Risk and Return Ranking | B-cities remain most attractive residential investment locations despite interest rate turnaround

Frankfurt a. M., March 13, 2023 - Leipzig, Darmstadt and Potsdam have the most attractive framework conditions for residential investments in Germany. In these cities, Lübke Kelber has identified the highest market attractiveness and the lowest risk. The top 7 locations are also strong: Frankfurt am Main, Munich and Stuttgart are among the top ten markets. Despite lower purchase factors, high attractiveness is still accompanied by relatively high pricing. On a risk-adjusted basis, second-tier cities such as Hamm, Hanau, Dresden and Mannheim are also worthwhile investment locations. This is the result of the new Risk and Return Ranking of the transaction company Lübke Kelber for a total of 111 German cities.

"The general conditions for residential real estate investments have changed massively and rapidly in the past year 2022. The causal chain of Ukraine invasion, price shock and interest rate shock has led to significantly increased financing costs, burdened the potential return side of investments and turned the environment towards a buyer's market," explains Marc Sahling, Managing Director at Lübke Kelber, a transaction advisor and asset manager specializing in real estate investments. "Consequently, this has resulted in declining values as well as a significant decline in transaction activity, which even the fundamentally stable rental market could not change."


"A clear characterization of A and B cities is generally becoming increasingly difficult. The top 10 in the rankings are a colorful mix of locations of widely differing sizes and locations. The current market environment ensures that investments and their locations have to be examined much more closely, unlike in times of low interest rates," explains Mark Holz, Head of Research at Lübke Kelber. "For investors, a deep fundamental property analysis is crucial for investment success when making purchases. Comprehensive local market knowledge, intensive technical and environmental due diligence, realistic assessment of the respective market development and intensive professional advice are decisive parameters for a successful asset selection. Our 2023 Risk and Return Ranking is an important guide."

Overall ranking: top 7 cities with little risk and low payout

Although the top 7 markets rank at the lower end of the performance scale, due in particular to the high entry factors, the markets remain above-average in terms of attractiveness and low risk. As in previous years, markets around major metropolitan areas are particularly strong: Potsdam, Darmstadt, Hanau and Fürth are prominent examples in the top 10. The lower end of the ranking remained virtually unchanged. The lowest scores were achieved in Dessau-Roßlau, Gera, Frankfurt (Oder) and Wilhelmshaven. In terms of risk-adjusted return, a number of hidden champions can also be identified in Worms, Delmen-horst, Neumünster and Leverkusen. "This does not mean, however, that the locations at the bottom of the rankings do not offer opportunities - but an even closer look is called for. Both smaller major cities and metropolitan areas can now offer individual advantages and disadvantages," explains Holz.

Financing massively complicates dream of own home

Due to the significant additional burden of buying a property as a result of the rise in interest rates, owner-occupied residential property now only saves money compared with living in rented accommodation in Dessau-Roßlau. In the previous ranking, there were still 69 cities where the financial burden of buying a home tended to be lower. The biggest financial disadvantage, at up to 20 percent, was in the high-priced metropolises of Munich, Hamburg and Berlin. While the average burden when living for rent, compared to 2021, increased by 3.8 percent to around 28 percent of household income, the burden rate when buying a market-rate condominium rose from 24.5 percent to an average of 35.4 percent.

"The combination of high energy costs, and therefore utility costs, and significantly higher financing costs significantly increases the overall burden on homebuyers. Since purchasing power has not increased to a similar extent, the affordability of home ownership has declined accordingly," explains Sahling. "While the burden on renters has also increased significantly, it has not risen as much as for homebuyers. The new interest rate level is thus ensuring across the board that the purchase of a condominium is being postponed or compromises have to be made in terms of location or apartment size," explains Sahling.

"Nevertheless, with a deep and comprehensive analysis of property- and market-specific risks, attractive residential real estate investments will continue to be found in the market in 2023. Also, due to the significant increase in encumbrance ratios among tenants and condominium buyers - especially in the major metropolitan areas - attractive and affordable second- and third-tier cities will see stronger population inflows and perform better than average as investment destinations," Holz expects.

About the Risk and Return Ranking

Lübke Kelber determined the individual market attractiveness and the inverse location risk for each of the 111 cities studied. This is derived from population trends, socioeconomic conditions, the housing market and current rental and purchase prices in the respective city. These risk premiums, plus the risk-free interest rate, result in the recommended minimum return that should be achieved at the respective location in order to adequately price in its individual risk. The risk-free interest rate of 2.4 percent corresponds to the yield of a ten-year federal bond. For the investment analysis of a typical institutional investor on which the Risk and Return Ranking is based, an equity ratio of 55 percent was assumed with a fixed interest rate of 3.75 percent for debt capital over ten years. Based on the difference between the return on equity calculated by Lübke Kelber and the recommended minimum return based on location risk, a comprehensive picture emerges of the most attractive locations for residential real estate investments in Germany.

Contact: mark.holz@luebke-kelber.de  

Download: Risk and Return Ranking 2023