Studio Empira: huge diversification potential for investors

In its most recent study, the Empira Group, a leader in institutional real estate investment management, compared the 46 largest real estate markets in the DACH region (Germany, Austria and Switzerland) for key socio-economic and demographic data. The aim was to determine the indicators that precede the development of the real estate market and to classify the markets in structurally similar clusters. The focus was on aspects such as local age and economic structure, demographic development, public debt, disposable income, unemployment and absolute and per capita GDP. While most cities have a positive outlook for economic and demographic growth, the study still reveals significant differences between locations and therefore huge diversification potential for investors.

“Especially for long-term oriented institutional investors, it is crucial to understand the structural factors for the future development of value in the real estate market. Experience has shown that traditionally used indicators such as job vacancies and rent levels can change at very short notice, while aspects such as educational qualifications or the percentage of employees in the public sector are very stable. Furthermore, our grouping reveals one or the other market in addition to the top 7, which is structurally similar to popular target markets, but possibly also cheaper to buy, “comments Prof. Steffen Metzner, Head of Research at Empira and author of the study.

Young and high-income cities are growing the most

Of the 46 cities surveyed, only 10 have an expected negative population until 2035. Bremen and Halle (Saale), one market each, are located in North and East Germany, while the remaining 8 cities are all in North Rhine-Westphalia. Forecasts range from a moderate -0.9 percent (Bielefeld) to -5.4 percent (Duisburg). The particularly fast-growing cities, on the other hand, come from Switzerland and Austria. All 6 markets analyzed (Vienna, Linz, Graz and Basel, Zurich, Geneva) are in the top 10 of the largest expected population increases. There are also several top 7 German cities (Frankfurt am Main, Cologne) and attractive B-cities such as Leipzig (13.5%) and Hanover (8.8%).

In most cases, the local average age is negatively correlated with the population forecast, i.e. younger cities grow much faster than older ones. Exceptions to this include the relatively old but fast growing Colony and the relatively young but dwindling Bielefeld. The link between annual net disposable income and population forecast is also statistically surprising. All the cities in contraction show values ​​below 24,000 euros per inhabitant, all the cities in rapid contraction (reduction of more than 4 percent) even below 22,000 euros.

Conversely, however, it does not necessarily apply that all low-income cities automatically have negative or below-average demographic development. For example, Leipzig, the fourth lowest-income city, expects population growth of more than 13%, while Munich, the highest-income city in Germany, will only grow by just over 7%.

Unemployment and economic growth have overestimated population growth factors

The correlations between other socio-economic parameters and local population development are significantly less reliable. Economic growth (GDP) and other broad economic indicators reveal relatively little about future demographic developments. There are some examples of markets with high GDP growth and low or negative population growth (eg Bielefeld or Lübeck), or for the opposite development (eg Münster or Bonn).

Surprisingly, the informational value of the unemployment indicator for future population development is relatively low, especially for large Austrian cities. There is certainly a rough connection between low unemployment and more positive demographic forecasts. Zurich is the leader here with less than 4 percent unemployment and a projected population increase of nearly 20 percent by 2035. On the other hand, Austrian cities are clearly outliers, especially Vienna with an unemployment rate of around 15 percent and a population growth forecast of nearly 10 percent.

“Nothing can replace individual macro and micro analysis based on our presence on the market and many years of experience in the respective type of use of the property. Blinders are out of the question for investors who want to seize opportunities, “says Lahcen Knapp, member of the Empira Group Board of Directors.” The huge variation in local economic structures, age and population in the DACH region allows for potential largely unique in Europe. One city may be particularly suitable for student accommodation, another for flexible office use, “adds Knapp.

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