DZ HYP publishes new research report on the German residential real estate market

• Dynamic rent increases for new contracts and first occupancies
• Demographic trends creating more and more tension on the market
• Good investment opportunities with moderate potential for value increases

Earlier today, DZ HYP published its new research report “The German Residential Real Estate Market 2024 | 2025”. This is the Bank’s first in-depth analysis of the opportunities and challenges associated with a particularly relevant asset class. The report looks at current market developments for residential real estate and provides an outlook for the segment from an investor’s perspective. Specifically, DZ HYP examines underlying factors such as demographic trends and the current status of new construction and refurbishment in the sector. This is followed by an analysis of Germany’s seven largest cities and twelve key regional centres. 

The research shows an increasingly tight housing market, where rising demand and stagnating new construction activity combine to drive rental prices across the various locations. At the same time, this scenario offers good investment opportunities, as DZ HYP CEO Sabine Barthauer explains: “The residential investment market is showing clear signs of recovery. The price correction phase appears to be over. Now that the ECB has begun to cut interest rates, investors will have greater planning certainty. Prices for multi-family homes remain high despite the decline in valuations over the past two years, which makes rental yields even more important for investors.”

Smaller households drive housing demand

Germany has a total housing space of around 4 billion square metres, spread over 43 million residential units. This translates into just under 50 square metres per head of population. Although this means that there is no general lack of housing, there is a growing divergence between the structure of the housing stock and that of the population. Declining household sizes play a major role in this development. While the number of inhabitants in cities such as Essen and Hanover only rose by 1 per cent between 2011 and 2022, the number of households here increased by 7 per cent and 9 per cent respectively. In Germany as a whole, the number of households grew more than twice as fast as the population during the observation period. While this increased the number of small households by 3 million, only 1.3 million units were constructed in multi-storey apartment buildings. 

Housing construction less economically viable due to framework conditions 

Construction costs for residential buildings have increased by roughly 40 per cent since 2020. Combined with rapidly rising interest rates, average overall construction costs in major German cities are now more than €5,000 per square metre. This means that constructing new housing is scarcely an option, even with high first-occupancy rents. The challenges facing new construction projects are evident in the sharp decline in the number of building permits and in sales of building land, which have fallen by almost 60 per cent since 2021. The number of completed apartments might fall below 200,000 [per annum] by 2026, well below the current level of 300,000 completed units – which itself is not sufficient either. 

Existing rents remain moderate despite the tense situation

Because of the growing housing demand and insufficient new construction activity, there are hardly any significant vacancies in most of the cities examined. This lack of supply drives up rent levels for new contracts and first occupancies. Average rents for re-letting existing apartments range between €8.60 per square metre for Dresden and up to €19.50 per square metre in Munich. First occupancies require an average mark-up of €4 per square metre on top of this. By contrast, rents on existing contracts remain at moderate levels overall as tenants with long-term contracts benefit from lower rent adjustment dynamics. While average rents in the fast-growing city of Leipzig are less than €6.50 per square metre, they are almost €13 per square metre in Munich. The rising divergence between rents on existing long-term contracts and new rentals puts additional pressure on the housing market, making it less attractive for tenants to move. This in turn means that very few existing apartments become available on the market, enabling landlords to charge very high rent for these. An increase of around 5 per cent is expected for the current year and for 2025. 

Slow momentum in energy-efficient refurbishment 

A large proportion of the building stock owned by German housing companies is several decades old. Although those responsible are acutely aware of the need to reduce greenhouse gas emissions, the investments that this would entail are as challenging and economically unattractive as investing in new housing construction in the current climate. On average, multi-family homes are more efficient than single-family and two-family properties. However, around 60 per cent of the approximately 3.3 million properties in Germany are assigned to energy efficiency classes D to H. It is fair to expect an increase in energy-efficient refurbishments over the coming years – especially since the costs incurred can be passed on, providing potential for rent increases. Overall, making the building stock more climate-friendly is set to remain an enormous challenge next year as well.