The dream of owning your own home has slipped from the grasp of many people in the UK in recent years. The situation is unlikely to improve soon as private renting is set to rise in the UK by around 24% by 2022. Part of the reason why people want to own a home is the dismal experience of being a tenant in the UK. The market is dominated by individual private landlords who are often more motivated by maximising their income than by the long-term happiness of their tenants.
Germany does not have this problem. About half of the population rents privately and the market for rented accommodation is a mature asset class in its own right.
So what are the Germans doing right?
1. Longer tenancies
Tenancies in Germany are much longer than in the UK, typically eight years. This compares with the standard annual contract (often with an option for termination after six months) that many UK tenants put up with. These longer tenancies attract people who want a home for a decent amount of time. They provide a stable income for whoever owns the property and means they avoid letting fees and vacant periods by not regularly replacing tenants.
The UK market is dominated by individual investors who are keen to maximise their income. This results in many landlords reviewing rents each year and inevitably causing tenants, who find the increases unpalatable, to leave. In Germany, rental uplifts are tied to inflation, so tenants have the peace of mind that rents will not rise rapidly. This is another factor in why they stay longer. It also gives investors long-term clarity about incomes.
3. Provide high-quality, purpose-built, efficient units
UK residential portfolios often comprise small blocks or individual apartments. These are inefficient to manage and maintain, which affects rent levels and income for investors. By contrast, larger, purpose-built and well-designed private rental blocks comprising over 100 units are the norm in Germany. These are highly efficient to operate and manage, with low maintenance and repair costs. These larger blocks maximise the amount of available space and allow owners to manage the block as one whole rather than as individual flats. This makes it much easier to manage: a block of flats could, for instance, have one broadband or utility provider for all the flats rather than one for each individual flat.
4. ‘AAA’ locations
Tenants want three things: affordability, accessibility and amenity. That means affordable rents and homes in places that are well-connected with good access to supermarkets and leisure activities. Big institutional investors in Germany know this and build properties accordingly. This makes it much easier to let the properties in the first place and to keep tenants over a longer term. In the UK, there are simply fewer properties that have these three qualities. Those that are accessible and have good amenities generally do not tick the affordability box.
This final point is what it really boils down to. The structure of the German market makes it much easier to treat residents as customers. Ultimately, if renters are happy because they’re in a good quality home in an area that they want to live in, and they can afford it, then they are much less likely to want to escape the rental market for home ownership. The German model works and we should replicate it.
Please note that this article was previously published in Financial News on 16 March 2018.