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Henryk Seeger: The upside of Germany’s equity release market

Within the real estate asset class, we often see international investors joining forces with German investment managers and other market players. Their decision is based on the rationale that international investors can tap into local knowledge and existing networks.

When it comes to the equity release for single-family homes market segment, it is the complete opposite – the product and how it works is familiar to international investors. And all of them share the view indicating a huge upside potential in an underdeveloped market. Over seven million Germans, aged 65 years and older, live in their own homes.

Crunching the numbers

There were 16.1 million single-family homes in Germany in 2021, according to Statista, the German data aggregator. The average price per square metre is around €2,736 and the average home size is approximately 135 square metres, based on figures from realtor website immoverkauf24. This equates to a purely mathematical average sales price of €370,000 per single-family home and a potential market of €6 trillion. If just one million single-family homes were to come onto the market, this would correspond to a volume of €370bn euros.

Yet the market is still very much in its infancy and international investors frequently wonder why. Unlike the UK and US, where the equity release market is well established, Germany´s market for single-family homes has been somewhat untouched by investors – until now.

Apparent conundrum

There is not a single reason for this apparent conundrum. For German homeowners and the investing public in general, the concept of equity release to unlock capital tied up in their single-family homes is still relatively new. In our initial discussions – aging potential clients are often reluctant to embrace its benefits.

Germans during their working life are less mobile. Especially as compared to employees in North America and the United Kingdom, they are frequently rooted to their regional background and often emotionally attached to their home, which represents their lifetime’s savings.

In their minds, a single real estate transaction instead of subsequent acquisitions and disposals of their home-base represents an anchor they are reluctant to touch at all. Furthermore, potential sellers in their mid-60s tend to be reluctant to adopt innovations. As we overcome their initially sceptical view, we learn about the financial needs of a generation that increasingly faces liquidity constraints to maintain their standard of living.

In this context, we see our ongoing efforts in investor education paying off. Step by step, German homeowners are beginning to understand the benefits of equity release products. As of now, more and more companies offering equity release schemes are building up impressive track-records and seeking to accelerate their growth, thereby tapping into international capital.

Build quality is key

In additions to its size, the German market for equity release also shows several other characteristics that are important to bear in mind from an institutional investor’s perspective – not least, the quality of single-family homes. Over many decades, local craftsmanship in connection with existing standards and building regulations have created a stock of high-quality and characterful single-family homes across the country, often with a lifetime of well over 100 years.

Second, first-generation homeowners after reunification who are about to retire have invested in their homes with great zeal. As Germany lacks one central hub and boasts at least seven major metropolitan areas on a national level, the quality of homes is evenly distributed in many regions. Affluent areas with a vast stock of single-family homes are to be found in A, B and C areas across all 16 German states, according to our own proprietary rating model.

Third, zoning restrictions and environmental concerns, coupled with a lack of newly designated building plots, provide upside for further asset appreciation in many municipalities where demand for single-family homes is expected vastly to exceed supply for many coming years, according to demographic patterns as well as our own estimates.

All this contributes to a fundamentally intact upwards momentum – according to the Federal Statistical Office, the prices for single and two-family homes nationwide increased by some 84% between 2010 and 2021. Broadly compared, rents per square metre are about 20% higher than those of rental apartments.

From an institutional investor’s perspective, there is more than one way to enter this market. Following recent acquisitions, for example, we consider ourselves the largest landlord of single-family homes in Germany today and have created several managed funds as a way to bundle single-family homes. Furthermore, our ongoing discussions with investors underpin their interest in considering equity options as an alternative to participate in our future growth.

Dr Henryk Seeger is managing director of GNIW, a German real estate company focused on equity release

Part of the Mark Allen Group.