(Bloomberg) -- German home prices are rising at the fastest pace in decades, reviving talk of a property bubble. Michael Zahn’s company owns more than 160,000 apartments and he’s having none of it.
“For 20 years, we had no growth in Germany at all -- nothing,” the 54-year-old chief executive officer of Deutsche Wohnen SE said in an interview. “We’re now making up for lost ground, but that doesn’t mean the market has peaked.”
German homes have appreciated by about 60 percent since 2010, Fitch Ratings Ltd. said in a report last week. That’s an unprecedented increase for a market that was slow to embrace home ownership and attract foreign investors.
“Property yields have come under extreme pressure in the big cities,” said Udo Cordts-Sanzenbacher, co-head of residential investment at BNP Paribas Real Estate in Frankfurt. “On the other hand, there’s a huge amount of liquidity in the market, and prices are still relatively low by international standards.”
Berlin, Deutsche Wohnen’s base and its largest market, has been the boom’s biggest winner. This month, the city came top of a global ranking of 150 residential property markets compiled by Knight Frank, sealing its transformation from a grungy backwater to one of Europe’s most sought-after locations. Three other German hot spots -- Hamburg, Munich and Frankfurt -- also appeared in the top 10.
Investors spent a total of 14 billion euros ($17 billion) on German homes last year, up from 13.5 billion euros in 2016, data compiled by BNP Paribas show. North American buyers accounted for about 5 percent of the total, the most of any region outside Europe.
Zahn has spent his entire career working for Berlin-based property companies. Yet even he was surprised by the speed of the change, which he attributes to the city’s rising population, combined with record-low unemployment, a shortage of new properties and high levels of liquidity. “There’s still a lot of upside potential,” he said.
Not everyone is so bullish about German real estate. Fitch last week predicted that price gains will slow to 5 percent this year and 3 percent in 2019, compared with 8.6 percent last year.
In a January report, Deutsche Bank said the risk of a bubble is increasing, while a month later, Germany’s central bank expressed its concern about the boom. The Bundesbank said properties in locations such as Berlin, Frankfurt and Munich may be overvalued by as much as 35 percent.
“Market crashes are typically caused by too much construction, and the opposite is true in many German cities,” said Michael Voigtlaender, senior economist at the German Economic Institute. A potential drop in immigration is a bigger issue, according to Voigtlaender, who expects prices to be little changed next year after a further increase in 2018.
Rising borrowing costs may also damp demand. Deutsche Bank expects five- to 10-year mortgage rates to rise to 2 percent by the end of the year, from about 1.7 percent at the moment. However, the speed of the increase -- from a very low level -- is likely to limit the impact, according to German lender Helaba.
Zahn was appointed Deutsche Wohnen CEO in December 2008. Since then, the company’s rental income has more than doubled, helped by acquisitions such as the 3.4 billion-euro purchase of GSW Immobilien AG and of 13,500 homes from Patrizia Immobilien AG for 1.1 billion euros. That’s lifted its market value to more than 13 billion euros.
However, Zahn can no longer count on acquisitions for growth because far fewer large portfolios are coming onto the market. “These days, our strategy isn’t M&A, it’s asset management,” he said.
Deutsche Wohnen is spending 1 billion euros to add value to its properties. That includes modernizing homes, expanding them by adding an extra story or even, in some cases, rebuilding them.
“We’re not in a position where we can expand at the same pace as we did in the last three or four years,” Zahn said. “That’s why we’re investing so much in our existing portfolio.”
Another priority is to widen Deutsche Wohnen’s shareholder base, according to Zahn. BlackRock Inc., Sun Life Financial Inc. and Norges Bank are currently its biggest shareholders, but the company would particularly like to attract more Asian firms and has already put on roadshows in Singapore, Tokyo and Shanghai.
“We’ve reached a size that makes us interesting for Asian investors,” he said.
©2018 Bloomberg L.P.