Residential is Back

In 2022, the inflation and interest rate shock meant that, all of a sudden, investors were left to question their positions in real estate as an asset class. Rising prices, increasing devaluation pressures, and uncompetitive yields prompted a retreat from the market. This trend even extended to the residential sector, despite the persistent – and growing – structural surplus in demand from tenants, particularly in Germany’s major cities. However, the narrative is beginning to change and institutional investors are once again rekindling their interest in German residential assets.

Navigating this new terrain depends on having the right strategy in place. Yes, housing in major German cities and metropolitan regions has proven to be one of the most resilient forms of investment: demand for housing consistently outstrips supply, and issues with vacancies and rental losses are infrequent and minor, especially within a well-diversified portfolio. At the same time, it is crucial to acknowledge that purchase prices and construction costs remain high, and the regulatory environment – both in terms of rental agreements and energy standards – introduces complexities that cannot be overlooked. Therefore, understanding not only what to do and how to do it, as well as knowing what to avoid, is essential in capitalising on this evolving market.

For example, you could ignore the housing markets in the most sought-after, A-grade districts in Germany’s top metropolitan areas. Although these neighbourhoods have the strongest demand for housing, and correspondingly high rents, they also have the highest purchase prices. Furthermore, many properties in traditional residential districts require significant renovation, and their energy efficiency often leaves a lot to be desired. Local authorities in these neighbourhoods are also particularly proactive in regulating tenancy and contract arrangements, for example by implementing neighbourhood protection statutes. Although it is possible to invest successfully in these markets, it typically means navigating numerous regulatory hurdles and accepting lower cash flow returns.

In contrast, investing in the suburbs and exurbs of major cities, or in demographically stable or growing cities with populations of 100,000 or more, or in selected university cities, promises better yield potentials with reduced regulatory burdens. Additionally, if you focus on newly constructed or as-new properties, you reduce the pressure to renovate any time soon as legal requirements increase and energy prices rise.

In addition, it is also important to broadly diversify your residential real estate investments. No other real estate asset class offers the same great potential for creating such a granular and diversified portfolio. Your investments could include niche segments, such as social or inclusive housing. Alongside traditional rental income, these also create opportunities to benefit from social housing subsidy programmes. Moreover, it can often make sense to incorporate small commercial units within your multi-storey residential buildings: ground-floor retail outlets or restaurants, for example, can significantly enrich the overall living environment while simultaneously boosting the value of your investment.

With a well-diversified residential portfolio and moderate leverage, we believe that attractive returns are possible. This balanced approach also minimises risk exposure, leading to competitive cash flow returns, including for institutional investors. Furthermore, investing in such properties helps to satisfy a fundamental social need, demonstrating your business’s commitment to society as a whole.