Freshfields: German real estate faces structural pressure

As the property sector gathers for EXPO REAL 2026, the German real estate market presents a complex narrative of structural pressure and delayed recovery, according to multinational law firm Freshfields.

Germany

While developers continue to grapple with high interest rates and liquidity strains, several years of suppressed construction are laying the groundwork for future supply shortages.

Developer Crisis and Valuation Reality

Following the European Central Bank's rate hikes in June, projects are weighed down by lingering high construction costs and uncertain exit values. Protracted sales and leasing cycles risk undermining otherwise fundamentally sound business plans.

Investors examining unfinished projects must look past purchase prices to carefully evaluate remaining construction expenses, contractor frameworks, and realistic completion routes.

In contrast, existing asset owners with stable rental income and secure debt-servicing capabilities are choosing to sit tight.

Open-ended property funds face separate liquidity constraints. Heavy redemption requests and recent high-profile withdrawals are forcing some managers into liquidity-driven disposals.

Political Friction and Regulatory Nuance

Berlin’s recent election has given renewed momentum to proposals to bring large privately owned residential portfolios into public ownership.

Although the federal governing coalition has moved to block individual states from enacting such measures, investors are adopting a wait-and-see approach.

Fundamental housing demand in major urban centres remains robust. Properties built and initially let after 1 October 2014 benefit from exemptions to standard initial rent brakes.

Spotlight on Housing, Offices, and Data Centres

Urban housing is stifled by plummeting completions in 2025 and a sluggish permitting pipeline. Major cities face widening supply deficits that will continue to support well-located residential investments.

While overall vacancy rates for prime offices tick upward, top-tier, energy-efficient offices in prime locations face constrained pipelines and resilient prime rents, favouring strategic refurbishments.

Data centres offer immense potential; however, project viability hinges entirely on electrical grid capacity, power availability, and reliable connectivity timelines.