The German residential property market concluded 2024 with a significant upswing, recording a transaction volume of €4.0 billion in the fourth quarter, marking the strongest quarter since the onset of interest rate hikes. The latest analysis by Lübke Kelber, a leading independent real estate consultancy, highlights a potential turning point for the market, with signs of yield compression in select locations and an increase in large-scale transactions driving activity. Record-Breaking Q4 Performance With a transaction volume of €4.0 billion, Q4 2024 exceeded the historical 10-year average of €3.5 billion for the first time since Q2 2022. This quarter alone accounted for a higher number of traded units—approximately 34,100 apartments—than the total for 2023. The year-end rally also brought the annual volume to €8.6 billion, substantially outpacing 2023 and signaling a potential market recovery. Large-scale transactions dominated the quarter, with deals over €100 million contributing 70% of the total turnover. Key transactions included portfolios from Vonovia/Buwog/Quarterback, HIH Invest, and ZBI’s acquisitions of Net Zero Properties and the Adler portfolio by Orange Capital Partners, collectively adding €2.9 billion to the volume. Yield Compression Signals Rebound For the first time since 2022, initial yields for residential properties have shown signs of compression in select markets, indicating a stabilization in investment pricing. Gross initial yields for existing properties in prime (A) markets averaged 4.7% in medium locations and 4.3% in good locations. In secondary (B, C, and D) markets, yields were correspondingly higher. For new builds, yields ranged from 4.1% in premium locations to 4.3% in mid-tier A markets. “Yield compression in selected markets suggests that the correction phase in the residential investment sector is nearing its end,” stated Mark Holz, Head of Research at Lübke Kelber. He attributed the trend to rising rents, falling interest rates, and renewed investor confidence. However, Holz cautioned that further devaluations in some portfolios remain possible, as valuations are yet to fully align with achievable market prices. Drivers of the Market Upswing 1. Tight Rental Market Vacancy rates remain critically low, standing at just 2.5% in 2022, with new residential completions consistently falling short of targets. In 2024, the goal of constructing 400,000 new units was missed, exacerbating supply constraints and pushing rents higher. Between 2020 and 2024, average rents in portfolios increased by 5.3% annually. By 2025, rents for existing properties are expected to surpass €10.00/m², while new-build rents could exceed €15.00/m² nationwide. 2. Declining Interest Rates Interest rate reductions by the US Federal Reserve and the European Central Bank (ECB) have supported the property market. Recent ECB key rate cuts have stabilized construction financing rates between 3.0% and 3.5%, with further decreases anticipated in 2025. LBBW forecasts a deposit rate of 1.75% by year-end, reinforcing favorable conditions for investment. 3. Renewed Investor Demand Institutional investors, real estate companies, and fund managers such as HIH and municipal housing entities (e.g., Gesobau, Hogowe, Degewo, Münchener Wohnen) have actively pursued acquisitions, particularly in new-build and development projects. This renewed demand underscores the sector’s recovery and growing confidence in Germany’s residential property market. Outlook: Opportunities and Risks While declining interest rates and strong rental fundamentals provide a supportive backdrop, potential risks include geopolitical tensions, Germany’s impending elections, and global economic uncertainties. Holz emphasized that while the market shows promising signs of recovery, the interplay between macroeconomic conditions and local factors will shape its trajectory. “Germany’s residential property market is at a pivotal moment. Although challenges remain, the sector’s resilience and structural fundamentals offer significant growth potential,” Holz concluded. Methodology The analysis includes residential properties with at least 20 units, excluding mixed-use, M&A deals, and specialized housing (e.g., student or senior housing). Yield data reflect average-to-good properties without significant under-rent or capex requirements. Source: Lübke Kelber,