Rents and Prices in the German Apartment Sector: an Asset Pricing View

In Germany new construction in the rented apartment sector is on a downward trend since the mid 1990ies. At the same time Germany has in a European context a low owner occupation rate of approximately 43%, as from a household's point of view renting is more attractive than owning. The higher attractiveness is due to the strict regulation of the rented sector, government intervention and the fact that roughly 50% of the rented apartment sector are privately owned, and therefore not managed very professionally. The professional institutional German investors, like e.g. insurance companies and pension funds, until recently had the goal to get out of the rented apartment sector. Despite this, in 2002 and 2003 increasing interest of opportunity funds for portfolios deals in the German residential sector was seen. This paper tries to analyze yields and yield spreads in the German apartment sector to gain insights why there is an increased international interest for rented apartments in Germany.