Signs of a recovery in the residential real estate market are becoming increasingly evident. Following the downturn that began in late 2022, a trend reversal has been emerging since the end of 2024. However, German residential real estate equities have yet to participate in this recovery, as concerns about rising interest rates remain elevated.
2025: Prices and rents rise in tandem again
According to the Federal Statistical Office, residential property prices increased by an average of 3.3% in the third quarter of 2025. As a result, housing prices are likely to rise broadly in line with rents in 2025, while rental yields remain stable. Over the same period, the yield on 10-year German government bonds increased from 2.4% to 2.9%. At the same time, financing costs for mortgage loans have stabilized at just below 4%.
Prices for newly constructed residential buildings are also picking up again (up 3.2% in November 2025 compared to November 2024), which is generally a positive signal, as prices for existing properties tend to follow new-build pricing trends. However, transaction volumes remain subdued. According to CBRE, the investment volume in the multi-family housing segment reached €8.4 billion in 2025, slightly below the previous year’s level. While the number of transactions rose by more than 40% to 200 deals, the average deal size declined to around €42 million. Large portfolio transactions remained significantly below prior-year levels, whereas single-asset transactions reached a three-year high of €4.3 billion.
2026: The upward trend is expected to continue
CBRE expects further market recovery in 2026, driven by capital reallocation from institutional investors toward residential assets. Transaction volumes are projected to increase to as much as €10 billion. Rental yields are expected to remain stable, implying that property prices should again move broadly in line with rents.
Despite ongoing economic challenges, strong rental growth—supported by persistent housing shortages—is expected to continue at 2025 levels. However, it remains to be seen to what extent rising energy costs—particularly gas prices, given that gas heating still accounts for around 45%—will drive higher ancillary costs. This could limit further rental growth, particularly for net rents.
Housing shortage remains the key price driver
The primary driver of rising property prices and rents is likely to remain the structural shortage of housing. Although building permits increased by 10.8% in 2025 to 238,500 units, the market continues to face supply constraints. Developers are still grappling with high construction costs and tight lending conditions.
Permits for multi-family housing remain at low levels, although early signs of recovery are emerging and are expected to continue into 2026. In addition, project completion timelines remain long—averaging 26 months overall and up to 34 months for apartment buildings. According to projections by the German Economic Institute, housing completions are expected to decline from 235,000 to 215,000 units this year. A meaningful easing of supply constraints is not expected before 2027—and even then, likely not at a level sufficient to resolve the housing shortage, which would require at least 320,000 new units annually.
Despite market recovery, residential real estate equities remain historically cheap
Although the outlook for the German residential real estate market is improving, real estate equities have not participated in the broader equity market rally over the past year. Typically, real estate stocks anticipate a recovery once the market bottoms out, often coinciding with rising property prices. However, investors remain concerned about further interest rate increases.
Yields on 10-year German government bonds have risen by 50 basis points to 2.9% over the past year, meaning that interest rate sensitivity has outweighed the improving fundamentals in the property market. This disconnect may now present an attractive entry opportunity—particularly if interest rates stabilize. Currently, 10-year Bund yields stand at 2.951%, largely unchanged, while valuations appear historically attractive.
Despite average property write-downs of 15% to 20% and expectations of rising prices in 2026, German residential real estate equities continue to trade at significant discounts to net asset value (NAV), near historic highs. Vonovia is currently trading at a discount of 53.4%, LEG at 57.4%, and TAG at 37% (including expected proceeds from asset sales in Poland). On average, companies expect sustained rental growth of 3% to 4%, more than offsetting higher interest expenses.
Vonovia, LEG and TAG: Three distinct growth strategies
Vonovia is generating additional growth through non-rental activities, including in-house services, development projects, and privatization. By 2028, these segments are expected to contribute 9% to 12% of EBITDA, with pre-tax earnings projected to grow at a mid-single-digit rate.
TAG is pursuing growth through expansion in Poland. As of the end of 2025, the company owned 3,526 units and aims to increase this to 10,000 rental units by 2028. Through the acquisitions of Vantage and Robyg, TAG has strengthened its development capabilities. Some of these newly built units are also being successfully sold. For 2026, TAG expects sales proceeds in Poland of €92–98 million.
Valuations based on earnings power—measured by price-to-FFO (P/FFO)—currently stand at 10.13 for Vonovia, 8.72 for LEG, and 12.88 for TAG. Despite mid-single-digit earnings growth and still relatively low in-place rents, these levels are historically low. For example, Vonovia’s average rent stood at €8.20 per square meter at the end of 2025, compared to market rents exceeding €12.00.
LEG, while lacking significant non-rental operations or expansion opportunities abroad, offers upside through expiring rent restrictions: roughly half of its remaining 30,000 subsidized units will exit rent control by 2028. These rents are currently around 60% below market levels and can then be gradually increased within regulatory limits—up to 15% every three years in regulated markets.
Middle East escalation: Is inflation returning?
The escalation in the Middle East currently weighs heavily on global equity markets. Elevated oil and gas prices are increasing the risk of a resurgence in inflation. The European Central Bank expects inflation to rise from 1.9% currently to an average of 2.6% this year—0.7 percentage points higher than its previous projection.
However, inflation could rise even more sharply in the event of a prolonged conflict, continued disruption of the Strait of Hormuz, or further damage to energy infrastructure. In such a scenario, interest rates could rise again—having already increased by 50 basis points since the outbreak of the conflict.
If the conflict does not ease in the near term, the recovery in property prices could stall or even reverse due to rising interest rates. The extent of damage to energy infrastructure in the Gulf region will be a key factor. Israel has recently targeted the world’s largest gas field, while Iranian forces have increasingly focused on energy infrastructure in several Gulf states. Reconstruction could take three to five years, potentially keeping inflation elevated for an extended period.
Given the weakening economic outlook in the US and already subdued growth in Europe, further rate hikes by central banks appear less likely. For long-term investors, current inflation concerns may therefore present an entry opportunity. Even in a worst-case scenario, the conflict is likely to end within the next six months—at the latest when one of the parties exhausts its resources. While rebuilding energy infrastructure will take longer, Gulf states have a strong incentive to restore production quickly. Over time, inflation is therefore likely to normalize, although precise forecasts remain uncertain.
Conclusion: Recovery likely – but interest rates remain the key variable
The war in the Middle East has triggered a sharp correction in German residential real estate equities, potentially creating an attractive entry point—particularly if the conflict subsides soon. From a valuation perspective, the sector appears compelling. At the same time, continued housing shortages are likely to support further price recovery and strong rental growth.
However, the key uncertainty remains the future path of interest rates, with oil price volatility playing a central role. Persistently high energy prices could drive inflation higher and lead to renewed rate increases. In such a scenario, equities may remain under pressure despite attractive valuations. Moreover, high leverage across the sector is likely to constrain earnings growth over the medium term, as average debt maturities of around six years imply gradually rising refinancing costs.
[1] CBRE (Coldwell Banker Richard Ellis) is the world’s largest commercial real estate services and investment firm, headquartered in Dallas, Texas.
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