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Existing buildings often require significant structural reinforcement to support additional storeys
Germany’s housing crisis, particularly in urban areas, continues to pose serious headaches for policymakers, developers, and investors alike. With demand for affordable housing consistently outpacing supply, redensification, or Nachverdichtung, has emerged as a potential solution. This approach involves increasing the density of existing urban spaces, and for investors, it presents both a promising opportunity and a considerable challenge. However, the critical question remains: Can this potential be realistically achieved, or is it another well-intentioned but impractical idea?
A fresh study by Bulwiengesa, commissioned by Berlin Hyp, calculates that up to 625,000 new rental flats could be created through redensification in Germany's metropolitan regions. The study focuses on post-war housing estates built between 1949 and 1968, characterised by generous open spaces, often located on the outskirts of cities. These estates represent prime opportunities for redensification.
André Adami, Head of the Residential Division at Bulwiengesa, underscores the untapped potential: "We calculate that around 625,000 multi-storey flats could be built in sought-after locations across Germany as part of redensification measures." Adami notes that of the approximately 6.8 million residential units built during this period, around 5 million are owned by municipal housing companies, cooperatives, and private housing associations—entities likely to be more open to new construction due to existing land holdings.
The economic benefits are clear. "The existing plots of land do not cause any outflow of liquidity in such a residential project development and could already represent the equity share as part of the financing," Adami explains. This significantly reduces financing costs, as the land portion typically accounts for about 20% of total project costs.
Investment opportunities - realistic or idealistic?
While the financial incentives for redensification are evident, translating this potential into reality presents formidable challenges. Sascha Klaus, board chairman at Berlin Hyp, acknowledges the complexity: "Building profitably and affordably at the same time is often only possible with enormous effort under the current conditions. It is therefore all the more important now to examine various solutions for easing the housing market and also to look at supposedly marginal disciplines such as redensification."
Despite the significant opportunities highlighted in studies, there is scepticism about whether these ambitious numbers can be realised. The Bulwiengesa study’s estimate of 625,000 new flats assumes optimal utilisation of all available spaces—a scenario many in the industry view as overly optimistic. The high costs of construction, regulatory hurdles, and potential public opposition are significant barriers that could prevent many of these projects from coming to fruition.
For instance, the practical difficulties of building on existing urban sites, such as those in densely populated areas, are often underestimated. Adding storeys to existing buildings, converting attics, or repurposing commercial spaces into residential units may seem straightforward, but these projects often involve complex and costly adjustments to existing infrastructure, such as upgrading utilities or ensuring compliance with modern fire safety standards. These complications can eat into profit margins, making the return on investment (ROI) less attractive than initially anticipated.
Case Studies: Bonn, Berlin, and Rhine-Main
Bonn offers a case in point. A coalition of local associations, including the German Trade Union Federation and the German Tenants' Association, has urged the city to explore redensification in its centre, where space is severely limited but the demand for affordable housing is high. The University of Bonn’s study commissioned by the ‘Bündnis Wohnen Bonn’ identifies specific sites, such as the Stiftsgarage multi-storey car park and the Windeckbunker, as potential redevelopment projects. However, the study also notes that Bonn's city centre has little potential for redensification, with many of the identified sites being small or already heavily developed. This highlights the significant challenges of finding viable redensification opportunities in older, densely built urban centres.
Berlin provides a more promising scenario, yet it is not without its own set of challenges. An analysis last year by Syte, Probis, Price Hubble, and LiWooD identified the potential for up to 8,000 new flats through the addition of storeys to existing buildings. Districts such as Neukölln, Tempelhof-Schöneberg, and Pankow are highlighted as having the greatest potential due to their mix of low-pitched roofs and flat roofs, which can accommodate additional storeys. However, the Berlin High-Rise Directive, which restricts buildings to a maximum of seven storeys in many areas, limits the scope for vertical expansion. Furthermore, existing buildings often require significant structural reinforcement to support additional storeys, adding to the cost and complexity of these projects. These additional costs can substantially affect the ROI, especially in areas where rental yields are already compressed.
In the Rhine-Main area, particularly in Frankfurt, the potential for redensification is substantial, with estimates suggesting up to 250,000 new flats could be created through adding storeys to existing buildings. The region's economic importance and ongoing population growth make it a prime candidate for redensification. However, as Christian Streim, chairman of the Haus & Grund Hessen owners' association, points out, "The discrepancy between the existing supply of housing and the constantly growing demand is increasing." This growing demand puts additional pressure on infrastructure, requiring careful planning to ensure that new developments do not overwhelm existing public services and transportation networks. Failure to address these infrastructure challenges could lead to increased operational costs and lower-than-expected returns for investors.
Navigating regulatory and public hurdles
The transition from case studies to discussing broader challenges is critical, as it underscores the gap between theoretical potential and practical execution. Regulatory barriers remain one of the most significant challenges to redensification. Marc Müller-Kurzwelly, Head of Residential and Commercial Buildings at Engel & Völkers Commercial Düsseldorf, offers a blunt assessment: "An experienced project developer told me back in the early noughties that it was easier to get permission for a skyscraper in Manhattan than a dormer window in Düsseldorf-Unterbilk. Not much has changed in this respect." This reflects the widespread frustration within the industry regarding the rigidity and complexity of Germany's building regulations.
To mitigate these risks, investors must engage in proactive dialogue with local authorities and community stakeholders. Müller-Kurzwelly suggests that "legislators should give the building authorities more room for manoeuvre" and advocates for a task force of experts—architects, project developers, and estate agents—to work on creating greater flexibility in building codes. Streamlining the approval process, particularly for projects that align with broader urban planning goals, could unlock significant potential and improve the overall ROI by reducing time-to-market and associated holding costs.
Public opposition is another critical hurdle. Existing tenants often resist redensification projects, fearing disruption and a decline in their quality of life. Effective communication and community engagement are essential to mitigate these concerns. Developers should focus on ensuring that redensification enhances the local environment, such as by improving green spaces or upgrading local infrastructure. Demonstrating these benefits can help to build community support and reduce opposition, thereby smoothing the path to project approval and execution.
What properties and regions offer the best potential?
For investors, the key to unlocking the potential of redensification lies in selecting the right properties and regions. Post-war housing estates, particularly those with ample open spaces, offer some of the most promising opportunities. These sites typically require less extensive modifications to accommodate additional density and often have existing infrastructure that can support increased population without significant new investment. This reduces the overall capital expenditure (CapEx), which can improve the ROI.
Rooftop extensions in urban centres like Berlin are another viable option, particularly in districts where zoning laws allow for vertical expansion. However, these projects require careful cost-benefit analysis. The need for structural reinforcement and compliance with stringent building codes can make them expensive and time-consuming, potentially diluting the financial returns. Investors should weigh these factors against potential rental yields and consider whether the long-term market trends in these districts justify the upfront investment.
Investors should also consider the broader sustainability aspect of their projects. As Matthias Zühlke, founder and CEO of Syte, notes, "Adding storeys and renovating existing buildings offers the opportunity to create additional inner-city living space without further soil sealing." This aligns with growing investor demand for environmentally responsible developments, which can enhance the appeal of these projects to both tenants and regulatory bodies, potentially leading to higher occupancy rates and more stable income streams.
Finally, investors should seek out partnerships with local governments. Working closely with municipal authorities can help to navigate the complexities of the approval process and secure necessary support for projects. In some regions, such as the Rhine-Main area, local governments are increasingly supportive of redensification as a means to meet housing demand without compromising on climate protection goals. These partnerships can also open up access to government incentives or subsidies, further enhancing the financial viability of redensification projects.
Redensification presents a significant opportunity for investors willing to navigate the complexities of Germany’s regulatory landscape and engage proactively with local communities. The potential to create hundreds of thousands of new flats is real, but achieving this requires overcoming substantial obstacles, including regulatory reform, public opposition, and the practical challenges of construction.
REFIRE: For investors, the key to success lies in strategic partnerships with local governments, careful risk management, and a focus on sustainability. These elements are crucial in navigating the regulatory and public hurdles that could otherwise derail projects. Additionally, a sharp focus on ROI, taking into account the specific challenges and opportunities of each region, will be essential in determining whether redensification can deliver the financial returns that investors seek.
As Germany continues to grapple with its housing shortage, redensification is likely to play an increasingly important role. However, whether the ambitious targets highlighted in studies can be met remains to be seen. Redensification DOES offer a path forward, but it is one that requires careful planning, strategic investment, and a realistic assessment of the obstacles ahead.
