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German government plans €500bn infrastructure fund
The latest ZIA-IW Real Estate Sentiment Index (ISI) offers little comfort to those looking for a turnaround in German real estate in 2025. The overall sentiment figure for Q1 remains virtually unchanged at 16.3 points (–0.1), but the underlying components point to renewed anxiety: the assessment of the current business situation fell by 6.9 points to 11.1, while expectations for the next twelve months rose by the same margin, to 21.7.
The reversal in outlook is driven almost entirely by financing concerns. A quarter ago, 28% of respondents still expected improved conditions. That figure has now halved to 14%. Meanwhile, the share of those expecting financing to worsen jumped from 7.7% to 19.2%. The shift reflects the market’s response to two developments: the German government’s plan for a €500bn infrastructure and defence investment fund, and growing fears of inflationary pressures from possible new US tariffs under this renewed Trump presidency.
“The federal government's extra debt for national defence and infrastructure could make loans even more expensive,” said ZIA President Iris Schöberl. While the spending programme may support asset values over time, the immediate effect is higher borrowing costs and rising uncertainty about long-term interest rate trajectories.
“In the short term, the effect of interest rates is likely to prevail,” added Dr. Michael Voigtländer, real estate specialist at the Institut der deutschen Wirtschaft (IW) in Cologne, which compiles the index jointly with ZIA. The survey, conducted in February and early March, may even understate the full extent of concern, as many participants submitted responses before the funding implications became widely understood.
Sentiment differs widely across asset categories
Sector-level sentiment continues to diverge sharply. The office segment remains under strain, with business conditions deteriorating further to 11.8 points (–3.7), and the overall climate slipping to 5.8. Persistent uncertainty around workspace demand, lease renegotiations and capex-heavy ESG compliance weighs on sentiment. Expiring leases, valuation resets, and looming refinancing deadlines from 2027 are combining into a potent risk cocktail. “Only those still financially strong after three bleak years—or backed by groups with deep capital pools—stand a chance of escaping the vicious circle,” warned Werner Rohmert in a recent commentary in his well-regarded publication, Der Immobilienbrief.
Project developers report the weakest sentiment across the board. Volatile material prices, regulatory delays, and pricing impasses continue to choke new build volumes, while expectations among developers have deteriorated further. Retail sentiment is slightly improved but too erratic to indicate a trend, owing to the low number of survey participants in that sub-segment.
The residential sector offers the only faint signal of optimism. While current conditions are rated lower (24.0, –9.3), expectations jumped to 33.7 (+12.9), pushing the overall residential climate to 28.8 points (+1.9). After falling in 2022 and 2023, purchase prices stabilised last year and are expected to rise modestly in 2025. At the same time, rents continue to climb due to sustained undersupply.
Still, even in residential, high financing costs are creating negative leverage for many fund structures. “Even with letting security and good quality, a possible doubling of the interest burden in the next few years alone leads to evaporation of the return on equity,” said Rohmert. Fund managers are already reporting pressure from BaFin as liquidity buffers fall below minimum thresholds, with some open-ended residential funds at just 3% liquidity against a 5% minimum.
Despite unchanged wishlist, a major shift is not expected
The industry’s wishlist remains unchanged. The overwhelming majority of ZIA members identify simplified building codes and technical standards (70%), faster building land designation in growth regions (66%), and digitalised permitting processes (40%) as essential to restoring activity. Subsidised interest loans also remain a top priority, with 52% citing their importance. “The sector needs not just investment, but reform courage,” said Schöberl. The interest rate ‘barrier’ remains another constraint—restricting deductibility of borrowing costs and creating tax complications for highly leveraged projects.
Few believe a major shift is imminent. “The general expectation is that no major turnaround is to be expected in 2025,” noted the latest Deutsche Hypo/NordLB sentiment index, mirroring the caution expressed in the ZIA-IW data. Even as inflation expectations ease and the ECB edges closer to rate cuts, the market continues to face capital constraints, valuation mismatches, and policy ambiguity.
Among the few constants is that sentiment remains highly segmented—stronger in residential, weak in office and project development, and volatile in retail. The outlook for the next twelve months is cautiously positive on paper, but the real test will be whether capital, regulation and sentiment can align to restart a market still stuck in neutral.