Determinants of lease terms in residential markets and their implications for economic sustainability

In contrast to its European neighbors, Germany’s rental housing market has a long tradition. 54.3 % of all Germans live in rental housing. According to surveys, property acquisitions for rental purposes are on the rise and high purchase prices boost European rental markets. Simultaneously, individuals increasingly value flexibility and tend to minimize terms of commitment, resulting in major changes for the real estate industry. As a consequence, property investors need to consider shortened lease terms and a higher probability of tenants moving out, resulting in longer amortization periods and increased capital expenditure. On the one hand, long leases create stable income flows and require less capital-intensive maintenance strategies, but are confronted with higher legal burdens to increase rents. This is especially relevant to properties where a high margin between market rent and contractual rent is observable. On the other hand, short lease terms enable instantaneous adjustment to equilibrium market rents once the tenant has moved out, but also lead to higher fluctuation and wear of the subject property and directly encompass substantial refurbishment, administration and reletting costs. Therefore, the ability of residential investment properties to generate adequate returns stands or falls with tenant behavior. This obviously creates the need for more and deeper research in this field of study. Thus, the paper at hand aims to contribute to the theory, practice and development trends of residential property leases. The authors analyze a steady panel dataset of 500 residential housing units throughout one of the most overheated metropolitan German areas, namely Munich, from 2007 to 2017. Consequently, the analysis covers periods of boom and bust, making findings extremely robust. Based on a desktop literature review and a Cox proportional hazard model, the authors provide a more in-depth explanation of influence factors for effectively observed lease terms in residential markets. The authors support the hypothesis that main drivers of lease duration are tenant and property attributes, effective rental price increases, geo-referenced location variables and macroeconomic indicators. Due to bounded availability of data, current research in this field is still limited, especially in Germany. Thus, the study at hand should provide deeper insights into the decision making process of tenants and its implications for investors in the German residential market