Leverkusen, 25.08.2023

In 2022 – and thus for the third time in a row – the Cologne Institute for Economic Research (IW), in cooperation with Cube Real Estate GmbH, once again looked at the market for compact living (CL) and published the results in the Cube Compact Living Report collected. This underlines the fact that the segment has not lost any of its appeal – on the contrary. Particularly in light of the massive rise in energy costs as a result of the Russian war of aggression, the energy-efficient apartments in the CL segment offer great potential for savings. For this reason, in addition to the usual analysis of purchase and rental prices, this year’s report focuses on hot and cold ancillary housing costs.

The down payments for Compact Living apartments rose by around 44 percent in 2022, to an average of EUR 268 in service charges. A figure that is well below the cost of a 2-3 room apartment. There are major regional differences in heating costs, with Augsburg, Kiel and Mönchengladbach leading the way. In contrast, cold service charges in the CL segment developed less dynamically in 2022 – here, down payments in January 2023 were only 5 percent above the previous year’s level. In addition, a market analysis of rental and purchase price trends shows that Compared to the previous year, quality-adjusted rents normalized in 2022 with a moderate increase of 3.7 percent, while quality-adjusted purchase prices rose by 7.9 percent despite high interest rates.

The study defines compact living as apartments with a maximum of 1.5 rooms (in addition to a kitchen and bathroom). The German Economic Institute used all purchase and rental offers for 1- and 1.5-room apartments in the 70 independent cities with more than 100,000 inhabitants as the basis for the report. Both offers in the city area and in the surrounding area that were available between 01.01.2018 and 31.12.2022 were analyzed at the respective locations. In total, around 413,000 rental offers (4.3 percent in new builds) and 63,000 purchase offers (8.3 percent in new builds) were analyzed in the five years under review.

Ancillary living costs at Compact Living: payments on account up 44 percent

The down payments for Compact Living apartments rose by around 44% in 2022, which is roughly in line with the increase in other residential segments. However, due to the smaller area, the increase in absolute terms is significantly lower. While an average of EUR 357 or EUR 466 is incurred per year in a 2- or 3-room apartment, ancillary costs in the CL segment are EUR 268 per year. In the future, a normalization of the discounts can be expected due to falling energy prices. Compact living therefore offers clear cost advantages in terms of ancillary costs, says Moritz Laufer, Team Leader Research and Acquisitions & Sales at Cube Real Estate: “The ‘second rent’ has become a major focus for tenants and investors in 2022. Thanks to energy efficiency and space benefits, compact forms of living can score points in terms of ancillary housing costs and offer direct financial relief to all parties involved.”

Regional differences in the rise in heating costs

Since the beginning of the war, heating costs have been one of the biggest expenses in the household budget. The down payments stated in the advertisements are therefore an important price signal. In the fourth quarter of 2022, the highest payments on account for warm ancillary costs for apartments in the compact living segment were reported in Augsburg (EUR 2.34), Kiel (EUR 2.24) and Mönchengladbach (EUR 2.22). The lowest down payments were in Chemnitz (EUR 1.22), Cottbus (EUR 1.24) and Harz (EUR 1.50). A look at the percentage development shows: In each of the districts evaluated, the payments on account for warm utility costs in Compact Living apartments were adjusted upwards. Nevertheless, a comparison of the federal states revealed regional differences: In Berlin, the advance payments were raised the most (+ 62 percent), whereas in Saarland the increase was only 24 percent.

Cold operating costs: Berlin and NRW municipalities in a special position

In addition to the warm operating costs, the cold operating costs, which are influenced by municipal fees and taxes, among other things, should also be taken into account. Their development last year was less dynamic than that of the warm service charges: In the CL segment, payments on account for cold service charges in January 2023 were only 5% above the previous year’s level. On average, cold operating costs increased the most in the federal states of Thuringia (+15.8%), Saxony-Anhalt (+13.8%) and Berlin (+12.7%). In absolute terms, cold operating costs for tenants in the compact living segment are relatively expensive in the city states of Bremen (EUR 2.28), Berlin (EUR 2.25) and Hamburg (EUR 2.19). Only in Hesse are the cold operating costs higher on average at EUR 2.33. This finding is significantly influenced by the high costs in Frankfurt am Main (EUR 2.70). In addition to Berlin and Hesse, cold operating costs are particularly high in urban regions in North Rhine-Westphalia (EUR 2.09). High property tax rates are passed on to tenants here. The high inflation rates also result in wage increases, which in turn increase the prices for waste disposal, for example. Regardless of the CL segment, North Rhine-Westphalia is at the top of the list nationwide.

Normalization of rental prices: Moderate increase of 3.7 percent

In 2022, rents in the 70 major city locations surveyed rose by 3.7 percent. Although this is higher than in previous years, it is below the inflation rate and can therefore be classified as a decline. New contract rents have developed very consistently since 2018 and are roughly in line with the development of consumer prices – but also lagged behind the inflation rate in 2022. It should be noted here that the rental period in the CL segment is often shorter than for large apartments, which is why inflation adjustments can be flexibly made up for at the next change of tenant. For the top 7 locations, the rent premium remains constant at 40 percent. In view of the very high rent increases in recent years, the results of the rent analysis may indicate a normalization.

Regional rental price trends: Munich and Berlin as exceptions

In addition to the overall analysis of rental price trends in the 70 locations surveyed, a differentiated analysis of the CL segment is also revealing: the highest rent increases were recorded in Berlin (9.1 percent), Potsdam (7.8 percent) and Lübeck (7.3 percent). Ingolstadt recorded the lowest rent increase at 1.2 percent. Berlin and Munich can be identified as exceptions among the 70 rental markets surveyed: Berlin shows a particularly dynamic development and now also occupies second place in terms of prime rent levels, while the city finds itself in 14th place for median rents. Munich continues to occupy a special role in terms of rent levels, even if the Bavarian capital’s rent increases are comparatively moderate at 18th place. However, the divergence trend of the 2010s does not appear to be continuing.

Remarkable increase in purchase prices of 7.9 percent

A look at the purchase price trend in the CL segment in major city locations shows an increase of just under 8% for 2022 despite high interest rates. This figure is lower than in the previous year and should be seen as a compensation for inflation. There are clear differences between existing and new builds: At 12.6%, the increase in new construction is significantly higher, which can be explained on the one hand by higher new construction costs but also by higher demand for energy-efficient properties. In the top 7 cities, there was a large increase of 71%. “The sharp rise in purchase prices for compact living apartments is truly remarkable given the significant rise in interest rates last year,” says Laufer. “A development that only further underlines the positive expectations for this segment.”

Regional purchase price development: Lübeck, Leipzig and Duisburg in the lead

The highest regional purchase price increases were recorded in Lübeck at 19.5%, although the price level here is in the lower mid-range. Lübeck is followed by a group of cities with a low price level (for example Leipzig with 14.9%, Duisburg with 14.2% and Mönchengladbach with 13.3%), a medium level (for example Mainz with 11.5% and Nuremberg with 10.6%) and also a high level (for example Frankfurt with 13.2% and Hamburg with 9.2%). In Karlsruhe (minus 2 percent), Mannheim (0.7 percent), Wiesbaden and Ludwigshafen (1.2 percent each), below-average price developments were observed. The price level based on median purchase prices in easily accessible urban areas once again shows Munich’s exceptional position, followed by Hamburg and Frankfurt. The outstanding position of the top 7 cities in terms of purchase prices is also clear, with these cities occupying positions 1 to 4, 8, 9 and 11 in the overall ranking.

Range of compact forms of housing: CL concentrates on the top 7 cities

Looking at the proportion of compact living properties on offer, it is clear that compact living is disproportionately common in the central locations of the top 7 cities (Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich and Stuttgart) and thus represents a response to the high prices per square meter in these cities. The number of rental offers speaks for high demand: in 2022, this fell from just under 26,600 in the previous year to 16,600 in the fourth quarter of 2022. “It can be assumed that many apartments were no longer advertised by landlords due to the high demand,” explains Prof. Dr. Michael Voigtländer, Head of the Finance and Real Estate Markets competence field at the German Economic Institute, the low supply figures. “In the case of advertised properties, on the other hand, a fast marketing period speaks for the increased demand for small apartments.” The report shows that the duration for rental apartments in the portfolio is slightly shorter than for new-build rental apartments, where the median is less than 2.5 weeks. In contrast to rental offers, the number of purchase offers has risen by almost 500 compared to the previous year, which can be explained by the rise in interest rates.

Outlook

In general, the future outlook for the CL segment is positive: Thanks to their high energy efficiency, they offer potential savings – particularly in the relevant area of ancillary heating costs – which will make them very attractive in 2023. In addition, demographically, the number of small households is expected to continue to rise, divided into pensioner households, immigrant households and young households. An expansion of the main demand group can therefore be expected in the CL segment. The optimistic view is underpinned by the dynamics of the urbanization trend, which is picking up again due to higher mobility costs after corona.

“Overall, the prospects for the compact living market are intact, although the turbulence of the past year has of course not left this segment unscathed,” says Voigtländer. “Nevertheless, the comparatively short marketing periods for new builds in particular reflect the robustness of the segment. We also anticipate a (re-)increase in rental prices in the future, which had previously grown moderately.” It can be assumed that newer and energy-efficient spaces, such as those in the CL segment, will continue to stand out from the rest of the market. It should be noted that compact forms of housing are particularly attractive in locations where high rents meet high demand for small households – which is happening more and more frequently.

You can access all three Cube Compact Living reports via the following link: