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The financial package is intended to upgrade critical infrastructure, accelerate the energy transition, and boost defence capabilities.
Germany’s newly approved financial package is altering the framework conditions for the real estate industry at a fundamental level. While many in the sector cautiously welcome the prospect of long-overdue investment in infrastructure and defence, the accompanying side-effects—particularly higher interest rates and continued uncertainty—are already rippling through the market.
On 21 March, the Bundesrat approved reforms to Germany’s constitutional debt brake, allowing the federal government to raise an estimated €500 billion over several years. This followed Bundestag approval days earlier, marking a pivotal shift in German fiscal policy. The special fund is intended to upgrade critical infrastructure, accelerate the energy transition, and boost defence capabilities. But the implications for property markets are far-reaching.
Real estate lenders and alternative debt providers are already reporting a significant increase in volatility in the wake of the announcement. Yields on 10-year German Bunds surged to 2.8%—the highest in two years—while construction financing rates have jumped by as much as 40 basis points, with the sharpest weekly rise since the global financial crisis, according to Barkow Consulting. Mortgage rates now hover between 3.6% and 3.9%, pushing construction and acquisition costs higher. Barkow’s CEO Peter Barkow warned that “the stream of bad news means there is no end in sight” and expects another wave of redemptions from property funds by mid-year.
Loans are likely to become even more expensive
Francesco Fedele, CEO of BF.direkt, also cautioned that forecasts of falling interest rates are misplaced. “The interest and credit markets reacted immediately. A historic debt will probably have to be financed by means of a special fund,” he said. “We’re already seeing the most significant weekly increase in building interest rates since the financial crisis.”
ZIA President Iris Schöberl warned that the new borrowing could crowd out residential development. “The additional debt incurred by the federal government for national defence and infrastructure could make loans even more expensive,” she said. ZIA is calling for equity-replacing funding tools and guarantees via the state promotional bank KfW to reactivate stalled new-build projects.
Indeed, project developers remain the weakest link in the value chain. Expectations in the sector fell sharply in the latest ZIA-IW Real Estate Sentiment Index, with the overall climate for developers dipping to just 4.9 points. The sector continues to contract, plagued by rising costs, limited access to finance, and disappearing margins.
Fears of rising inflationary pressures
While hopes for market recovery persist, the inflation risk associated with the financial package is increasingly under scrutiny. The German Economic Institute (IW) has warned that the scale of new debt—potentially exceeding €2.2 trillion—could exert substantial inflationary pressure if not counteracted by structural reforms. “There is a risk that the additional debt will create inflationary pressure, causing interest rates to rise and the hoped-for growth impulses to fizzle out,” the IW wrote in a March analysis. The concern is that the construction and defence sectors, both targeted for major investment, lack the capacity to absorb such funds without triggering price increases.
Sven Carstensen of researchers Bulwiengesa echoed those concerns, warning that the rise in borrowing costs puts a question mark over any assumptions that residential property prices have bottomed out. “The clouds have darkened,” he said to REFIRE at the recent MIPIM trade fair.
Others remain more sanguine. Cushman & Wakefield’s David Gingell told MIPIM delegates in March that the new investment programme could finally end decades of underinvestment. “It will be incredible for growth as it will fund infrastructure as well as defence,” he said. “This amendment will represent a meaningful statement of intent from the new government.”
But the crowding-out effect is real. Residential developers fear being sidelined as public-sector contracts for rail, roads and bridges absorb scarce labour and materials. Mike Kammann, CEO of Schwäbisch Hall, has warned that integrating housing into a future infrastructure ministry would further delay critical support. “In private residential construction, there are lead times of two to three years. When I look at the approval figures now, I fear for the years 2026 and 2027.”
Rising interest rates make loans more expensive
Vonovia’s CEO Rolf Buch, announcing another year of losses, was blunt: “Higher interest rates are not good for real estate values because they make refinancing more expensive.”
Nonetheless, some in the industry are finding opportunity. With valuations resetting, distressed deals in development are attracting long-term institutional capital once again. One recent transaction saw a large development site in Frankfurt, previously stalled due to insolvency, acquired by an institutional buyer at a significant discount—marking a rare return of core capital into development risk. Patrick Züchner of debt specialist Aukera observes: “More transactional activity brings the typical investors back to the table—not only those seeking 25–30% IRRs.”
Adalbert Pokorski of Greenwater Capital was more direct in his criticism. “The political debt deal will cost tenants and house builders dearly. Rising interest rates make loans more expensive and subsequently slow down all types of real estate investments.”
Yet for this recovery to gain traction, financing conditions must stabilise. The ECB’s planned rate cuts may offer temporary relief, but they are unlikely to outweigh the pressure building in capital markets due to government issuance.
Unless interest burdens are addressed directly, or housing receives clearer prioritisation within the infrastructure agenda, the risk remains that the financial package—while well-intentioned—will deepen rather than alleviate the structural crisis in Germany’s residential market.