GERMANY – Investors struggling to commit capital to residential real estate in growth cities can generate comparable income yields by targeting cities with declining populations and lower GDP, according to Patrizia, the German property firm.

A cluster analysis performed for the German market by research head Marcus Cieleback found significantly stronger upward rental momentum in cities with growing populations – an average 12.6% over five years, compared with 8.4% for those with shrinking populations.

But although anticipated rental increases as a result of short supply were lower than those for growth cities, lower asset prices provided sufficient compensation for investors to expand their focus. 

City-specific upward GDP trends have focused demand on prime assets.

But residential supply will continue to be unequal to demand, driven by demographic growth in the medium term, with low yields as a result of rampant investor demand.

Meanwhile, although Munich posted the highest rents for new units, followed by Frankfurt and Hamburg, the greatest rental increases – those above 5% – were in the smaller cities of Coburg, Speyer and Amberg.

However, Patrizia warned that the findings only applied to new prime assets.

Average rents are higher in urban markets with new prime residential developments – an indication, according to the researchers, that rental levels "play quite an important role" in building activity.

Cieleback added that the analysis showed the significance of qualitative housing needs because, even where the overall population is in decline, there is evidence of rental increase at the high end.

"Currently, this is a trend that gets little consideration in the investment behaviour of many institutional investors," the report said.