Best risk-return opportunities in eastern Germany while prices slide

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A new report from consultants Wüest Partner highlights how much the residential housing market in the eastern German states has changed since the second half of 2022. In particular, it highlights the new risk-return ratios of investment in various cities, in what Wüest describes as a ‘structural break’ from previous patterns.

Examining purchase prices across 20 cities in the region, Wüest found that in 17 cities, prices fell in the first quarter of 2023 over last year’s prices, in some cases significantly. The average fall was 3.7%, but was higher in Jena (9.2%) and Cottbus (8.2%). The towns of Zwickau and Frankfurt (Oder) both saw price falls of 7.1%.

While these falls sound hefty, prices are still well up on their price levels of ten years ago. Leipzig (up 155%) and Berlin (up 122%) are examples where median purchase prices climbed particularly rapidly. but even at the lower end of the market, Jena and Cottbus both saw sizeable rises of 39.4% and 32.7% respectively.

Rents rose in 14 of the 20 cities since 2022, due to growing demand and very little new supply. Brandenburg an der Havel and Frankfurt (Oder) saw rises of 7.3%, for example, while Berlin saw a surge in rents on new leases of 21%, as we reported in an earlier issue of REFIRE on how regional differences are becoming more pronounced.

Median rents have also risen by far the most in Berlin over the past ten years: up 109.7%, according to the Wüest report. However, there were also strong rent increases in Rostock (plus 71.9%) and Leipzig (plus 65.3%). Measured against this, rent increases in Zwickau (up 18.2%), Neubrandenburg (up 15.6%) and Chemnitz (up 13.2%) were low and thus lagged far behind the rate of inflation over the past ten years.

For risk-averse residential investors, the highest gross initial yields can be found in Dessau-Roßlau and Plauen, which offer up to 10%, followed by Gera at 8.3%. (Plauen, incidentally, has the lowest average price per square metre of the cities surveyed, at €1,159, compared to €6,262 in Berlin.) But investors in Berlin, Dresden, Leipzig and Potsdam should be able to achieve 3.7% to 4.1%, while Erfurt, the capital of Thuringia, should also yield 5%.

For the rest of 2023, Wüest is anticipating stable to slightly rising interest rates, which should induce further price falls for condominiums. For multi-family houses, reduced new construction activity and the shortage of rental apartments had a stabilising effect on prices as demand increased. Rising rents are supporting increases in yields.

Karsten Jungk, partner and managing director of Wüest Partner Germany, articulated what is becoming widely observed throughout Germany’s residential housing markets. “As a result, we tend to expect moderate price declines in the established markets and relatively stable markets in the smaller cities in the short term. We do not expect price crashes. The exception in all markets are older existing apartments with poor energy standards. Here, significant price discounts can be expected in the future.”