Residential Investments in Germany – march 2025

Dear readers,

The European Central Bank (ECB) has slightly lowered interest rates. However, sustainable relief for the real estate market is still lacking. While short-term financing has become cheaper as a result, construction interest rates have slightly increased recently — driven by higher government debt and acute geopolitical risks. Economic uncertainty persists, and the real estate industry once again faces challenges.

At the same time, the market is proving more stable than it was a year ago. Buyers and sellers are meeting on equal terms again, social sustainability is gaining importance as a value driver, and new opportunities are emerging even in B and C cities. Those who understand the market can take advantage of these opportunities.

We wish you an enjoyable read!

JMS and HFR

Social Impact as an underrated value driver

Tenants are increasingly willing to dig deeper into their pockets for apartments that offer added social value. The Process Management Real Estate Monitor 2023 clearly confirms that tenants are willing to pay higher rents for housing that promotes the common good. In particular, properties that promote health and well-being and have convenient access to public transport and cycling paths are increasingly attractive to tenants, who are, in turn, willing to pay more for extra amenities. This trend is further supported by a PwC study on the social sustainability of residential real estate, which highlights a range of factors including accessibility, green spaces, and communal areas.

These developments are catching the attention of investors, especially as the sustainability debate in the real estate industry has so far tended to focus on the environmental. While the market has already implemented many of the easier environmental measures, the “low hanging fruit”, the more challenging and cost-intensive measures that remain often only deliver marginal added value. In contrast, there is still significant and cost-effective potential in the social aspect of sustainability – the “S” in ESG.

Social Impact as an economic factor
And it is in this area, perhaps more than any other, that the market is still in its infancy and many opportunities have not yet been tapped. This is not about playing environmental and social measures off against each other. On the contrary, both can contribute significantly to the long-term value and appreciation of real estate. That said, it is often possible to achieve more with less effort in the social sector today.

This is because investments in social measures do not always have to be expensive. Strategic planning, especially in neighbourhood management, can yield significant benefits, whether in new or existing buildings. Incorporating amenities such as daycare centres or healthcare facilities can enhance the neighbourhood as a whole and boost the market value of properties in the long term. This underscores the importance of integrating social measures into the planning process early on to streamline subsequent certification and reporting procedures.

Long-term trends and new standards as a lever for social sustainability
Furthermore, long-term social trends such as New Work, community, and diversity are increasingly shaping the requirements for real estate. The demand for integrated living and working spaces that prioritise sustainability is on the rise.

These trends are also evident in regulatory developments. The planned EU social taxonomy, combined with initiatives to measure social impact are creating new standards and establishing social sustainability as a quantifiable value factor. For instance, the EU social taxonomy is taking the first steps towards standardised measurement of social sustainability. At the same time, existing models, such as Livable Places and the Social Impact Investing Initiative, are already supporting the systematic appraisal of social added value.

This is coupled with enormous pressure to enact environmental measures driven by tremendous technological advances, increasing regulatory requirements, and an (in)active legislator. This, in conjunction with the pressure to innovate and the constant development of new state-of-the-art solutions in environmental technology, can, in some cases, create a barrier to investment. Given the level of complexity involved, successful value retention and efficient investment strategies are primarily achieved by experienced market participants with strong implementation capabilities.

Viewed through this lens, social investments may soon emerge as plannable and cost-effective long-term investments, to some extent offering a lower level of risk compared to their environmental counterparts. The expectation is therefore that the social dimension will no longer be viewed merely as a “soft factor”, but will instead establish itself as a financially relevant factor that contributes to sustainable value growth.

Secondary cities: underappreciated markets for residential mixed-use developments

Everyone in the industry is familiar with the distinct characteristics of the two primary real estate categories, residential and commercial. While residential real estate fulfils a basic need and generates reliable, albeit conservative, returns, commercial real estate is more susceptible to economic fluctuations but provides higher returns. Residential properties have therefore always had a stabilising effect on institutional investors’ portfolios.

Residential properties can be integrated in two ways:

Firstly, they can be included as an ‘admixture’ in a fund via the acquisition of one or more purely residential buildings or a mixed-use building. Secondly, residential properties can also have a stabilising effect within a single property – as is the case with the aforementioned mixed-use, residential/commercial properties. This model has been a defining feature of typical Central European cities for centuries, with retail, crafts, or gastronomy on the ground floor and residential units above, sometimes with storage, production, or offices in between.

A whole neighbourhood under a single roof
This concept finds its urban nucleus in the Gründerzeit districts that are just as popular and desirable places to live in today as when they were first developed 120-150 or so years ago. The high quality of life experienced in these areas, from Prenzlauer Berg in Berlin to Lehel in Munich and Nordend in Frankfurt, is testament to the enduring appeal of these neighbourhoods. Having buildings that offer a combination of commercial and residential space under the same roof helps create vibrant neighbourhoods with convenient amenities and contributes to the stability of the local real estate market. Investors who take advantage of this configuration stand to benefit from a granular tenant structure and more balanced risk profile.

While this approach may seem tailored exclusively to major cities, this is by no means the case. It is not just the Top Seven cities in Germany that offer potential for mixed-use buildings in urban locations. Many B, C, and even D cities also have streets that present viable opportunities for investment in mixed-use buildings. In addition to structural conditions and micro-location, the local infrastructure also plays a decisive role.

More than just the major cities
After all, compared to many other European countries, Germany is highly decentralised, with numerous major metropolitan areas and strong regional centres. While Germany’s Top Seven cities have a combined population of around ten million, secondary cities such as Bremen, Hanover, Bonn, Essen, Mannheim, and Nuremberg also boast significant populations and strong economies.

The same applies to C cities such as Darmstadt, Mainz and Offenbach, as well as to a number of medium-sized cities. These urban centres offer a high quality of life and diverse economic opportunities that are often overlooked by institutional investors, even though they are ideally suited for mixed-use investments. The frequently more attractive price-performance ratios – and thus higher yield potentials – further underscore the advantages of investing in smaller cities, which are largely exempt from the bidding wars of large and international investors in the A cities.

Markets in B and C cities are less liquid – which is also an asset
Many investors have been discouraged by the lower liquidity of real estate markets in B and C cities. However, what may initially appear a disadvantage is, on closer inspection, actually an opportunity: The stability of peripheral markets serves as a deterrent to speculative investors looking for a quick exit after a couple of years, without any major property management effort. Instead, the lower liquidity attracts investors with long-term investment horizons, leading to more stable and less volatile real estate markets. As a result, the price surges common in A cities during economic upswings are far less likely in these secondary cities. When it comes to selecting locations, investors should take off their blinkers if they want to capitalize on Germany’s polycentric regional structure.

Adding residential space to commercial real estate portfolios through urban mixed-use developments in lesser-known markets is a prudent strategy to diversify portfolios and ensure consistent long-term returns. Investors who seriously consider the entire German real estate market, rather than focusing solely on A cities, stand to benefit from these diverse opportunities to add a ‘pinch’ of residential to their portfolios. And institutional investors, many of whom have failed to adequately diversify their portfolios by focusing exclusively on commercial real estate in A cities, would be well advised to do the same and position themselves for both the next real estate boom and the next real estate slump.

405 days until the deal is done – How investors can accelerate transaction processes

It’s not quite as hopeless as in Samuel Beckett’s Waiting for Godot, where two men wait in vain for someone who never comes. However, at an average of 405 days to close a transaction last year, many investors found the experience to be frustratingly drawn out. That was up from 374 days in 2023, positioning Germany as one of the leading countries in Europe in terms of transaction completion time, second only to the United Kingdom where real estate professionals typically wait an average of 499 days for deals to close.

The reasons for this negative development are quite clear. Investors point to the increasing demands of Environmental, Social, and Governance (ESG) criteria, regulatory requirements, and stricter guidelines as the primary causes for delays – especially for large portfolios. And real estate transactions not only involve moving a lot of money, but also more and more data. In 2023, there were 3.0 gigabytes of documents and records per transaction; this figure has now risen to 3.6 gigabytes.

Appeals to politicians are often disregarded, so investors must take it upon themselves to develop more efficient processes in order to reduce time-to-market and time-to-close risks. After all, these risks are real: buyers and sellers may back out, liquidity is not always assured, and market demand can shift more quickly than expected. Efficient processes are the key to avoiding delays. However, the potential for improvement is within reach.

Streamline processes, improve coordination, and honour the handshake
First of all, investors should carefully analyse their own processes. Which control mechanisms do little to enhance security but a lot to hold up the process? Which phases of due diligence can be conducted simultaneously? Which legal contrivances really need to be included in the purchase agreement? And how can cooperation with external service providers, both domestically and internationally, be improved?

International deals often fail due to language barriers, missing documents, and unclear responsibilities. If reports go missing or documents exist in different versions, an entire transaction can be jeopardised. A single source of truth and clear communication with partners can speed up the process considerably. This is because transactions often hinge on legal details – and on the parties themselves. Relying on tactical contractual clauses or incorporating unnecessarily complicated safeguards can hinder progress on closing any deal. Clear and binding commitments are essential. Establishing a reputation as a reliable and trustworthy partner does a lot to speed up negotiations.

Targeted application of new technologies throughout the transaction process

Artificial intelligence (AI) and technology can significantly expedite the transaction process – with no immediate need for neural networks to calculate purchase prices or risks. The automated capture, searchability, and translation of documents are enough to save valuable time on their own. Many investors simply underestimate how inefficient traditional processes can be: While AI is already capable of running complex analyses, it is not uncommon for deals worth millions to be conducted through insecure channels such as WhatsApp, posing a significant security risk that can certainly result in hefty fines. Just recently, for example, the SEC in the USA fined eight investment companies 63 million dollars for this very reason.

Investors must not only optimise their transaction processes from a technical standpoint but also from an organisational perspective. Because efficiency alone is not enough. A strong reputation as a reliable partner can often expedite negotiations more effectively than any technological innovation. However, without centralised and transparent data management, even the most promising deal can become unnecessarily complicated.

The Ideal Market

An ideal market is one where buyers and sellers meet on equal terms. Supply and demand are balanced, decisions are based on rational fundamentals rather than speculation or market pressure. Sellers come with realistic expectations, buyers have sufficient options and can invest strategically according to their objectives. There are no frantic exaggerations or a one-sided buyer or seller’s market, but a balance that allows for meaningful transactions.

This ideal market is actually a model concept. It is described as an equilibrium model in which all market participants operate under fair conditions. However, such conditions are very rare in practice. Especially in recent years, reality has been far from this ideal.

From Overheating to Correction
For a long time, sellers had the upper hand in the German real estate market. Demand significantly exceeded supply, and prices only went in one direction. Anyone wanting to sell could demand almost any price. A buyer could almost always be found.

However, with the market shift, the situation changed abruptly: buyers became scarce, sales processes stalled, and those still active dictated the terms. Headlines like “Real estate market in free fall” or “Buyer strike paralyzes the market” echoed in the press. Suddenly, talk of the real estate bubble bursting or even a crash that could shake the market surfaced. But it didn’t come to that.

Today, we are experiencing a very different phase: a stabilization on equal terms. Buyers are back in the market, sellers are more flexible, and negotiations are much more balanced than in the extreme market phases of the past. It’s a situation that is rare and one that I haven’t witnessed in a long time.

Why 2025 is the Ideal Market
The current market offers opportunities for both buyers and sellers. Buyers find a market with moderate prices, a wide selection, and stable financing conditions. While hasty purchases were often made during the peak phase, now one can act strategically, with a clear focus on location and substance.

At the same time, sellers also have strong arguments on their side. Those who wish to undertake energy-efficient renovations or adjust their portfolio can do so without sales pressure. Increased demand is bringing movement to the market, and those with a long-term perspective can find reliable buyers with a clear investment horizon. Additionally, the current situation offers sellers the opportunity to sell their properties at fair prices without fearing overinflated expectations or undervaluations. The chances of a faster sales process have also significantly improved, as interested buyers are once again more active in the market.

In boom and crisis times, usually only one side benefits. But now both sides have a rare opportunity: buyers and sellers are operating on equal terms, and decisions can be made strategically and with foresight.

2025 will not be a market of extremes, but rather an exciting market for both private and commercial players who are ready to seize the opportunities now.

News

Property prices across Germany stagnate, while prices and rents in Berlin continue to rise

The real estate markets in Germany and Berlin are experiencing mixed fortunes. In its new housing index, the German Economic Institute (IW) reports that purchase prices for real estate in Germany remained largely unchanged at the end of the year – while new contract rents increased by approximately 4.7% on average compared to the previous year. In contrast, the real estate market in Berlin is far more dynamic, with the IW reporting an 8.5% increase in new contract rents during the same period. This growth can be attributed to the ongoing shortage of living space, which has resulted in increased rental demand and subsequently higher rents, especially in major cities and popular locations such as Berlin. The ImmoScout24 Residential Barometer paints a more nuanced picture, putting the average price per square meter of a new-build apartment in Berlin at EUR 6,575 . For the end of 2024, the barometer indicates an increase in new-build prices in Berlin of 1.4% compared to the third quarter and 2.5% compared to the previous year. Existing apartments, on the other hand, cost an average of EUR 4,643 per square meter, representing a year-on-year price increase of 2.1%. Dr Gesa Crockford, Managing Director of ImmoScout24, attributes the rising purchase prices to an unprecedented surge in demand: “Demand in metropolitan areas and major cities has reached new heights, surpassing even the levels seen during the low-interest phase at the beginning of 2021.”

Renovating Berlin’s building stock will cost billions

Legislation on zero-emission buildings sets out some very specific targets: according to the EU Buildings Directive, all new buildings must be emissions-free from 2028, with existing buildings required to meet the same standard by 2050. In order to bring emissions in the German capital under control, Berlin’s Senate has set itself the target of reducing emissions by 70% by 2030, with the primary focus is on heating, air conditioning, and hot water supply, which collectively contribute approximately half of Berlin’s emissions. Specific measures include the electrification and decarbonisation of the heating supply as well as the expansion of renewable energies and district heating networks. However, a building’s age is a major factor in its energy consumption. The majority of Berlin’s two million apartments were constructed during the Wilhelminian era at the end of the nineteenth/beginning of the twentieth century, or between 1949 and 1978. According to calculations by Bulwiengesa, around 27% of Berlin’s apartments require urgent refurbishment and energy efficiency upgrades over the next ten years in order to meet the final energy consumption targets. Bulwiengesa estimates that the total investment needed to comply with the German Climate Protection Act (KSG) of 2019 by 2045 is approximately 41 billion euros, or 1.9 billion euros annually. This estimate excludes buildings constructed after 2001 that already meet current energy efficiency standards.

Berlin’s rent brake is lawful according to Federal Supreme Court ruling

Berlin’s rental price brake remains in force. On 18 December 2024, Germany’s Federal Supreme Court (BGH) ruled that regulations limiting rents for re-lettings in Berlin are constitutional. As a result, the Court confirmed that the rental price brake, which was introduced in 2015 and extended in 2020, continues to apply across the entire capital. Since June 2015, Berlin has enforced rules to control rents for new leases. Originally limited until the end of 2020, the regulation was subsequently extended by a further five years until the end of 2025. The ruling by the BGH concerns a dispute between tenants and their landlord over a sliding rent scale that was significantly above the permissible limit. The judges in Karlsruhe determined that the rental price brake is a justifiable restriction of property rights, intended to curb escalating rents in tight housing markets and ensure the availability of affordable housing. According to the BGH, the regulation is suitable, necessary, and proportionate to achieve this goal. The BGH emphasised that landlords should never have banked on the rental price brake not being extended. The ruling provides legal clarity for tenants in Berlin, who can continue to rely on protection against excessive new contract rents. Landlords, on the other hand, are required to comply with the regulations of the rental price brake and are prohibited from unrestricted rent adjustments. While the ruling provides legal certainty in the long-running debate, it is unlikely to bring an end to the controversy surrounding the rental price brake in Berlin.