One small thing: micro-flats won’t cut housing shortage down to size
Micro-apartments are small on size but big on popularity. But beware: less doesn’t always equal more when it comes to long-term investment promise.
The rapid pace of urbanization and rising rental prices means that Europe’s cities are tight on affordable housing. Just how should the real estate industry house more people within a shrinking space and at a reasonable cost to boot?
One solution is to cram more into less. That’s why more and more students, commuters and those on an average income are tucking in their elbows and squeezing into micro-apartments. These fully furnished one-room flats come complete with a kitchenette and bath. Think cosy and compact rather than claustrophobic.
For sure, micro-apartments are an efficient use of space amid a soaring urban population. What’s more, they’re often located in the heart of the city centre. And their popularity illustrates how cities of the future will surely rely on more compact housing solutions. Nevertheless, with rent levels several times higher than that of a conventional apartment, they’re “not a long-term solution to the acute housing shortage”, points out Nathalie Winkelmann, Managing Director of PATRIZIA AG Augsburg KVG and Head of Fund Management Residential. They are, however, still “a good transitional solution” for those on temporary contracts or who are finding their feet in a new city, she says.
Big or small investment promise?
From an investor’s point of view, micro-apartments initially seem an attractive proposition, not least because they can bring in twice as much rent per month as an unfurnished apartment. In fact, returns outstrip all other asset classes and can reach as high as 8% per year, although 3.5 - 4.5% or less remains more realistic.
As a long-term investment, however, micro-apartments offer less potential. Firstly, tenants tend to stay at micro-flats for a mere six to twelve months, she adds. “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.”
And once the current hype for micro-apartments has passed, what should investors do next with the asset? One option would be to convert them to boarding houses and residences with associated hotel services, asserts Winkelmann. Overall though she expects that “these properties will be relatively inflexible in terms of possible resale”.
PATRIZIA exercises caution
Ultimately, micro-apartments can be deemed a good, selective addition to a portfolio but shouldn’t be a core focus, despite the current trend. PATRIZIA therefore exercises caution, only selecting quality micro-apartments in a prime location, which show a promise of success for the medium to long term. With this in mind, PATRIZIA has invested in student dormitories in Hamburg, Münster and Leipzig, is turning a building in Mainz into 50 micro-apartments, and has bought a building in Frankfurt which contains 221 micro-apartments.