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Investors can still profit from run on micro-apartments – for now

Affordable housing is scarce in Europe’s urban centres. Students, commuters and job starters are also seeking a place to stay – usually for a limited term, preferably furnished and in a central location. Micro-apartments, fully equipped one-room flats, offer a good option. And investors can reap a return, but they need to be selective.

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Demand exceeds supply in housing markets

European housing markets are experiencing great demand. And that’s not just in places like Amsterdam, Berlin, London and Paris. Even in Germany’s medium-sized cities, such as Jena, Rostock and Wilhelmshaven, people with average incomes have difficulties finding an affordable place to live.

In such cities, rents are running considerably higher than the generally accepted German guideline value of 27 percent of a tenant’s net income, according to a study that Panorama, a programme on the German television channel ARD, commissioned from the real estate data firm empirica-systeme.

Current statistics indicate that nearly six out of every ten people worldwide live in cities and metropolitan areas. Germany, at over 75 percent, already exceeds that level of urbanisation today. The real estate industry faces the challenge of creating innovative concepts to house more people in the existing space.

The growth of micro-apartments demonstrates how cities of the future will rely on more compact forms of housing. Micro-apartments are fully-furnished one-room apartments generally measuring 20 to 35 square metres – including kitchenette and bath. The built-in furniture is modular, multifunctional and makes intelligent use of every centimetre. The most familiar concept is student dormitories. But as the workforce becomes more mobile – willingly or not – commuters and job starters are bringing new target groups onto the scene.

The market is responding: According to one study by the F+B research institute, furnished apartments already account for 14 percent of the nation’s total housing inventory, and one of the driving forces is the growth of micro-apartments. But at rents of 25 to 30 euros per square metre, with heating and services included – several times the rent for a conventional apartment – these properties are only feasible as temporary lodgings. That is why they are “not a long-term solution to the acute housing shortage,” says Marcus Cieleback, Chief Economist at PATRIZIA AG.

Micro-apartments a lucrative asset class for investors

While some asset managers cite returns as high as eight percent a year, a more realistic return figure would be no more than 3.5 to 4.5 percent, and often less. “Every apartment needs first-class accoutrements and must be fully furnished. In addition, you need to expect higher tenant turnover, meaning more wear and tear, which drives up costs, including maintenance costs,” explains Nathalie Winkelmann, Managing Director of PATRIZIA Augsburg KVG and Head of Fund Management Residential.

Once the hype about micro-apartments has past, these properties will be relatively inflexible in terms of possible resale

Nathalie Winkelmann, Head of Fund Management Residential, PATRIZIA AG

As a rule, tenants stay at these properties for six to twelve months at the most, and the building and apartment need to offer above-average quality and appeal for the next tenant. In the long term, Winkelmann foresees an entirely different challenge: “Once the current hype about micro-apartments has past, these properties will be relatively inflexible in terms of possible resale.” One option she foresees is a conversion to boarding houses: residences with associated hotel services.

Good addition to a portfolio, but not a core focus

PATRIZIA recommends micro-apartments as an addition to a portfolio, but according to Winkelmann, the firm itself “doesn’t have much exposure” in this niche. It has bought student dormitories in Hamburg, Münster and Leipzig, and in some cases even developed new ones. It is remodelling an existing building in Mainz into 50 micro-apartments for job starters and commuters, and acquired a new building in Frankfurt with 221 micro-apartments.

The company is acknowledging the trend without overinvesting in it: “We first need to be persuaded that a market is a good one, including its opportunities and sustainability. Then we look for capable specialists in the area – ‘localists’ – who know the market well,” explains Cieleback. That is why PATRIZIA is not investing “all at once in micro-apartments in French B cities just because micro-apartments in French B cities are suddenly the hot thing to buy.”

For PATRIZIA, an investment needs to meet two conditions. “Market analysis needs to convince us that this kind of property at these locations shows a promise of success for the medium to long term; and we need to have experts on the team who really know micro-apartments,” explains Cieleback.

Most of the European transaction volume in this asset class is currently located in the UK and Germany. But Austria, Ireland and Spain also seem to be developing eminently above-average prospects in the micro-apartment niche segment.

High standards with a prime location

In a broader sense, this market belongs to the trend known as micro-living. The most popular segments at present, aside from mini-apartments for students, are business apartments. These are competing with the co-living concept, which currently holds a special appeal for digital nomads. In this hybrid form, people live and work together in a high-quality furnished communal residence. “These also have common rooms, fitness spaces and other amenities,” says Winkelmann.

Another important option for investors is hotel-like facilities, known as serviced apartments. They offer higher returns because the tenancies are significantly shorter than in student homes and business apartments, with a higher tenant turnover – as long as wear and tear is minimal. All of these concepts have one thing in common: properties are either located in the city centre or have excellent connections to the centre. “With micro-apartments, location is key,” Cieleback confirms.

The housing situation has lent micro-apartments a greater significance than they would enjoy in a healthy market .

Marcus Cieleback, Chief Economist, PATRIZIA AG

He is cautious about the segment’s outlook, at least where the German market is concerned: “The acute situation in the housing market here has lent micro-apartments a greater significance than they would enjoy in a healthy market environment.” In the long term, there will always be demand for micro-apartments, “but at some point, there may not be quite as much a need as the exaggerated current estimates might lead one to expect.”

Hype must not distract from quality

Cieleback advises investors to check the parameters before getting into micro-apartments. If the answers are all positive, it’s fine to go ahead – selectively. An investor needs to be “flexible enough to realise that this trend exists,” but they should remain cautious, he warns: “The current hype can’t interfere with their eye for quality.”

The market is responding: According to one study by the F+B research institute, furnished apartments already account for 14 percent of the nation’s total housing inventory, and one of the driving forces is the growth of micro-apartments. But at rents of 25 to 30 euros per square metre, with heating and services included – several times the rent for a conventional apartment – these properties are only feasible as temporary lodgings. That is why they are “not a long-term solution to the acute housing shortage,” says Cieleback.

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