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Germany’s housing market is navigating turbulent waters, with construction delays, soaring costs, and regulatory hurdles exacerbating the mismatch between supply and demand. Recent events—one organized by the Association of German Pfandbrief Banks (VdP) in Berlin and another by the BIIS Residential Property Conference in Frankfurt—along with a press discussion organized by PB3C, provided plenty of practical insights into whether the country is any closer to unlocking housing development.
Held as a hybrid event, the VdP forum gathered around 300 attendees, both in person and virtually, to discuss how Germany can overcome its current housing crisis. Jens Tolckmitt, Managing Director of the VdP, lost no time in emphasising the broader socio-political dimensions of the housing shortage. The affordability crisis, especially in large urban centers, is making homeownership increasingly unattainable for middle-income households. Tolckmitt stressed that the gap between rental prices and home purchase costs is widening, creating a significant social tension that could have far-reaching political implications.
For REFIRE, the VdP Forum's overarching message was that the country’s construction industry is stuck in the past. Professor Dr. Michael Voigtländer, property economist at the Cologne Institute for Economic Research (IW), and no stranger to these pages, delivered a sobering assessment: the productivity of Germany’s construction sector has stagnated for over 30 years. In his view, the reliance on traditional, small-scale methods makes it impossible to meet the growing demand for new housing.
Voigtländer identified serial and modular construction as the “game changer” Germany needs. In this method, large building components or entire room modules are prefabricated in factories and assembled on-site, reducing costs and speeding up construction. The approach is already well-established in countries like Denmark, where 40% of residential construction employs modular techniques. In contrast, Germany lags far behind, with modular construction accounting for just 5% of new builds.
"Germany lacks economies of scale due to the fragmented nature of the market and the obsession with custom-built solutions," Voigtländer quipped, adding a bit of humour to his otherwise grave assessment. "Every German motorway bridge is unique, individually designed like a bespoke suit, which is why construction takes so long."
Modular construction as a means of bypassing price fluctuations
By adopting serial construction, Germany could overcome its labour shortages, shorten construction timelines, and cut costs. The key advantage, as Axel Gedaschko, President of the GdW, pointed out, is that modular construction allows companies to bypass fluctuating market prices. "With prefabrication, the time savings are significant, and prices are lower than average," Gedaschko explained. However, as both Gedaschko and Voigtländer noted, Germans still harbour prejudices against modular construction, associating it with bland, cookie-cutter homes.
Fabian Viehrig, Head of Construction and Technology at GdW, lamented that Germany had "slept on the technology," while Denmark and other European neighbours surged ahead. Viehrig argued that modular construction is particularly suited for urban centres, where the need for affordable housing is greatest. "We’re already behind, but serial construction can help us catch up—if we can get past our love for one-off designs."
Yet, there are signs of cautious optimism. Thomas Hofer, Head of Domestic Property Financing at the VdP, provided a mixed but hopeful outlook. Interest rates may have surged, slowing the property market, but there are signs of recovery. Households, benefiting from rising wages and lower inflation, are regaining purchasing power, and Hofer noted that demand for property loans is beginning to rebound. However, this recovery will only matter if developers can actually deliver affordable housing at scale—a challenge modular construction could potentially solve.
BIIS Residential Property Conference
The BIIS event, held as a hybrid at the Maritim Hotel in Frankfurt, took a more analytical approach, focusing on the accurate valuation of real estate assets in a volatile market. Ralf Werner, head of the Frankfurt, Hamburg, and Cologne branches of Instone, shared insights into the difficulties of land acquisition over the past two years due to valuation uncertainties. Developers like Instone had paused land purchases until prices became more aligned with market realities. Werner’s optimism now stems from government initiatives like the Growth Opportunities Act, which includes special depreciation allowances for rental housing, potentially spurring investment.
"We expect price increases of 20% to 30% for new-build flats in cities like Frankfurt over the next two to three years," Werner remarked, though his tone suggested cautious optimism rather than unbridled enthusiasm.
Valuation concerns are central to the broader market debate. Thomas Rothäusler from Deutsche Bank emphasized that the housing market has shown resilience despite rising interest rates. The days of pricing properties at 40 times annual rent may be over, but the market correction has brought valuations closer to reality. Jan Linsin from CBRE pointed out that prime yields for new constructions in top locations have shifted from 2.56% to 3.39%, a clear signal of the market’s adjustment. "Valuations are becoming more realistic," Linsin said, but warned that further adjustments are likely, particularly for portfolios saddled with ESG and maintenance requirements.
Adding to the discussion, Lars Vandrei from Catella Residential noted that while the market has likely hit bottom, recovery will be slow. Vandrei stressed that Germany’s high rate of private ownership—93% of the residential market—is stabilizing prices. However, Raimund Noss from PMA warned that institutional investors remain wary. Many are cautious about re-entering the market, concerned that the valuation adjustments are not yet complete. "Private buyers might stabilize the market for now," Noss observed, "but they’re not going to trigger the large-scale development Germany needs."
This hesitancy among institutional investors has broad implications for Germany’s housing supply. Developers rely on the capital and long-term commitments of institutional players, and their caution slows the entire pipeline of new projects. Furthermore, the sluggish recovery of property valuations could delay the type of large-scale development projects that Germany desperately needs to address its housing shortfall.
Financing, valuation, and development
Both the VdP event and the BIIS conference highlighted the interconnectedness of the financing, valuation, and construction challenges facing Germany’s housing sector. While the VdP event emphasized modular construction and technological innovation as key to overcoming housing shortages, the BIIS conference showed clearly how valuation corrections and institutional investor caution add another layer of complexity.
On one hand, modular construction offers a way to significantly lower costs, reduce project timelines, and overcome labour shortages. Yet, even with these potential advantages, developers like Instone hesitate to commit to new projects until property valuations align with market realities. This interplay between financing mechanisms and valuation adjustments reflects the broader challenges Germany faces: even with innovative construction methods on the table, the market dynamics of valuation and capital investment must be aligned to unlock new housing supply.
Developer frustration and glimmers of hope
At the press conference organized by PB3C in Berlin, frustration among developers was palpable. Jan Grade, Managing Director of Empirica Regio, reiterated that while there has been some recovery in financing, completion figures will remain low for another two to three years. "We’re not out of the woods yet," he warned, pointing to the sluggish pace of project completions, particularly in urban centres.
Anett Barsch of Swiss Life Asset Managers Germany added that local regulations continue to stifle development. "Parking space requirements, overly cautious development plans, and the watering down of good ideas through bureaucracy are slowing us down," she said. Barsch highlighted the paradox that while regulations are designed to ensure quality and safety, they often add significant costs and delays, making affordable housing more difficult to deliver.
Meanwhile, Stefan Spilker, Managing Director of Fox Real Estate, pointed to the rise of micro-apartments as a temporary solution to the housing crisis. While these smaller units cater to singles and older residents, Spilker noted that they are not a long-term fix. "We’re pushing families out of the cities into the surrounding areas," he said, adding, with a hint of dark humour, "At this rate, city centers will be filled with tiny apartments, but no one will be able to afford to live there."
Is Germany moving forward?
Germany’s housing market remains at a critical crossroads. While modular construction offers a tantalizing solution to the country's long-standing productivity issues, implementation remains slow. Entrenched regulations, market hesitancy, and a cautious institutional investor base all contribute to the logjam.
On the financial side, interest rates have stabilized, and rising wages provide some hope for a gradual recovery in demand. Yet, developers remain cautious, with many waiting for valuations to adjust further before launching new projects. Institutional investors, once the backbone of large-scale developments, are still sitting on the sidelines, wary of over-committing in a market where property prices remain volatile.
In the end, while Germany may be laying the groundwork for a more sustainable housing market, the road ahead is filled with challenges. Without decisive action to streamline regulations and align financing and valuation mechanisms, the housing crisis will continue to loom large. If Germany doesn't act soon, it risks being overtaken by its more nimble European neighbours. Or, as one attendee at the BIIS conference wryly noted, "By the time we figure this out, Denmark might be prefabricating bridges and houses for us."
