Year-end rally in Germany’s residential property market: Trend reversal – rising prices in selected locations
- Q4 transaction volume of €4.0 billion – strongest quarter since interest rate hikes
- Fallen yields in individual markets – first indications of a pricing trend reversal
- Activity in large transactions over €100 million driving the market
Frankfurt a. M., 3 January 2025 – According to Lübke Kelber, an owner-managed, independent consultancy for real estate transactions, the German residential investment market recorded a transaction volume of €4.0 billion in the fourth quarter of 2024. This represents the highest figure since the first quarter of exceeding the historical 10-year average of €3.5 billion for the first time since the second quarter of 2022.
At just under 34,100 units, the number of apartments traded was also significantly higher than in previous quarters. The fourth quarter of 2024 alone exceeded the annual total of 2023.
Large ticket transactions represented the main drivers of this volume. Transactions weighing in at a volume in excess of €100 million accounted for 70% of total turnover. The largest transactions include the new construction portfolios of Vonovia/Buwog/Quarterback and HIH Invest, as well as ZBI's transactions with Net Zero Properties and the Adler portfolio, which was acquired by Orange Capital Partners. These deals contributed a total of €2.9 billion to the total volume.
Together with the first three quarters, the annual volume stands at €8.6 billion (see Figure 1). Although this is still below the volumes seen during the low interest rate phase, it significantly exceeds the year 2023 and signals a clear trend reversal.
In addition to purchases by fund managers such as HIH, which particularly characterised new-build transactions, municipal housing companies such as Gesobau, Hogowe, Degewo and Münchener Wohnen were also active in acquiring development projects. In the value-add sector, the market share - apart from the transactions of Net Zero Properties - tended to be lower compared to the previous year.
Pricing – signs of a turnaround
Initial yields in the German residential property market are showing signs of a turnaround. With the return of investment activity, Lübke Kelber reports yield compression for selected markets for the first time since 2022– for both existing and new-built properties.
In the case of existing properties, gross initial yields range from the market-driven factors in A markets are recorded on average at 4,7 % in medium locations, and 4.3 % in good locations. In the case of B, C and D markets, yields are correspondingly higher. In the new-built segment, the range in A markets is between 4.1 % in good locations and 4.3 % in locations (see Figures 2 and 3).
“Yield compression in selected markets indicates that the correction in the investment area is largely over and that a turnaround is setting in. This is driven by supporting fundamentals of sharply rising rents, falling interest rates and generally strengthening investment demand. Nevertheless, further devaluations remain possible in some existing portfolios, as valuations have not yet been fully adjusted to the prices currently achievable on the market,” as Mark Holz, Head of Research at Lübke Kelber, stated.
Price developments: rental market and interest rate policy as driving factors
Initial yield compression is driven by three key elements: the tight rental market, the more relaxed financing environment and ensuing investment demand across the board from players such as real estate companies and institutional investment managers who were not active in recent years.
Vacancy rates continue to trend downwards and had already stood at 2.5% in 2022. At the same time, the number of completed residential units is decreasing and the target of 400,000 new units was once again missed in 2024. This supply bottleneck is causing rents to rise further: since 2014, rents in portfolios have advanced by an average of 2.5 % p.a., with the increase since 2020 amounting to 5.3 % p.a. By 2025, the average rent for existing properties is expected to exceed €10.00 and €15.00 for new builds nationwide (see Figure 4).
The interest rate trend supports both the transaction volume and the purchase price trend. The interest rate decline introduced by the US Federal Reserve in September 2024 provided a further important aspect. At the same time, the ECB's ongoing key interest rate cuts influenced cost of finance to such an extent that construction interest rates settled between 3.0% and 3.5% in recent months. Interest rates are expected to continue declining in the coming year, which should support investor demand.
“The current level of inflation in the euro area, which is largely within the ECB's target range, and the subdued economic situation in some EU markets – such as Germany – suggest that interest rates will continue to trend downwards; for example, LBBW predicts a deposit rate of 1.75% by the end of 2025. At the same time, the upcoming inauguration of Donald Trump, the ongoing geopolitical tensions and the impending elections in Germany are creating numerous uncertainties that could impact the investment environment in the real estate sector at national and international levels,” as Holz outlined.
Methodology
Our analysis of the transaction volume comprises all residential properties with at least 20 residential units in which commercial uses play only a subordinate role. In addition, minority interests and pure M&A transactions or entity deals are not considered. Special forms of housing, such as student accommodation or retirement homes, are also excluded from the analysis. The factor analysis is based on market-typical average to good buildings, without significant under-rent and without significant capex requirements.