Institutionals The big potential of micro apartments

16.11.2022 5 Reading Time

Micro apartments: Residential concept with great potential

 In recent years, a new type of use has become firmly established on the property investment market: micro apartments. Also known as micro flats or micro-living, this asset class continues to gain popularity – despite temporary fluctuations – and achieved a transaction volume of 1.2 billion euros in 2022.

The coronavirus crisis was the first major stress test for this asset class, but the pandemic only managed to inhibit its potential in the short term. Overall, the signs continue to point to growth.

Micro-living: the asset class in detail

In its early days, the micro-living asset class was often equated with student apartments. However, a large number of sub-segments have now emerged, which differ primarily in terms of rental duration, target group as well as fittings and fixtures and facilities. 

This makes micro-living far more diverse than many initially thought. Students still make up around 34 percent of tenants – the remaining 66 percent are distributed among professionals and those known as “Silver Agers”. Compared to previous years, students thus accounted for a much lower proportion of tenants last year. 

In addition to residential concepts, micro-living also makes use of commercial concepts that offer longer stays of three nights or more in the form of “serviced apartments” or “apart-hotels”. This is a transition from residential properties to hotel properties, which are usually characterised by a greater variety of service offerings. 

Pandemic as a test

After the utilisation rate had at times fallen significantly during the coronavirus crisis, the 2023 market report of the Micro-Living Initiative, of which Commerz Real is one of the founding members, reported an average utilisation rate of 94 percent in April 2023. This showed that the declines caused by the pandemic, in which occupancy fell to 86 percent in some cases (spring 2022), had been overcome. Utilisation returned to pre-coronavirus levels this year (spring 2020: 93 percent). 

Rental deferrals or non-payments were hardly a problem during the pandemic. On the other hand, new lets of high-priced apartments was a greater challenge as many international professionals who had rented high-priced micro-apartments returned to their home countries. Rental to domestic tenants was less difficult. For students, it was more difficult than usual to rent out accommodation in shared housing, presumably for hygiene reasons. 

Another interesting development during the pandemic was the shift to micro-apartments by highly qualified employees. Instead of working from home, more and more micro apartments were rented to be able to work there in peace and adequate comfort. As a result, the pandemic-related declines in rents for foreign skilled workers were partially dampened. 
In recent years, micro apartments have established themselves as a real estate asset class between residential and hotel properties. During the coronavirus crisis, they successfully passed their first stress test: the effects are predominantly manageable or only temporary, but strongly depend on the respective sub-segment. In times when international mobility in particular is increasing again, micro-living offers will not only be characterised by catch-up effects, but will also be in greater demand than ever before in the long term.

Current challenges in the micro-living segment

The impact of the COVID-19 pandemic on the real estate market seemed to have been overcome. However, with the war in Ukraine, inflation and rising energy costs, we are now facing new challenges that need to be overcome. 

Owners and administrators are struggling more than before with rental defaults, and rental to non-European students and non-students is also perceived as a major challenge. Due to the sharp rise in energy costs, the majority of the members of the Micro-Living Initiative decided to allocate the full cost to the tenants by increasing rental prices and ancillary costs. The aim is to avoid an excessive burden from higher energy costs and to maintain liquidity. 

At the same time, the higher interest rates are also causing the number of transactions on the market to decrease and many companies are acting more cautiously than before. 

Looking to the future: how the micro-living market is evolving

Despite the current challenges posed by rising costs and inflation, the majority of respondents are still willing to buy and sell on the property market. Confidence in the growth potential of the micro-living segment has therefore only been slightly shaken, even given the current crises. 

Particularly with regard to the student micro-living segment, the majority of respondents are optimistic and expect a positive development of the student housing market. 

The steady increase in “Silver Agers” as a demographic target group also suggests that the number of micro-apartment properties will continue to grow. By 2030, more people aged 65 and over are expected to live in Germany than people under the age of 20. This means that the proportion of people over the age of 65 will rise to 28 percent, and by 2050 the figure is expected to be as high as 32 percent. Micro apartments are also becoming increasingly popular in this target group – especially among pensioners who are still mobile in old age. 

In the long term, the development of the micro-apartment asset class is expected to continue to be based on three main trends: Firstly, the increasing number of single-person households (singularisation), which increased by almost 30% between 2009 and 2021 and continues to drive the demand for quality housing. Secondly, the continued influx into urban areas (urbanisation), which makes high-quality, well-connected housing a scarce and above all expensive commodity. And thirdly, the advancing demographic change, which is reflected, for example, in the growth of certain target groups such as professionals and silver agers. In view of the continued popularity of working from home, micro-living also offers people the opportunity to combine work in the city and life in the countryside. 

Furthermore, the return to face-to-face teaching at universities is expected to lead to greater demand for housing in university towns. Micro apartments are therefore of interest not only for metropolises, but also for smaller towns with renowned universities. 

Best prospects for micro-living

Despite past and ongoing crises, the micro-living real estate sector is extremely resilient. Thanks to innovative and sought-after usage concepts, micro-living serves a wide range of target groups as a new and future-proof living concept that is characterised by a high level of mobility and flexibility. Despite current economic losses, the average capacity utilisation has been significantly increased and raised to a new level. 

The outlook therefore remains good, even if economic and political events temporarily slow down demand, because the value of high-quality housing in well-connected locations has so far survived every crisis. This makes micro-living a promising asset class with huge growth potential.