. As demand soars and supply struggles to keep up, the vacancy rate in Leipzig has tumbled from as high as 12% in 2011 to as low as 2% today. This excess demand has put sustained upward pressure on house prices, with Leipzig being one of the few locations in Germany to experience double-digit growth in the year 2019.
As we gear up to take advantage of this unique German market, let’s explore Leipzig’s background to better understand how this unique opportunity materialised.
Located 160km south of Berlin, the city of Leipzig is situated at the confluence of two great continental trade routes, the east-west Via Regia and the north-south Via Imperii. Leipzig therefore became a flourishing trade centre and economic hub in the 14th century, and during this time developed a rich culture and leading educational role within Germany. The University of Leipzig, founded in 1409, is the second oldest university in Germany and one of the oldest in Europe.
Leipzig quickly became a hub of innovation, giving rise to the world’s first daily newspaper published in 1650. The first high speed printing press in Germany was later invented here in 1829, along with the introduction of steam-powered production machines which revolutionised the textile industry. At the forefront of business and technological change, the first long distance railway line in Germany was completed between Leipzig and Dresden in 1838. This laid the foundations for Leipzig’s industrial development, and by 1915 Leipzig Central Station was the largest rail station in Europe.
Leipzig was one of Europe’s fastest growing cities at the end of the 19th century, and by 1933 was the fourth largest city in Germany. It was relatively unscathed by the Second World War compared to the neighbouring city of Dresden, and therefore became the industrial production centre of the communist-run German Democratic Republic’s (GDR) economy. In the 1980’s Leipzig became the centre of a peaceful protest movement against the GDR’s policies, such as the erection of the Berlin Wall in 1961. These peaceful protests culminated with the Monday Demonstrations in 1989 which are widely credited as accelerating the fall of the Berlin Wall and paving the way for German unity.
The 1990’s were a difficult period for Leipzig. After the fall of the Berlin Wall and German Reunification, many former communist-era East German industries collapsed. This resulted in severe job losses and depopulation in Leipzig as many people migrated to West Germany. The outlook appeared quite bleak, however with the newly elected Mayor Wolfgang Tiefensee in 1998 came renewed hope for the city. New strategies focusing on education, urban renewal, economic development, social integration and environmental reclamation were considered the key to renewed growth of private enterprise and investment.
Leipzig reinvented and refocused its economy on five key business clusters, selected as promising industries with future high-growth potential. These five key clusters which have experienced the highest levels of employment growth since 2005, form a robust platform for the diverse economy to innovate and grow sustainably.
The five key clusters have proven highly successful since their creation. Better infrastructure and vigorous support of the new industry focus has aided the city in attracting prestigious “lighthouse” firms such as Porsche, BMW, DHL and Amazon. These firms act as beacons for Leipzig’s economic revival and growing global status.
A start-up scene is materialising in the city too, attracting many founders with its high quality of life and relatively low costs compared to other cities. Numerous incubators, accelerators, and co-working spaces provide entrepreneurs with business premises, expertise, and high-quality talent creating the perfect environment in which start-ups can flourish. There are currently an estimated 250 start-ups operating in Leipzig focusing on a range of sectors such as e-commerce, big data, energy infrastructure and smart mobility. Leipzig currently ranks as the 5th strongest start-up hub in Germany, and 117th globally -having jumped 173 places in a single year.
As a result of Leipzig’s successful strategy, the economy has doubled in size since 2000, totalling EUR22 billion as of 2019. After a slight decline as a result of the coronavirus in 2020, the economy is expected to increase by further 75% and reach EUR37 billion by 2035. At the same time, average GDP per capita has risen 62% since 2000, reaching over EUR64,000 as of 2019. After a slight dip in 2020, GDP per capita is expected to increase to EUR108,800 by 2035, an increase of 75%.
As Leipzig’s economy continued to flourish, 64,000 extra people joined the workforce resulting in the unemployment rate falling from a high of almost 21% in 2005 to 5% 2019. The unemployment rate is forecast to rise slightly in 2020 to 6.2% due to the coronavirus before swiftly returning to its pre-crisis full-employment level in the following years. At the same time, disposable incomes have increased from EUR25,700 in 2000 to EUR36,600 in 2019 (+42%). While disposable income is also expected to drop slightly in 2020, it is expected to rebound swiftly and continue rising to hit EUR59,300 in 2035, an increase of 131% since 2000.
Leipzig central station is in the middle of the Central German Railway Network and currently sees an average of 60,000 commuters per day. In January 2020, the German government announced a record breaking EUR86 billion investment programme for the national rail network.
The decision was based on Germany’s commitment to reduce transport sector CO2 emissions by up to 42% by 2030. The program aims to see regular high-speed connections operating between larger cities, with long-distance rail passengers increasing from 148 million in 2018 to 260 million (+76%) by 2030.
Leipzig Public Transport Network
With over 515 tram stops spread across the city, Leipzig boasts Germany’s second-largest tram network which services the city centre every 2-3 minutes. Alongside the bus network which encompasses 556 stops, the public transport network spans over 955 km across the city. In 2018, over 156 million passengers used tram and bus services in Leipzig, an increase of 400,000 on the previous year. The Leipzig Transport Authority continues to improve and expand its services, investing EUR30 million in 2018 alone.
Education has been a focal point in the city of Leipzig since the foundation of the University of Leipzig in 1409. As one of the oldest universities in Europe, former professors include the globally renowned physicist Werner Heisenberg and Nobel Prize winning chemist Wilhelm Ostwald. The university has also produced world-famous alumni such as writer Johann Wolfgang von Goethe, and philosopher Gottfried Wilhelm Leibniz.
Leipzig also has 6 universities of applied sciences, and approximately 150 research institutes and clinics including the specialist Heart Centre Leipzig, the IZI Fraunhofer Institute for Cell Research and Immunology, the Max Planck institute, the Media Campus, and BIO CITY LEIPZIG. Founded in 1764, the Academy of Fine Arts Leipzig is one of Germany’s oldest art schools specialising in fine arts, graphic design, photography and new media art. It is home to two world-renowned modern art movements, the ‘Leipziger Schule’ and the ‘Neue Leipziger Schule’. There are approximately 40,000 students living and learning in Leipzig today.
Leipzig is one of the most vibrant and unique cites in Germany today. The musical heritage is truly extraordinary with an abundance of great composers such as Johann Sebastian Bach, Clara and Robert Schumann, and Richard Wagner. The city also has a tradition of hosting great musical performances, with the famous Gewandhaus Orchestra alone attracting over two hundred thousand people to its concerts each year. They also perform Bach cantatas with the world-renowned St. Thomas Boys Choir – Leipzig’s oldest cultural asset, founded in 1212 - in St. Thomas Church where Bach once worked and is now laid to rest.
RB Leipzig was founded in 2009 when the Red Bull company purchased the playing rights of the fifth-tier side SSV Markranstädt with the intent of advancing the new club to the top-flight Bundesliga. In May 2016 this became a reality with RB Leipzig securing their spot for the 2016-17 season.
One year later, their meteoric rise continued with the team capturing a place in the 2017-18 UEFA Champions League. Red Bull has invested over EUR100 million in the club thus far, while match attendance numbers have sky-rocketed from 2,000 per game in 2009 to over 43,000 today.
Annual turnover for the club jumped 82% to EUR218 million in 2017 due to the promotion to the Bundesliga. The club’s income has continued to grow thereafter to EUR268 million for the 2018/19 season, putting RB Leipzig in 4th position in income terms after Bayern Munich, Borussia Dortmund, and FC Schalke.
As COVID-19 spreads fear and uncertainty around the world, finding the right market for investment is crucial.
The volatility of stocks in the first half of 2020 has left flight-to-safety investors wondering which economy and asset class will be the most resilient, providing security for their investment. Property has historically been this go-to asset for a number of factors. But with trepidation across the globe, how do you find the right market?
This guide outlines the 5 key elements to look for, using IP Global’s investment case for Berlin as an example.
When we look at Berlin, it is an ideal example of an international hub for business and innovation, not to mention the capital of Europe’s largest economy.
While the German economy proved itself highly resilient to external shocks, Berlin’s economy with average GDP growth of 5.6% p.a. since 2016 has far outpaced the national average. The city’s diverse economic base including the large public, business, and knowledge intensive digital services sectors meant it was far less susceptible to external shocks than cities and regions heavily reliant on banking or the manufacturing and export of capital goods such as automobiles, ships, and airliners.
It is estimated that Berlin’s decrease in GDP will amount to a mere 2.7% this year followed by a rebound of 4.9% in 2021, once again outperforming other major German cities.
More than 420,000 new jobs were created in Berlin since 2009, an increase of 40%, resulting in the unemployment rate falling from 20% in 2003 to 7.5% at the end of 2019. The city is forecast to have 635,000 people in office- based employment by 2021, an increase of 12% from 2019, while Frankfurt is forecast to have 268,270 people, an increase of just 2% over the same period.
Due to the high caliber new job creation, Berlin incomes grew by 34% between 2009 and 2017. This was a higher growth rate than in most other German cities and the national average, revealing the scale and underpinning the city’s transformation.
Going forward, we expect to see more reliance on technology than ever before and regions with strong innovation and technological capabilities will perform the best.
Berlin is a start-up capital, and one of the most prolific start- up hubs in Europe with 40% of all German start- up jobs created in the city. Over 200,000 new jobs have been created in the technology-based knowledge intensive business service sector since 2009, resulting in the number of jobs in information and communications technology doubling over the period.
German startups raised a record EUR6.2bn in venture capital investment in 2019, an increase of 36% on the previous year. E-commerce is becoming less significant than previous years with software, FinTech and mobility start-ups receiving significantly more financial backing. The lion’s share of finance went to Berlin-based startups receiving over EUR3.7bn – an increase of 41% compared to the previous year.
Another important factor to consider is how a market is primed for attracting young talent, often the largest demographic in the rental sector.
Berlin boasts a top-class academic environment with world-renowned institutions such as Humboldt University, Charité, and Frei University Berlin amongst the top ten in Germany. There are a total of more than 250,000 people currently working, researching, or studying in Berlin’s tertiary level educational institutions. And over the next ten years, Berlin is expected to develop into an outstanding European hub for cutting-edge research and technological innovation, attracting more and more talent to the city.
Property investment is for long-term growth and so it's crucial to invest in a market with a high level of government stability and an economy that can weather any downturns or global crises.
Germany has proved to be one of the safest countries in the world to live during the global pandemic. It recorded by far the lowest number of fatalities per 1 million inhabitants of any industrialised nation, thanks to a swift and effective response. Germany’s first-rate healthcare system has approximately 48 ICU beds per 100,000 population compared to the OECD average of 12 beds and has the capacity to process over 1 million COVID-19 tests per week.
Over 98% of Germans are covered by public or private health insurance, greatly reducing the number of unknown pre-existing conditions which contributed to the subdued mortality rate. As a result of the brief yet effective lockdown, and the enormous fiscal program worth 50% of the total European response, the German economy is on track to rebound far quicker than the majority of other advanced economies globally.
Not only this, but you need to find a market where there is a growing population opting to rent. This is usually the case for young professionals, new migrants, and actually 83% of Berlin’s local residents
Berlin is the most populous city in the EU with 3.7 million residents as of 2020, and on track to surpass 4 million residents by 2030. The city has experienced sustained positive net migration, bolstered by positive natural population growth since 2009. Together with the surrounding area of Berlin-Brandenburg, there are over 6 million people living and working in the region.
Berlin is a young and truly international city, home to expats from over 190 different countries representing 21% of the total population, with the average age of newcomers to the city under 35. Continued population growth and a trend towards one-person households will continue to put pressure on the city’s already strained housing stock.
Berlin’s housing market remains structurally undersupplied with a deficit of at least 86,000 units as of 2019, while economic and population growth are expected to outstrip supply until at least 2030. An additional 0.5% of apartments were completed per annum over the last decade, while population growth was double that at 1%. As a result, the vacancy rate has continued to tumble from 3.5% in 2011 to 0.8% as of 2019.
An undersupplied housing market combined with a booming economy puts sustained upward pressure on house prices and rents, which has been the case for Berlin over the last decade. Prices for newly built and existing apartments increased by over 120% between 2009 and 2019, with rents following a similar trajectory.
Berlin’s top market segment which accounts for new-builds and refurbished units experienced 8.1% capital appreciation in 2019, while rents increased by 7.3% over the same period. Yet Berlin still remains affordable by both national and global standards for investors and residents alike, and thus the trend is expected to continue for as long as the structural factors persist.
To learn why Berlin's prime housing market experienced the highest level of capital growth in Europe during the pandemic, click here
Small is beautiful -and the news is out.
Europe is abuzz with change, and new lifestyles are being embraced. In Germany, for example, the Federal Statistical Office predicts that by 2040 one in four people will live alone -a vastly different outlook from the turn of the century. Millennials are getting married later, putting careers first in a fierce focus on independence. And with time a rare commodity, people don’t want to waste it on a long commute.
Enter the growing lifestyle trend of micro-living. Otherwise known as the future of making limited space work in flourishing European cities. Expansive, cluttered apartments are a thing of the past. Minimalism is the future of city-centre living.
A classic characteristic of micro-living is that it is suitable for singles and, occasionally, couples. One might find this a disconcerting factor when looking at the rapid global population growth. A more accurate benchmark, however, is to measure your investment against the trend of household sizes. For example, the outlook for micro-apartments in Germany, Sweden or Austria is dramatically different to that of Ireland or Poland.
Germany is one country particularly primed for micro-living. As you will see by the below graphic representation of its household structure, single households will rise to an alarming 19.3 million by 2040.
According to Cushman & Wakefield, 2018 saw an increase of 85% on the previous year in transactions for micro-apartments, bringing the total to EUR1.5 billion. Berlin, Hamburg and Frankfurt in particular saw a large growth in the market. In fact, Germany as a whole has the highest investment in micro-living in the European Union.
Due to the large number of young working professionals and students embracing convenient living, micro-flats are usually located near key employment nodes and the best universities.
Europe is a mecca to highly-skilled immigrants and offers some of best education in the world. Key cities are seeing a growing demographic of young working professionals and international students, drawn to fruitful job prospects and outstanding universities.
Paralleling this trend is a direct growth in demand for micro-apartments.
Considered a very lucrative market, in 2018 alone, the European student accommodation investment landscape saw a transaction volume just short of EUR10 billion.
According to UNESCO, the UK, France, Germany, Italy, The Netherlands, and Spain are among the top 20 destinations for global students studying abroad. This correlates with Corestate’s ideal markets for micro-apartments as seen in the below graph.
In addition to this, Cushman & Wakefield found that there is a clear correlation between micro-apartment buildings under construction and urban areas in which demand for residential property is highest. Locations like Berlin, London and Vienna are the leading cities of education and have buoyant job markets, it is no surprise that these are the places fervently jumping on this new lifestyle trend.
There are 3 main sub-sectors of micro-apartments. These are namely: serviced apartments, student accommodation and furnished micro-apartments. The commonality among them all is the convenient location, furnished-nature and shorter-term leasing.
One mistake to make is to assume that the only target demographic is the youth, although currently it is the largest market. With the world becoming so globally accessible, commuting and frequent business trips are a way of life for a large share of working professionals.
Many of which do not wish to live in hotels as they prefer the privacy and a space to make their own. This demographic further elevates the rental prospects as luxury living becomes compact.
Micro-apartments are becoming relevant in several phases of life due to changes in society and demographics. This makes property investment in micro-living a multifaceted opportunity for all generations. There are young adults requiring student housing, new working professionals branching out from families and expats and commuters of all ages who prioritise convenience. In future, there could even be a market for the elderly with mobility constraints to benefit from assisted micro-living. As the housing supply pipeline narrows across European cities, the future of this trend has countless possibilities but the one certain forecast is growth.
Property has one of the more secure income generators of all the asset classes as it is not as heavily benchmarked to the economy. If trouble looms for the stock market, people still need places to live and with populations growing exponentially, the security is further cemented each year.
It’s important to diversify your portfolio with a real estate investment, but often the biggest concern is the substantial lump sum of capital needed to finance the purchase. This is particularly an issue in sought-after areas.
Given the smaller property size of micro-apartments, the entry point for investors is much lower than that of a 1- to 2-bedroom apartment. It is a great opportunity to get a foot on the property ladder. Moreover, the lower price presents the opportunity for property investors further up the ladder to purchase more than one apartment, so the risk is spread across multiple sources.
There are many income benefits to micro-apartments but two particularly stand out. The first is that, when done well, their appealing modern amenities combined with a central location make the return on square metre comparably high while still being in the price range of a far larger demographic. Furthermore, they generally have lower running costs and are more eco-friendly due to their size and new-build nature.
The second income benefit is in the short-term nature of the lease. It is the custom in many European countries like Germany to rent on a rolling lease, which means to begin the process as a tenant, there is usually vigorous credit history scrutiny and a 3-month security deposit. Micro-apartments take all this hassle away. Moreover, the buy-to-let investor benefits as the 12- to 24-month contractual period allows more price elasticity to increase the rent according to demand.
In terms of investment security, one has to look at the facts. A definitive figure cannot be placed on the overall supply of micro-apartments because there are so many different segments to micro-living.
Given that the largest portion with measurable data is student housing, we will base further analysis on those metrics by Cushman & Wakefield. To date, primarily 60% of investment in the student housing segment has been domestic, with a further 28% coming from European countries. Seeing as this is a relatively new concept and demand is rapidly growing, investor confidence remains secure that the market for resale will be particularly fluid.
Furthermore, it bodes well for security that the growing youth are the largest sector using micro-living. It means the investment is not correlated with economic fundamentals but rather the value placed on career prospects and education. Micro-apartments are therefore a defense investment and an ideal risk diversification strategy (Corestate).
● Students, international young professionals and a growing number of singles fuel a fervent demand for micro-living.
● The high quality, flexibility and lower rent in central locations are key features to tenants.
● Micro-apartments are attractive to risk-averse investors as occupancy rates soar.
To learn about IP Global’s latest opportunity in micro-living, click here.
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