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Looking to the future: progress and challenges with PropTech solutions in German urban development

An interview with Prof. Dr. habil. Steffen Metzner, Head of Research at EMPIRA Group and Professor of Business Administration & Real Estate Economics at the German University of Applied Sciences, led by Anna Gnemmi, Marketing Manager @Sofia part of ISEO.

The development of the residential sector in recent years has been remarkable and has been largely driven by the introduction of cutting-edge technologies and ground-breaking PropTech solutions. With Prof. Dr. habil. Steffen Metzner MRICS, a leading expert in this field, to gain deeper insights into these transformative changes. As Head of Research at the EMPIRA Group and Professor of Business Administration & Real Estate Economics at the German University of Applied Sciences, he was able to open up valuable perspectives with his expertise.

The aim of the interview was to explore the profound influence of this progress on housing construction in Germany’s vibrant cities. We set out in search of the winding paths that technology has taken to reshape the fabric of urban development. From initiatives to promote sustainability to the ongoing challenges around affordability and the compelling need to optimize resources, our discussion revolved around the multifaceted role of technology. The discussion is intended to provide orientation and show how technology is shaping the future development of residential construction in Germany’s vibrant cities.

What major trends or patterns emerged on the housing market in major German cities in the period from 2003 to 2023?

In the period from 2003 to 2023, the real estate markets in the eight most important cities showed strong growth. This trend is due to the increasing demand for living space as a result of immigration and demographic developments. The result was an increasingly tight rental market, particularly in metropolitan areas. As a result of low interest rates and low letting risks, investors have recently also accepted very low rental yields. Values of around 3 percent were typical in the top 8 cities. Nevertheless, these were still higher than the yields on German government bonds. With interest rates rising again recently, real estate yields are necessarily also adjusting upwards.

What differences or variations were found in residential real estate between the various cities surveyed? How did the age of the buildings contribute to these differences and what impact did it have on the dynamics of the housing market in the individual cities?

Of course, there were clear differences in the housing market within the cities surveyed.

Some cities have very specific characteristics when it comes to building age classes. Berlin, Stuttgart and Leipzig, for example, have an above-average number of old buildings dating back to 1948, and more than 40 percent of apartments in these cities are over 75 years old. Despite renovation, these older buildings are increasingly being replaced by new ones as energy standards evolve and economic modernization becomes difficult. Outdated building standards often lead to higher consumption and additional costs, which has an impact on rentability.

Conversely, cities with younger housing stock such as Munich are in a more favorable position. Munich has experienced considerable population growth in the last five decades, which has led to many new buildings. Around 25 percent of the housing stock in Munich was built from 1991 onwards, and almost 40 percent was built after 1979, with less than 14 percent in the greater Munich area being pre-war buildings. This advantageous distribution allows cities to use resources to improve existing structures and quality instead of providing replacements.

What has contributed to the expansion of housing construction in these cities, and what obstacles have hindered this growth?

The increase in living space in these cities is mainly due to factors such as the attractiveness of the labor market, which has led to an influx of large numbers of people. Munich experienced a remarkable increase in population due to its enticing employment opportunities, which led to extensive construction measures. Hamburg was also able to meet demand by creating suitable new buildings thanks to cooperation between the public and private sectors involving investors and construction companies.

Despite this growth, there were problems that hindered progress. Excessive bureaucracy, often reported in public fromBerlin, for example, significantly delayed the creation of development plans and the granting of building permits. This hinders building initiatives and makes it more difficult to meet housing needs efficiently.

What challenges and opportunities have emerged from your research on the German real estate market?

The German real estate and construction industry was faced with declining new construction figures during the period under review, with an estimated 280,000 new apartments in 2022 compared to 293,000 in 2021. There is no improvement in sight for the coming years due to high construction costs and increasingly difficult financing. Despite this, politicians have stuck to their target of achieving an annual completion rate of 400,000 new apartments, which shows a considerable discrepancy between this postulated expectation and the objective forecasts.

Some regions, such as Berlin, Stuttgart and Hamburg, were confronted with a significant surplus in demand coupled with a low level of new construction. Berlin saw a significant influx of population, especially in the 2010s, while new construction activity was minimal due to various factors such as location-specific restrictions and lengthy processing times for building permits.

Recognizing this demand and responding to it effectively is crucial for both cities and investors. The situation reveals a challenge in analysis and control that could potentially be addressed by innovative PropTech solutions in the future.

What impact do the research findings have on investment in the German top cities in the housing market?

The results of the study show concrete investment opportunities on the residential market in Germany’s top cities. Properties that are characterized by energy efficiency, modern fittings, a good local infrastructure and good public transport connections are particularly attractive. These factors often lead to increased tenant interest and higher rental potential.

For older properties, however, the possible investment considerations shift. They may require follow-up investments, particularly for energy modernization and improving accessibility. These future investments can entail considerable costs for investors and should be carefully considered when calculating the investment.

Strategic investments in centrally located properties are promising, as they can save tenants high commuting costs, which is foreseeable in view of rising energy prices and taxes. This shift is likely to lead to greater differentiation within the residential market, giving investors the opportunity to profit from properties that meet the evolving needs of tenants and market demands.

In your opinion, how will the housing market in Germany’s top cities develop over the next few years and what factors will have a significant influence on this development?

The development of the housing market in major German cities is likely to be characterized by a combination of different factors in the coming years. The continuing influx of immigrants, particularly to urban centers, will lead to a continued high demand for housing. However, the construction industry is faced with obstacles resulting from rising construction prices, prevailing interest rates and the introduction of ever stricter standards and comprehensive regulations. As a result, the imbalance between demand and construction capacity is expected to lead to a shortage of rental apartments and drive prices up further.

The trend of rising construction and administration costs is likely to continue. These increases appear to be in line with policy objectives, particularly in terms of energy efficiency and reducingCO2 emissions, even if they have the unintended consequence of increasing housing costs.

There are currently hardly any practicable solutions to overcome these challenges. Although there are innovative concepts such as modular construction and model projects, their broad effectiveness on the market remains a medium-term prospect.

In response to escalating costs and limited options, tenants may increasingly prefer smaller apartments. This shift in preferences is likely to lead to increased demand for smaller living spaces on the housing market.

How are technology and PropTech solutions shaping the future of residential construction in Germany’s top cities? What are the key advances, challenges and potential benefits for the construction industry, sustainability efforts, affordability, resource optimization and market understanding?

The residential construction market in Germany’s top cities has undoubtedly seen significant advances and trends in technology, particularly in PropTech. These innovations have contributed significantly to the efficiency and effectiveness of the construction process.

One example of PropTech solutions in residential construction is the integration of smart home technologies that improve energy efficiency and sustainability. These systems use intelligent devices to monitor and regulate energy consumption, thus supporting the development of environmentally friendly and energy-efficient buildings.

In addition, the digitalization of the construction industry, particularly through Building Information Modeling (BIM), has revolutionized planning, cost estimation and collaboration between the parties involved. BIM facilitates precise planning, which leads to cost savings and higher construction quality.

The further development of technologies and PropTech in residential construction in major German cities is promising. Energy efficiency is expected to remain the focus, supported by intelligent technologies. Automation and robotics are likely to play an increasingly important role in speeding up construction processes and reducing costs.

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