Cushman & Wakefield, one of the world's leading real estate consultancy firms, and the global commercial law firm Hogan Lovells have jointly published the report ‘Regulation in the German residential property market’. This report provides a detailed analysis of the legal framework and current market trends in the German housing sector. The report is aimed at investors and landlords who wish to find out about the complex regulations and their implications.
Locational Advantages and Legal Environment
Germany is an attractive market for institutional investors due to its strong economy, high rental rate, and increasing demand for housing. Investors appreciate the stable macroeconomic situation of Europe's largest economy, characterised by a high level of education, a growing population and significant legal security.
Germany stands out in international comparison in several aspects. For instance, it consistently ranks among the leaders in various purchasing power indices. In 2023, the annual disposable income per capita was EUR 26,271, according to market research firm GfK - 48 per cent above the European average. In addition, Germany is experiencing a significant housing shortage, which is expected to worsen in the coming years due to currently weak construction activity.
“The demographic development in Germany is leading to a consistently high demand for housing, which ensures long-term demand, particularly in the major cities," emphasises Helge Zahrnt, Head of Research & Insight Germany at Cushman & Wakefield.
Notably, around 50 per cent of the population rents their homes, making Germany the country with the highest rental rate in the EU. As a result, there is extensive regulation of the rental market. Additionally, Germany's federal structure adds further complexity to the legislation, as law-making and administration occur at the federal, state, and local levels, which can lead to regional differences. Therefore, investors and landlords must be aware of the specific regulations in the regions where they operate.
‘Tenant protection plays a significant role in German rental law. In light of the housing shortage and its associated political sensitivity, these regulations are likely to become even stricter in the near future,’ explains Stefanie Kern, Partner for Real Estate Law at Hogan Lovells.
Key Regulatory Instruments in the German Residential Property Market
The report highlights the existing central regulatory mechanisms that investors and landlords in the German housing market need to consider.
1. Rent regulation
- The German Civil Code (BGB) governs the setting and increasing of rental prices. The "Mietpreisbremse" (rent control mechanism) is a tool applied in areas with a tight housing market. It limits the permissible rent for new leases to a maximum of 10 per cent above the local comparative rent. The report outlines where this regulation applicable.
- The local comparative rent is determined by rent indices, which can be either simple or qualified rent indices. Qualified rent indeces are based on scientific surveys and are legally binding.
2. Building Code (BauGB)
- The Building Code contains regulations on urban development, renovation measures, and the preservation of the unique character of urban areas. In so-called community preservation areas, special provisions apply that make the demolition, alteration, or change of use of buildings subject to approval.
- For example, the conversion of rental flats into owner-occupied flats or partial ownership – even outside of preservation areas - is subject to special approval requirements and may be prohibited if necessary.
- Another important instrument is the municipal right of first refusal, which allows local authorities to purchase land and properties before other buyers, in order to achieve urban development goals.
3. Building Energy Law (GEG)
- The GEG sets out the energy efficiency requirements for buildings and aims to reduce greenhouse gas emissions. Since 1 January 2024, stricter regulations for heating systems have been in effect, requiring a gradual transition from fossil fuels to renewable energy sources.
- Existing gas and oil heating systems may only continue to be operated under certain conditions. New buildings must use heating systems that are powered by at least 65 per cent renewable energy.
Market Trends and Investment Activity
The German residential investment market remains attractive despite extensive regulatory challenges. The high demand for housing, combined with low construction activity, is leading to rising rents and stable investment demand. As a result, the transaction market for residential properties continues to show stability despite increased interest rates and construction costs. Domestic investors dominated the market in the first half of 2024, accounting for 82 per cent of the total investment volume. Moreover, Cushman & Wakefield reports a growing interest from foreign investors in this sector, with a growing proportion of investments being directed towards micro-apartments.
This segment is gaining importance as these small, fully furnished residential units are typically rented out on a temporary basis and are largely exempt from regulations such as rent control. They also specifically designed to meet the needs of students, professionals, and senior citizens.
The report also provides an outlook on future developments in the German housing market and offers recommendations investors and landlords:
- Given the high demand for housing and rising rents, additional regulations that could further strengthen tenants' rights are to be expected. These may include potential tightening of rent controls and caps on rent increases.
- Investors should take into account the energy requirements of the Building Energy Act and invest in energy-efficient modernisations. These measures not only help to meet legal requirements but can also enhance the long-term attractiveness and value of properties.
- Future legal changes could have a significant impact on the profitability of investments. Investors should regularly stay informed about new laws and regulations and seek legal advice if necessary.
'Regulation requires careful attention from all players in the housing market. A thorough review of the legal framework, combined with the needs of the demand side and market developments, also presents interesting opportunities,' summarises Jan-Bastian Knod, Head of Residential Investment Germany & Head of Healthcare Advisory at Cushman & Wakefield.
