German residential/commercial mix property market picking up

Following a 33% average price drop across 52 monitored cities, Germany's mixed-use property market appears to be recovering, with renewed strength in apartment building investments.

Felix von Saucken, head of Residential Germany at Colliers, commented: ‘Investors are increasingly evaluating the price level that has now been reached as attractive and are using it to re-enter the market. Falling new construction figures and rising rents will reinforce this trend. In the long term, housing remains a megatrend from an investor's point of view.’

Transaction volume for residential and commercial buildings in Germany's seven largest cities (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Stuttgart, and Munich) dropped roughly 28% from 2022 to 2023. However, demand is recovering, driven primarily by high-net-worth individuals and family offices. Favorable market conditions—strong housing demand, anticipated lower financing costs, and increasing rents—suggest a continued rise in transaction activity. Prime yields in these cities currently average 3.85%.

Residential rents in Germany increased significantly faster than disposable incomes during the first half of 2024. New apartment rents in the seven largest cities rose by an average of 7% year-over-year, reaching 8% in the top 50 cities. This marks a substantial acceleration compared to the first half of 2023 when the increase in the top 50 cities was only 4% over six months.

Strong population growth, particularly in major cities, is fueling rent increases. Over three million people moved to Germany's seven largest metropolitan areas in the last five years.

A housing shortage is worsening due to a dramatic decline in building permits. A 27% drop in 2023 was followed by a further 21% decrease in the first half of 2024, meaning the supply of housing will not keep pace with demand.

‘Even though immigration has slowed down somewhat in 2023, the overall pressure to move to the metropolises remains high, driving demand for housing. New residential construction has collapsed massively. There are no signs of a turnaround,’ predicts Felix von Saucken.

The rental apartment market in Germany's 50 largest cities is tightening, with overall supply down 4% in the past year. This decline is particularly acute in larger apartments (two to five rooms), which are 9% less available. Conversely, smaller units like micro-apartments and serviced apartments have increased by 6%.

The dwindling supply of subsidized housing in Germany, falling from approximately 2.9 million units after reunification to just 1 million today, disproportionately harms low-income households and is expected to continue.

‘In order to be able to meet the housing needs of this target group, it is essential to promote social housing more effectively,’ concluded Felix von Saucken.