Real Estate Rental Levels in Leipzig, Germany, Boosted – Investors Take Note

Background

Rental levels have remained low and fairly static for much of the past decade in Leipzig. A higher than average housing vacancy rate of around 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} some years ago lead to an over supply of apartments, particularly in eastern parts of the the city which gave tenants good bargaining power. In recent years, through steady population increase and a removal of dilapidated buildings the vacancy rate now stands at 10{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} across the city. In many areas, there is no longer an over supply and rental developments have taken place. In the coming years, action by the local council will have a big impact on rental development across the city which this brief will cover.

Detail

An effective floor to the market in any German city is provided by the level of rent the government pays to tenants in receipt of unemployment or income support benefit. It has been interesting to note that the level of this payment, 3.85 Eur per sqm in the usual case, has remained for the past 10 years unchanged. Leipzig has one of the lowest levels of rental payments by the government, making it look a little odd. For example, the nearby and less-prosperous city of Halle has a level some 13{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} higher at 4.35 Eur per sqm. The Leipzig council have now released plans to hike the level of payments to a more nornal rate of around 4.5 Eur per sqm in the coming years, around a 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} increase. This will have a dramatic effect on the rental market across the city.

Analysis

To predict the effect of this action by the government in the coming years, it is useful to use a comparison of rental levels with a city that has rental levels paid by the government at a level suggested by Leipzig city. The closest comparison can be made with Dresden, a city of equal size to Leipzig in the state of Saxony with a broadly similar economic outlook.

The two pictures below show the rental levels across the cities, with a 4 colour system showing the different levels of rent achievable in different areas.

Conclusions

Whilst the vacancy rate is slightly lower in Dresden, it can be estimated that a development towards a similar rental level will be achieved in Leipzig over the coming years through a combination of this government action and continued population growth. The levels in the 4 different colour bands show clearly that Leipzig rent levels fall some 20-25{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} below Dresden and this gap is likely to close rapidly.

The effects will be various and of different speed depending on the property and location. Taking an apartment house in a mainly social tenant area, the rentals will increase automatically overnight, rising by around 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}. This is great news for current investors who will see a dramatic increase in yield. Property located in areas of mainly private renters will experience rental increases of between 15-25{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, over a longer period as rental agreements are reviewed by investors. It is difficult to predict which areas will see bigger gains, and a swifter upward movement. That said, it is fairly easy to argue that areas to the west of Leipzig such as Plagwitz and parts of Lindenau will benefit the most as the average rents are around 4-4.5 Eur per sqm and show the greatest capacity to increase. This is due to rapid population growth and infrastructure improvement in the area such as the Karl Heine Kanal project, the development of the canal system between Plagwitz and Lindenau “Harbour”. Other parts of the city that are deemed good or very good also demand attention, particularly where current rental levels of a particular investment are low at the point of purchase due to inactive management.

In terms of capital values, it would be safe to assume that sellers will start to price any expected increase into sales prices once the level of development becomes clearer. Typically, capital values increase directly in line with rental levels in Germany, other things being equal, so capital value development which is already occuring in the city should accelerate in speed in the coming 12-24 months. All very interesting for investors, as they research what is one of the most exciting yield markets in Europe and indeed the world with net returns up to 12{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} still in place and excellent finance available. For further guidance on market conditions in Leipzig and some example investments available today, please contact Proventure Property where we will be delighted to talk to you.

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