Surge in Capital Investment in Real Estate Market Driven by Low Interest Rates and Rising Rents
Introduction
As interest rates decline and rental prices soar, real estate investment is regaining popularity among private investors. This trend is evident in the increasing number of investment-related mortgages compared to loans for owner-occupiers. Additionally, banks are witnessing a return of institutional investors, leading to a revival in property prices, particularly for multi-family dwellings.
Capital Investors Drive Market Growth
According to Interhyp, a Munich-based mortgage broker, capital investors are driving the current resurgence in real estate investment. "Our data indicates that demand from capital investors increased more significantly than from owner-occupiers last year," said Jörg Utecht, CEO of Interhyp. In 2024, one in four financing deals closed through Interhyp was for investment purposes (25%), up from 22% the previous year.
The trend accelerated further in the final quarter of 2024, with private capital investors accounting for 26% of completed financings. This approaches the peak of 27% witnessed in 2021, shortly before the real estate boom ended.
Factors Attracting Capital Investors
Interhyp’s CEO Utecht attributes the renewed interest in real estate investments to the combination of lower interest rates compared to 2023 and rising property prices. Additionally, growing rental income enhances the return prospects for investors.
Similar observations were made by Hüttig & Rompf, a mortgage broker from Frankfurt. In 2024, real estate financing for capital investors increased by 27%. "The temporarily reduced interest rates were a contributing factor," the company said. "We anticipate a continued rise in rental prices, resulting in positive return prospects for real estate investors."
High Rental Prices Fuel Investor Interest
The pressure on rental prices is evident in data released by the Association of German Pfandbrief Banks (VDP) for the fourth quarter of 2024. New lease contracts for multi-family homes saw a 4.6% increase in rents compared to the same period in the previous year.
Rising rents are attracting not only private investors but also institutional investors. According to VDP, which represents around 50 real estate financial institutions, prices for multi-family homes rose by an exceptional 2.9% in the fourth quarter of 2024 compared to the previous year.
"This indicates that some institutional investors are re-entering the market," said Jens Tolckmitt, Managing Director of VDP. In contrast, prices for owner-occupied properties, including single-family homes and condominiums, increased by a more modest 1.2%.
Impact on Home Ownership and Rental Market
While the increased activity of institutional investors is a positive sign for the real estate market, market researcher Stephan Kippes of the Immobilienverband Deutschland Süd views it cautiously as a "tentative sign of recovery."
"The rental market will continue to face upward pressure," predicts Kippes. The shortage of new housing construction and persistent housing demand in major cities contribute to this trend. "Our population continues to grow."
VDP Managing Director Tolckmitt highlights the consequences for home ownership: "Many people can no longer afford to buy property." This influx into the rental market further intensifies competition, driving up prices. "We do not expect the increase in rental prices in sought-after cities to cease."
However, Tolckmitt does not anticipate a new boom in purchase prices. "For that to happen, interest rates would need to drop significantly."
