GERMANY Trends and Developments Contributed by: Carsten Loll, Otto von Gruben, Ivo Veit Wanwitz and Sebastian von Hornung, Latham & Watkins
Germany. Investors must address potential chal - lenges related to grid stability and capacity con - straints, which can impact operational efficiency and cost-effectiveness. Despite these challenges, the long-term outlook for data centres remains positive, with private equity firms and infrastructure investors viewing them as stable assets with strong cash flows and reliable tenant demand from major technol - ogy firms. Residential: a defensive asset class with growth potential Germany’s residential rental market stands out as one of the most resilient segments in real estate, offering a stable source of long-term income. With homeownership rates persistently below 50% and a continual shortage of housing supply, the demand for rental properties remains robust. Institutional investors are increasingly expanding their portfolios in the multifamily housing sector, drawn by its capacity to gener - ate stable rental income even during economic downturns. Despite this strong demand, the sector is not without its challenges. The government’s empha - sis on affordable housing has led to heightened regulation, such as the Mietpreisbremse (rent control), which limits rental increases upon letting in urban centres. Additionally, the Kap- pungsgrenze (rental cap) restricts rent increases to a maximum of 20% over a three-year period, or 15% in areas with tight housing markets. This legal mechanism ensures gradual and predict - able rent adjustments, protecting tenants from excessive hikes while allowing landlords to man - age rental yields. Exceptions may apply for sig - nificant property improvements, requiring land - lords to justify higher increases.
These regulations generally restrict rental increases through re-letting, rent review, and modernisation measures, particularly in high- demand areas like Berlin and Munich. Investors must navigate these regulatory frameworks, including compliance with the Mietpreisbremse and Kappungsgrenze , to optimise rental yields while ensuring adherence to local housing laws. Concurrently, rising interest rates and devel - opment costs have slowed new construction, further deepening the housing shortage and enhancing the value of existing rental assets. Although rental hikes are constrained, residential properties continue to be attractive investments due to their defensive nature and predictable income streams. Residential investments further provide PERE investors with the opportunity to align their investment strategies with ESG goals, integrat - ing sustainability measures into new develop - ments and refurbishment projects to access public funding and tax incentives. Simultane - ously, some funds are targeting distressed resi - dential developers facing financing challenges, enabling them to acquire projects at discounted valuations. Legal due diligence and strategic contract negotiations, including compliance with the BGB and BauGB, are essential to secure favourable terms and mitigate risks associated with distressed assets. This strategic approach not only addresses immediate market challeng - es but also positions investors to capitalise on long-term growth opportunities in Germany’s residential rental market. Future outlook: What is next for PERE in Germany? The next few years are expected to bring a peri - od of capital adaptation and sector specialisa - tion in the German PERE market. The increasing reliance on alternative capital structures, includ -
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