Germany’s residential real estate investment market: rising interest rates paralyzing investors

  • Transaction volume at €3.1 billion in the first half of 2023, down 61 percent year on year 
  • Prime yield (at market rent) as an average of the Top 7 cities rises to 3.04 percent 
  • Strong domestic and international investor demand for core residential complexes and portfolios – but very limited availability due to due to new build activity coming to a virtual standstill 

In the first half of 2023, the transaction volume on the Germany’s investment market for multifamily properties (upward of 50 units) came in at €3.1 billion, marking a decline of 61 percentage point compared with the year-earlier period. The second quarter of 2023 proved to be the weakest quarter on the multifamily property transaction market since 2011. The number of residential units also slumped by 73 percent to 11,900. Conversely, the average purchase price per square meter rose – by 22 percent to €3,400, particularly as mainly premium residential complexes and portfolios were traded in the context of ESG criteria in the first six months. The largest net buyer group consisted of private investors with €638 million. Listed property companies, on the other hand, clocked up a minus of €920 million. Prime yields (at market level) in the Top 7 cities have risen to currently 3.04 percent on average, ranging from 2.90 percent in Munich to 3.15 percent in Hamburg. These are the results of a current analysis prepared by the global commercial real estate services company CBRE.

Konstantin Lüttger, Head of Residential Investment

“The residential investment market has transitioned seamlessly from its winter hibernation to the summer break. Rising interest rates and concerns about the cost of the green energy transformation is paralyzing investors. International investors, whose share came in at around 40 percent, view the German residential investment market considerably more optimistically than domestic players, especially as the fundamentals are right.

Konstantin Lüttger, Head of Residential Investment

Furthermore, there is sustained demand for core properties, as borne out by the CBRE IM transaction (investment of almost €560 million in Vonovia portfolios). Despite the difficult financing situation, housing developments and portfolios of this kind generate attractive returns as they are typically in very good condition, situated in good locations, and offer exceptionally attractive prospects 
for rental development going forward.

Michael Schlatterer, Teamleader Residential Valuation

That residential complexes and portfolios are seldom leveraged has naturally also helped in price discovery, and the currently high bid-ask spread for these transactions has dwindled to virtually nothing.

Michael Schlatterer, Teamleader Residential Valuation

Less construction and rising rents 
In the first half-year of 2023, €965 million was allocated to forward funding transactions as against €3.1 billion a year ago. In the second quarter of the year, the investment volume for developments halved again quarter on quarter.

Jirka Stachen, Head of Research Consulting Continental Europe

In the years ahead, construction will only take place on a selective basis due to the high costs of building resulting from the excessive statutory requirements placed on energy efficiency. Combined with the significantly higher level of interest rates, more restrictive lending conditions, and with selling prices achievable at a lower level on exit, new builds are often no longer worth it for some developers and investors.

Jirka Stachen, Head of Research Consulting Continental Europe

The upgrading of existing stock is also hampered by massive cost increases and protracted planning periods. Although forward-looking programs such as the “KfW261” subsidy help, these measures are not sufficient to enable a balanced relationship between supply and demand.

Less value-add investments
Value-add investments suffered the worst decline, shedding 77 percent. “Along with transaction momentum trending down in this segment, we will see another significant price decline over the course of the year,” Schlatterer says in anticipation. Prices and achievable rents do not allow any leeway for value-add investors who are currently actively scanning market for opportunities. Developers who are unable to foot the higher costs and interest rate burdens from running projects and therefore need equity are also on the radar. If things do not work out for them, a growing number of restructurings and insolvencies can be expected in this market segment through to the end of the year. 

Core and core plus investments dropped only around 50 percent short of the year-earlier level and were made mainly by high net worth investors and the public sector. “These properties are very desirable due to their strong rental potential, but hardly ever on offer,” Lüttger says. By contrast, the transaction volume in the opportunistic segment has risen. “Some investors possibly see the highest potential here, 
with prices already bottoming out,” Schlatterer surmizes.

“The public sector is also active alongside core investors with the aim of securing residential stock,” Lüttger explains. This is particularly evident in southern Germany’s expensive municipalities, especially in Munich. “The public sector’s motivation stems from the ongoing steep uptrend in rents and the mandate of making housing available long term for the population as a whole and for all income groups. 
They are therefore making use of the currently attractive time window,” Lüttger states. 

Focus on Berlin 
In the first half of 2023, investments of €810 million were made in Germany’s capital city, putting Berlin in the lead of the Top 7 cities in terms of transaction volume. Berlin continues to occupy an exceptional position in Germany’s residential market. Domestic and international investors as well as institutional and private players view prospects in this market very positively, particularly in an international context – this despite the expert commission’s “final report on the socialization of large housing companies” that is now available. Munich took second place with €570 million compared with a year ago when this was only €126 million. Frankfurt accounted for €180 million and Hamburg for €116 million. The transaction volume of €1.4 billion was recorded in the cities and regions outside the Top 7 markets compared with €4.9 billion in the first half of 2022.

Outlook for the remainder of the year 
“Through to the end of the year, the transaction volume in the housing segment will remain far below the average of the last ten years,” Lüttger predicts “Further portfolio streamlining can, however, be expected. The refinancing requirements of listed housing companies will also serve to keep supply generally high.

“Yields are set to rise over the course of the year while displaying an increasingly disparate picture: While the core segment will see yields stabilizing, the repricing phase for value-add and opportunistic investments in particular will remain strong and ongoing,” Schlatterer adds. “The market is currently virtually non-existent for parts of the housing spectrum, which principally applies to residential 
portfolios that have not been upgraded and are located in less attractive, peripheral locations.”

“Particularly unusual at the moment is international investors’ keen interest principally in niche residential segments, such as student accommodation, micro- and serviced apartments and senior living. A number of platform transactions can be expected here in the coming months,” Stachen anticipates.



Konstantin LüttgerMichael Schlatterer
Head of Residential Investment GermanyManaging Director Residential Valuation
+49 69 170077-29+49 30 726145-156
Dr. Jan LinsinJirka Stachen
Head of Research GermanyTeam Leader Research
+49 69 170077-404+49 30 726145-111

About CBRE

CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2022 revenue). The company has more than 115,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

CBRE Germany has been represented by its head office in Frankfurt am Main since 1973; there are further branch offices in Berlin, Düsseldorf, Essen, Hamburg, Cologne, Munich and Stuttgart.