Residential investments in Germany become attractive again

After two years of market hesitancy, Germany's residential investment sector is experiencing a resurgence of confidence. 

Jürgen Michael Schick

In his analysis, Jürgen Michael Schick, a leading German residential real estate expert and owner of brokerage Michael Schick Immobilien, indicates that long-term interest rates have stabilized around 3.5-3.7%, leading to price adjustments that have created a more balanced market between buyers and sellers. This has re-established a market driven by dependable fundamentals.
Transaction volumes have notably increased since 2024, with many investors who previously sidelined themselves now re-entering the market. Following the peak prices of the "super-cycle," conditions are now favourable for buyers. In Germany's top seven cities, the price-to-rent ratio is now 24 times the annual net cold rent, nine annual rents lower than its 2021/2022 peak. Prime cities now exhibit price multiples similar to what secondary cities had in 2021.
Crucially, the classic leverage effect has returned to residential investments. Equity returns generally sit in the high single digits and can even reach double digits with increased debt financing.
For instance, a €1 mln multi-family building in a "B city" generating €55,000 in annual net cold rent (a factor of 18.2) can yield a 13% return on equity with 18.2% equity, or 9.3% with 27.3% equity, not even accounting for potential rent-driven value increases.
While some might suggest bonds as a "risk-free" alternative with around 4% yield, this view is superficial. Bonds lack real value growth, are susceptible to inflation, and face reinvestment risk at maturity, often at lower rates. Residential property, conversely, provides stable cash flow, inherent value, inflation protection, and benefits from debt amortization. Furthermore, bank financing can often lead to equity returns twice that of bonds.
Berlin exemplifies this market stabilization, representing 24% of the nationwide transaction volume across Germany's 50 largest cities, making it the benchmark market. Munich follows at 9% and Hamburg at 6%.
Berlin's prices are largely flat, with slight upward trends in desirable areas. Multi-family buildings average €2,200 per square meter, while mixed-use residential and commercial properties recently saw an 11% increase to €2,315 per square meter. Both buyers and sellers can now rely on solid valuations and realistic pricing, reinforcing Berlin's role as the benchmark for the entire German market.
Schick believes that Germany's residential investment market is currently full of opportunities. Housing demand continues to grow in major cities, their suburbs, regional centres, and university towns, while new construction struggles to keep pace. With long-term financing available, the multi-family property market presents numerous attractive prospects for investors.