Irresistible force

Germany is ageing. The number of workers is falling, the number of people needing care is rising. What does this mean for property investors? By Claus Hornung

Demographics used to be a hot topic. Until about 20 years ago, recalls Tobias Just, Academic Director at the Irebs Real Estate Academy, no conference of real estate experts would go by without dire warnings that the population was declining and those who were left were ageing. But the demographic shock never came. Not initially, at least.

Immigration cannot stem the tide of ageing

High levels of immigration prevented the anticipated decline. While the population of Germany was 80.6 million at the end of 1992, by the end of 2022 it had reached 84.3 million – the highest level in the history of the Federal Republic. But another problem remains unresolved, Just says: “Immigration can only delay ageing of the population, not stop it.” Over the last 30 years, the proportion of over-65s has increased from 15 percent to a current level of 22 percent. By 2060, forecasts say it will reach 34 percent. “Demographics is back on the agenda,” says Tobias Just, “as indeed it should be.” 

In his view, residential real estate will be most affected by the changes. “There will continue to be high demand for living space,” says Just. Alongside population growth, a further factor is that the amount of living space per inhabitant is increasing: from an average of 34.9 square metres in 1991 to an average figure of 47.7 square metres in 2021. The demand situation is exacerbated by the behaviour of “empty nesters”. When their children have moved out, older people often stay in their house or apartment, even if they no longer need the space. This is partly due to the massive increase in rent and property prices in recent years, says Philipp Deschermeier, Senior Economist and demographics expert at the German Economic Institute (IW): “There’s no incentive to move if a smaller home will cost just as much as the larger one you’re already in.” 

Demographics concerns itself with population trends and structures, meaning that factors such as the birth rate, net migration and the mortality rate are important. In Germany, demographic trends are bringing about significant changes in the population structure.
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Demand for residential space varies widely by region

But not every region is affected by this demand. Since 2012, Germany’s Federal Institute for Population Research (BiB) has seen a slight deurbanisation trend, for the first time in ten years. This does not, how­ever, prove that people are moving to rural areas, says Nikola Sander, Research Director for Migration and Mobility at the BiB: “The statistics don’t make an exact distinction between the countryside and the outer suburbs.” Professor Just of Irebs is sure of one thing: “City centres are losing out, but metropolitan areas are growing. Until land in urban areas becomes more affordable or the quality of life there improves significantly, this trend will continue.” According to a study carried out by real estate valuers ENA, most of this migration trend is accounted for by the cohorts born between 1957 and 1969, who will reach pension age in the course of the next 15 years.

Growing need for different forms of residential care

This is having an effect on the need for care real estate. By the end of 2021, the number of elderly people in Germany needing care had reached five million. “This number is set to grow,” says Carolin Wandzik, Director of Strategy and Business Development at urban development specialist Gesellschaft für Ortsentwicklung und Stadterneuerung and a member of the German Property Federation’s Council of Real Estate Experts. Demand for care properties will increase accordingly. Currently, 84 percent of all those in need of care are still being looked after at home. Wandzik sees a huge opportunity for investors here. 

While returns on care properties fell from 7 percent to 3.9 percent between 2012 and 2021, by 2022 they had recovered to 4.3 percent, Wandzik notes. She adds: “And demand is growing.” However, properties need to meet the actual needs of the target group. According to the ENA study, these include the desire to “create one’s own living space”. Says Wandzik: “Demand will mainly be for serviced living, where care services can be flexibly booked as extras. This residential type is also particularly attractive for investors because it’s less staff-heavy.”

Such properties must also be built first and foremost in metropolitan regions, says Irebs director Just. He has a warning: “For this to happen on a large scale, the aim shouldn’t be full accessibility, but to reduce barriers to a minimum. That’s usually completely adequate.” Here, he is not thinking only about individual buildings: “We should create entire districts where people with rollators can also get to the doctor, go shopping or access green spaces.” That would also change the role of investors, he says: “This shifts the focus away from the financier and developer to the asset manager.”

Office spaces in city centre locations are still in demand

An ageing population means that fewer people are in work. According to a fore­cast from the German Federal Statistical Office, the number of workers available to the labour market will fall from 35.3 million in 2019 to 30.7 million by 2040. This will be accompanied by a reduction in the number of office workers, which has grown continuously since 2000 – in Germany’s seven largest cities, the figure soared by up to 35 percent between 2012 and 2021 alone. There will be clear regional variations in the future, says Sven Carstensen, a director at consultancy and analysis company bulwiengesa and a member of the German Property Federation’s Council of Real Estate Experts. 

bulwiengesa calculates that the number of office workers across Germany will stagnate from 2024 onwards, before declining. In the major cities, however, it will continue to grow by an average of 1.2 percent until at least 2026. In some cities, such as Berlin, growth will exceed 1.5 percent a year. “In our view, companies will tend to continue being based in the major centres,” says Carstensen. The influx of inter­national staff will likewise be focused mainly on big cities, adds BiB researcher Sander.

“The aim shouldn’t be full accessibility, but to reduce barriers to a minimum.
Tobias Just Academic Director at the Irebs Real Estate Academy

But how will working from home impact demand once the Covid pandemic has subsided? “Companies will need less space but also different kinds of space,” says IW expert Deschermeier: “When employees work more from home, there’s less need for offices with desks, but more need for spaces where employees can meet and interact. When competing for skilled staff, that can give companies an edge.” bulwiengesa expert Carstensen likewise believes that working from home will give rise to new workplace concepts, but there will be no collapse in demand for office space in prime locations: “Central locations have been resilient to date.” Carstensen has this advice for investors: “Quality rather than quantity. Don’t buy too much space and don’t rely solely on single tenants.”

Changes in working practices could also trigger a surge in demand for living space in rural areas, says Deschermeier: “Commuters will accept longer journeys.” This in turn presents opportunities for a new kind of office, says real estate expert Wandzik: “Co-working will become an alternative to working from home, not just for creatives but across the board.”

A study conducted by the regional ministry of Lower Saxony in 2022 reaches a similar conclusion, predicting a growth in demand in rural areas. Carstensen is not so sure: “I don’t think businesses are willing or able to bear the associated costs and management overhead.” No matter how divergent the forecasts are, they all still confirm Tobias Just’s assessment: “Demographics is a factor that investors can’t afford to underestimate in the future.”

By Claus Hornung

Title image: IStockphoto

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