Bundesregierung/Sandra Steins
Dr. Stefanie Hubig, Federal Minister of Justice and Consumer Protection
The Federal Cabinet's approval on 30th April of a sweeping reform of German tenancy law has landed in a market already under severe stress. The draft bill, presented by Federal Justice Minister Stefanie Hubig of the SPD and still requiring Bundestag approval, introduces five substantive changes to the landlord-tenant relationship that will affect millions of rental contracts across Germany's tightest housing markets. For institutional investors in German residential real estate, the implications extend well beyond the political debate.
Germany has approximately 44 million tenants. Advertised rents rose 4.5% in the final quarter of 2025 compared with the same period the previous year, according to the GREIX Rent Index, with Munich averaging €23.35 per square metre and Frankfurt €17.36. Against this backdrop, the government has moved to close what it describes as systematic loopholes that landlords have been exploiting through furnished apartments, short-term contracts and index-linked rent escalation to circumvent the rent cap. "Especially in times of rising inflation, renting a home must not become a cost trap," said Hubig.
The property owners' association Haus & Grund saw it rather differently. "The federal government is stigmatising private landlords," said association president Kai Warnecke. "The law makes letting less attractive." The scale of the reaction is captured in a single statistic: according to a Haus & Grund survey, 60.5% of private landlords are now considering selling their rental properties as a result of the cumulative regulatory burden.
Five changes — and what they mean
The most immediately impactful change concerns furnished apartments, which have proliferated rapidly in Germany's major cities as landlords have used furnishing surcharges to circumvent the rent cap. In some markets, one in three advertised apartments is now offered furnished. Under the new rules, landlords in tight housing markets must itemise the furnishing surcharge separately in the tenancy agreement. If they fail to do so, the apartment is legally deemed to be unfurnished. For fully furnished properties, landlords may apply a flat-rate surcharge of ten per cent of the net rent, though higher charges remain permissible where the current market value of the furniture justifies it. Market value here means current depreciated value, not purchase price.
The original February draft from minister Hubig had proposed a flat rate of only 5%. This was raised to 10% during coalition negotiations with the CDU/CSU. The taz observed drily that the Union had "watered down several points" but concluded the result was "still better than what has been standard practice so far."
Short-term tenancy agreements, which are exempt from the rent cap and have been widely used as a circumvention mechanism, are to be capped at a maximum of six months, extendable to eight under defined exceptional circumstances. A short-term agreement will only be permissible if the tenant has a genuine, specific reason for the short-term let. The German Tenants' Association (DMB) welcomed the change but noted that repeated sequential short-term lettings remain permissible, which it described as a continuing loophole.
Index-linked rents, in which the basic rent rises in line with the consumer price index, are to be capped in tight housing markets. Above an annual inflation rate of 3%, only half of the excess increase may be passed on to tenants. In concrete terms, had this rule been in force in 2022 when inflation reached nearly 7%, an index-linked rent would have risen by around 5% rather than the full 7%. According to the German Economic Institute, index-linked contracts now account for around 19% of all rental agreements in new-build residential buildings constructed since 2014. The controversial housing company Heimstaden has made index-linked contracts its standard model, precisely because the rent cap applies only to the initial rent, with subsequent increases unrestricted. That route to above-market rent escalation is now being partially closed.
Warnecke was unsparing: capping index-linked rents does not make the underlying costs faced by property owners disappear. "If income is capped whilst expenditure rises, the federal government is effectively expropriating private owners." The association's survey found that 26% of landlords regard the index-linked rent restriction as a significant burden.
The fourth change affects eviction law. Under existing rules, a tenant facing extraordinary termination for rent arrears could avert it by settling the debt in full within two months of the eviction notice. This grace period payment applied only to extraordinary termination, not to ordinary termination with the standard three-month notice period. The new draft extends the grace period payment to ordinary termination as well, but only once per tenancy. Haus & Grund described this as the most damaging provision in the package, with 68.5% of surveyed landlords describing it as a significant or very significant restriction. "If even a lawful ordinary notice of termination becomes invalid, and if landlords have to bear rent losses, delays and costs for even longer, even though tenants are breaching their contractual obligations, then the federal government is destroying not only tenancy law but also trust in the rule of law," said Warnecke.
The one provision that benefits landlords is the raising of the modernisation threshold for the simplified rent increase procedure from €10,000 to €20,000, allowing landlords to pass on a greater portion of smaller modernisation costs through a streamlined process.
What it means for investors
For institutional investors in German residential real estate, the reform introduces new variables into portfolio modelling. Index-linked contracts have been a preferred instrument for managing inflation risk — their partial capping in tight markets reduces one of the key arguments for their use in new tenancies. The furnished apartment rules affect co-living platforms and serviced apartment operators where furnished supply has been a core strategy. The extended grace period for ordinary termination changes the risk profile of residential portfolios by lengthening the effective timeline for dealing with non-paying tenants.
The 60.5% of private landlords considering selling should not necessarily be read as a crisis signal. It may represent an opportunity: private landlords exiting the market create a potential pipeline of assets for professional investors with the management infrastructure to operate within the new regulatory framework.
The reform is not yet law. The Bundestag process will subject it to further scrutiny, and the CDU's track record during coalition negotiations suggests further adjustment is possible. But the direction of travel is clear. Germany's rental market is moving towards tighter regulation of the mechanisms landlords have used to operate outside the rent cap. Investors who have built strategies around those mechanisms would be wise to plan accordingly.