Real Estate 2025

Last Updated May 08, 2025

Germany

Law and Practice

Authors



Linklaters is a full-service provider offering international advice on legal and tax issues in the real estate industry, which gives it a leading edge in meeting client requirements and demands. The cross-practice team includes real estate experts and specialists in corporate, tax, finance, investment, competition and regulatory law. With more than 50 real estate lawyers in the Frankfurt, Munich and Berlin offices and over 350 real estate lawyers globally, the firm’s real estate team is chosen by leading global investors, developers, occupiers and financial institutions to advise on their largest and most complex or multi-jurisdictional real estate transactions and disputes. The German real estate sector, inter alia, advises private equity clients (eg, Blackstone, BlackRock, and Cerberus), funds and institutional investors (eg, Barings, BNP Paribas REIM, CBRE IM, GARBE, and DWS, GARBE, and Tishman Speyer), as well as a number of Asian clients (eg, Hanwha, Frasers, Huazhu Group, Samsung, and CapitaLand). The firm acknowledges with thanks the contribution made to this chapter by Isabelle-Carmen Weis of Linklaters LLP.

The main source of real estate law is the Civil Code (Bürgerliches Gesetzbuch).

Of further relevance are:

  • the Land Registration Act (Grundbuchordnung);
  • the General Terms and Conditions for Building Contracts (VOB/B);
  • the Mandatory Fee Structure Regulation for Architects and Engineers (HOAI);
  • the Federal Building Code (Baugesetzbuch);
  • the Federal Land Use Ordinance (Baunutzungsverordnung);
  • the 16 states’ individual building regulations (Landesbauordnungen);
  • the Notarisation Act (Beurkundungsgesetz);
  • the Heritable Building Right Act (Erbbaurechtsgesetz); and
  • the Condominium Act (Wohnungseigentumsgesetz).

In 2024, the willingness to purchase property remained subdued. The price spiral, rooted in the low-interest rates of previous years, has left many potential buyers unable to afford property. The economic crisis and the sharp prior increase in interest rates have increased foreclosure rates, with significantly more apartments, houses, and plots of land auctioned compared to 2023. However, 2024 saw a slight decline in interest rates and a slowdown in inflation compared to 2023. Inflation in the eurozone is expected to stabilise during 2025 at the European Central Bank’s target level of 2%. Nonetheless, high government debt and sluggish economic growth are likely to continue. This trend is leading to decreased demand for office, retail, and logistics spaces, which could exacerbate competition for tenants with strong credit ratings.

The residential real estate segment remains the most vital asset class in the German investment market, with demand particularly high in metropolitan regions. Significant transactions were missing in 2024 and the year was primarily characterised by numerous small transactions. Noteworthy transactions in 2024 nevertheless included the sale of the Upper West office building in Berlin and the acquisition of approximately 6,900 apartments from a ZBI sub-portfolio by asset manager ZAR Real Estate.

Blockchain in real estate transactions and the tokenisation of real estate assets have yet to gain broad acceptance, although artificial intelligence is becoming increasingly important in accounting, property management, valuation, due diligence, and ESG monitoring. Looking ahead, investors are likely to focus on sectors where demand is rising, such as residential properties, data centres, micro-living, and student housing. There is also notable demand for spaces offering sustainable inflation protection, achievable through manage-to-core or manage-to-green strategies.

Between 2024 and 2027, real estate loans in Germany totalling approximately EUR228 billion have required/will require refinancing. A capital shortfall of around EUR77 billion is anticipated, due to high loan-to-value ratios and low interest coverage ratios impeding the refinancing process. The residential and office segments are particularly affected, with EUR36 billion and EUR35 billion respectively in required refinancing. An uptick in restructuring cases is expected in both office and retail properties as demand declines.

Federal Building Code (Baugesetzbuch)

In September 2024, the federal government proposed amendments focusing on affordable housing, innovation, construction speed, climate protection, and adaptation. However, with elections having taken place in early 2025, these changes are unlikely to pass within the current legislative period.

Property Tax Reform

Effective from 1 January 2025, the reform aims to introduce fairer property tax assessments, standardising property valuations. Tax reductions may occur in regions with lower land values, whereas expensive cities might face higher charges as municipalities can raise tax rates, increasing costs.

Growth Opportunities Act

From 2025, this act will introduce declining balance depreciation for newly built residential properties, allowing higher depreciation in the early years post-completion. This incentive boosts residential construction for properties finished after 1 January 2024.

Energy Efficiency Guidelines

Stricter building energy efficiency standards will commence in 2025, potentially requiring owners of older properties to modernise to comply, including replacing outdated heating systems.

Charging Stations for Electric Vehicles

The Electromobility Infrastructure Act mandates non-residential buildings with over 20 parking spaces to install e-vehicle charging stations from 2025, introducing further costs to property owners.

CO₂ Tax Increase

From 1 January 2025, the CO₂ tax rose from EUR45 to EUR50 per tonne, encouraging a shift from fossil fuels to renewables. Owners, landlords and tenants face increased heating and operational costs, impacting properties with inefficient systems. State subsidies may support energy-efficient upgrades.

Renewable Energy Sources Act 2025

From 1 January 2025, the government eliminated the free feed-in tariff for new photovoltaic (PV) installations during negative electricity pricing, favouring self-consumption. Investment cost subsidies will replace feed-in tariffs, promoting initial investment yet risking profitability during specific periods.

Amendments to the Regulations on Remaining Useful-Life

Changes from 2025 will impact tax depreciation and valuation, swapping the flat-rate calculation for individual assessments. Expert evaluations may incur additional costs, but they offer greater valuation transparency by reflecting actual property value loss.

Generally, there are freehold titles granting full and absolute ownership, and heritable building rights (Erbbaurechte) giving the right to lease the land for a certain amount of time (30–99 years) and to erect buildings on it. Both categories can be split into condominium shares accompanied by special rights of use for a designated area of the property.

Properties can be encumbered with various rights in rem, such as easements (Dienstbarkeiten), land charges (Grundschulden) and mortgages (Hypotheken).

The Civil Code and the Land Registration Act apply to every transfer of title. In addition, permits under other laws, in particular, the Federal Building Code for properties located in special areas and the Real Properties Transfer Act (Grundstücksverkehrsordnung) for first-time sales in eastern Germany after 28 September 1990, might be necessary. Local authorities might have statutory pre-emption rights in certain designated areas.

The laws applicable to transfer of title do not distinguish between the types of use of the property.

Transfer of title requires a deed notarised by a notary containing an agreement on the sale (Kaufvertrag) and an agreement on the transfer (Auflassung). The notary applies for the permits necessary for the sale and waiver of pre-emption rights, which are a prerequisite for transfer of title and usually also for the payment of the purchase price. The notary also informs the tax authorities about the conclusion of the sale and purchase agreement. They will issue a clearance certificate confirming that real estate transfer tax has been paid, which is necessary for the registration of transfer of title in the land register (Grundbuch).

While economic transfer of title (transfer of possession, use and burdens) is usually agreed for the day following the payment of the purchase price, the actual legal change of ownership only takes place upon registration in the land register.

Title insurance is not relevant due to the title guarantee resulting from the so-called “public belief‟ in the land register. Its accuracy is protected by law and, therefore, a buyer can acquire ownership in good faith (bona fide) even if the property is purchased from an unauthorised person registered in the land register.

Legal and technical due diligence is usually performed on documents provided by the seller. Technical advisers often carry out site visits. Some information can be obtained from authorities with power of attorney from the seller and public registers. In some cases, separate environmental due diligence is performed.

The typical legal report contains information about title and encumbrances, leases, public building and zoning issues and other permits (if required), environmental information and, if relevant, acquisition documents, service agreements and litigation. In a forward transaction where the building is still to be developed, the report also covers development, project management, construction, architectural and other agreements relating to the development.

The extent of representations or warranties agreed depends on the market climate. Germany is currently a seller’s market, giving sellers enough leverage to avoid granting the buyer large-scale representation or warranties. Instead of objective guarantees, guarantees to the seller’s best knowledge are often given.

Remedies

The parties can agree on the type of remedies – either compensation in cash or actual repair of the damages. The parties often agree on a cap of the overall maximum amount of compensation. This agreement is regularly accompanied by both a de minimis method, granting damages only if the claim exceeds a certain amount, and a basket method, granting compensation only if the sum of all claims exceeds a certain threshold, resulting in the seller having to cover the total amount of the claims rather than just the difference between the total and the threshold.

The buyer carries the risk of the seller’s insolvency often without being especially secure. Possible security would be paying a certain amount into an escrow account, holding back on a certain amount of the payment, or simply lowering the purchase price. In some cases, a joint liability of or comfort letter by a parent company can be agreed with the seller. Less often a W&I insurance is contracted as security for the given seller guarantees.

Limitation of Liability

The statutory period for expiration of claims of approximately three years is often contractually limited to 12 or 18 months. Depending on the seller’s negotiation skills, a cap, de minimis amount and basket can be agreed to limit liability. The liability is often limited to approximately 5–10% of the purchase price (cap); claims can only be raised if the individual claim reaches at least 0.1–1% of the purchase price (de minimis) and exceeds 0.5–1.5% of the purchase price (however, approximately EUR500,000 maximum) either by itself or together with other claims (basket). It remains to be seen how the changed market environment influences these values in favour of purchasers.

In addition to the civil and public law provisions mentioned in 1.1 Main Sources of Law, the provisions contained in the Anti-money Laundering Law (Geldwäschegesetz) are particularly important for investors and the required know-your-customer checks sometimes create unexpected bureaucratic hurdles. Company register excerpts, passport copies, etc, must be provided to those who are obliged to carry out the checks. Corporations, partnerships and foundations operating on the financial market and/or buying real estate in Germany have to report their beneficial owners to the register of ultimate beneficial ownership (Transparenzregister). Checks and notifications not only have to be carried out by providers of financial services, but also to a certain extent by brokers, law firms and notaries.

Under the Federal Soil Protection Act (Bundesbodenschutzgesetz), the polluter, all current and former users, and all current and former owners of a property can be held liable for environmental laws irrespective of whether they are aware of the contamination or if it was caused by them. When requesting remediation measures, the authorities act solely on the basis of the principle of effectiveness and will usually charge the most financially sound party, which is often the owner. However, the owner may take redress from the actual polluter if their actions or fault can be proved.

A property owner has a right to a building permit if the proposed building complies with public building law. The issued building permit will ensure the legality of the building and its permitted use.

Local Authorities

In many areas, the general public building law is substantiated in local development plans (Bebauungspläne) issued by the local authorities that make provisions for the permitted use and size of the property. If there is no development plan, the permitted use can be determined by the Federal Building Code and the Federal Land Use Ordinance. If no local development plan exists or significant amendments are required for a development to be permitted, the owner might enter into an urban development agreement (städtebaulicher Vertrag) with the local authorities with the aim of establishing/amending the project-related development plan to secure the building project.

The fundamental right to property is protected by the German constitution, which only allows the government to expropriate for public interest, if authorised by German law, for appropriate cause and against compensation. There are federal and federal state laws enabling expropriation. The procedure varies, depending on the law it is based on. Compensation is based on the market value of the property at the time of expropriation.

Municipalities also have the right to expropriate, as a last resort, to fulfil their goals under the Federal Building Code, especially if the real estate is located in a development area (Entwicklungsgebiet).

Asset deals are subject to RETT, with the rate varying between 3.5% and 6.5% depending on the federal state in which the asset is located. VAT is in principle not applicable to the sale of real estate. If the property is sold B2B, the seller can waive the VAT exemption, thus VAT at 19% applies. The buyer has to pay this VAT to the tax authorities (reverse charge). If the buyer intends to use the real estate to render non-VAT-exempt supplies, the VAT triggered may be reclaimed as input VAT; hence no VAT would actually be payable.

RETT-neutral share deals were significantly impeded by the recent RETT reform. Share deals trigger RETT if at least 90% of the partnership interest/shares of a partnership/corporation holding German real estate is transferred within ten years to new partners/shareholders.

In addition, RETT is triggered if at least 90% the shares in a corporation or partnership holding German real estate are directly or indirectly unified in one hand or the hands of affiliated entities.

Generally, there are no legal restrictions on foreign investors acquiring real estate in Germany.

However, a notary may only notarise a real estate sale and purchase agreement with a foreign entity as the buyer and, therefore, a foreign entity can only acquire real estate in Germany if the entity is registered in the German ultimate beneficial owner register (Transparenzregister). Due to the European single market, registrations in an equivalent register of an EU member state are also sufficient.

Generally, acquisitions are financed by both debt and equity, with the ratio between the two depending on the market. Equity is often provided downstream in the form of shareholder loans that are expected to be subordinated to the debt financing. If insufficient equity is available in the company’s group, additional funds may need to be obtained from mezzanine lenders. For mezzanine loans, there will typically be an increased margin, giving the lender a way to participate in the profit and/or the possibility to transform the loan into an equity participation (“equity kicker”).

Portfolios are often financed by syndicated loans involving different lenders, and secured debt is traded between the lenders. For refinancing, the so-called Pfandbrief (covered bond) is often used. In this case, the loan and granted security must comply with a strict standard.

Furthermore, sale-and-leaseback transactions can be seen as a different form of financing, as the former owner/now tenant of the property activates new liquidity.

The most important security granted over real estate is the land charge (Grundschuld) or mortgage (Hypothek). While the more often-used land charge is non-accessory in nature and connected to the secured claim via a security purpose agreement, the mortgage is accessory in nature and attached to the underlying claim. Both are registered as rights in rem in the land register, as encumbrances over the freehold property or a hereditary building right.

In addition, the typical security package includes the assignment of rental income, claims under the acquisition agreement, the property management agreement, insurances and contractor agreements. Bank accounts and shares or interest are pledged to the financing bank. The property/asset manager is expected to conclude a duty of care agreement.

If developments are financed additionally, cost overrun and/or finance costs shortfall guarantees are commonly granted by the sponsor.

There are no restrictions on granting security over real estate to foreign lenders and no restrictions on repayments made to a foreign lender under a security document or loan agreement.

However, the payment of interest to foreign lenders can be restricted. Under German tax law, banks and other financial services providers must withhold taxes on interest payments made to foreign lenders that do not themselves qualify as a bank or financial services provider.

If a foreign lender has a permanent establishment in Germany and the loan is attributable to this establishment, the foreign lender is subject to German taxation on the profit resulting from the loan. Depending on the applicable double-taxation treaty, the interest will generally either be tax-exempt in the foreign jurisdiction or the German tax will be credited against the tax liability arising in this jurisdiction.

Land charges/mortgages as well as share pledges require notarisation which triggers mandatory statutory notarial fees. Furthermore, the mandatory registration of land charges/mortgages on the land register triggers registration fees. If the land charge/mortgage is granted by a foreign entity, the land registry often requests a cost advance before registration.

Enforcement of security is done via court proceedings for which court fees are payable. The court will only initiate the proceedings once the secured creditor applying for the proceedings has paid a cost advance.

No taxes apply to the granting and enforcing of security. However, if a land charge/mortgage is enforced by way of public auction, RETT of between 3.5% and 6.5% (depending on the German federal state in which the property is located) is payable, for which the successful bidder and the property owner are jointly liable.

Additionally, interest on loans granted by a foreign lender and secured by German real estate would trigger German domestic income for the lender; ie, interest would in principle be subject to German income tax if no double tax treaty excludes the German right to tax this income.

Depending on the security-granting entity, financial assistance and corporate benefit rules must be complied with.

The prohibition on financial assistance only applies to German stock companies (Aktiengesellschaften). If there is a control agreement or a profit transfer agreement (Beherrschungs- oder Gewinnabführungsvertrag) in place between the stock company and the financially assisted company, the prohibition on financial assistance does not apply. On the other hand, a transaction carried out in violation of the financial assistance rules is void.

As a corporate benefit rule, managing directors are legally obliged to act as prudent business people vis-à-vis their company. In upstream or cross-stream loans within a group, there is an obligation on the lending entity to take security if there is a credit risk in relation to the borrowing entity. Furthermore, the German Code of Corporate Governance applies to members of the managing board and the supervisory board of German listed stock companies. An infringement of corporate benefit rules does not lead to the invalidity of a transaction, but to the possible liability of the directors, managing board, and/or supervisory board.

In addition, other rules deriving from corporate and insolvency law apply, including rules relating to capital maintenance, restrictions on transactions between a company and its affiliates other than its own subsidiaries, and provisions relating to transactions that disadvantage creditors and have been entered into within a certain period before the commencement of insolvency proceedings.

In addition to contractually agreed prerequisites for the enforcement of security, such as serving an enforcement notice to the security grantor and the borrower, and giving the chance of healing the default, additional statutory requirements apply to the enforcement of a land charge/mortgage. It must be terminated with a mandatory six months’ notice period and the enforceable copy of the land charge/mortgage deed must be officially served to the property owner. Only once this has been done can enforcement proceedings via forced administration and/or forced auction commence. A forced auction procedure takes a minimum of several months; in some cases it can take more than one year.

Additional steps to give priority to a lender’s security interest are not required.

There are no pandemic restrictions on a lender’s ability to enforce security.

Although the percentage of non-performing loans has multiplied within the last year, and preparations for enforcement of real estate securities are underway in some cases, a significant number of actual enforcements has not been initiated. Lenders largely still tend to agree on a standstill and issue waivers or reservation of rights letters.

Existing secured debt can be subordinated both by agreement and by law.

A creditor can agree to subordinate its existing debt to that of another creditor by means of a subordination agreement or an intercreditor agreement. If the existing debt is secured by a land charge/mortgage and such land charge/mortgage will be subordinated to a newly created land charge/mortgage, registration of such subordination is required in the land registry in order for it to become effective.

Shareholder loans and other arrangements equivalent to shareholder loans are subordinated to the claims of all other creditors by law, except:

  • when the relevant shareholder is not a director of the company and does not hold more than 10% of the registered share capital in the company (minority shareholding privilege – Kleinbeteiligungsprivileg); or
  • when the shareholder has acquired shares with the intention of rescuing the company from insolvency (restructuring privilege – Sanierungsprivileg).

In addition, newly created debt is subordinated by law to outstanding debt to public authorities.

A lender holding or enforcing security over real estate cannot be held liable under environmental laws due to its position as lender/security beneficiary.

Under the Federal Soil Protection Act, the polluter, all current and former users, and all current and former owners of a property can be held liable for contamination. The lender can, therefore, be held liable in the unlikely circumstances that they were in possession of the property or that they are themselves the polluter.

In certain circumstances, a borrower’s insolvency administrator may challenge agreements entered into by the borrower between one month and ten years prior to the filing for the opening of insolvency proceedings. The following are valid reasons for challenging security interests granted by the borrower:

  • the creditor had knowledge of the borrower’s illiquidity, or the borrower had already applied for the opening of insolvency proceedings, or the creditor was aware of circumstances leading directly to the conclusion that the borrower was illiquid or had applied for insolvency proceedings;
  • the creditor is a shareholder of the borrower;
  • the borrower provided the security intending to discriminate against the rights of other creditors and the creditor was aware of this intention;
  • the creditor did not have a valid right to obtain the security that he or she was not due to receive, or was not yet due to receive, or was due to receive in a manner that was otherwise inconsistent with the original agreement between the borrower and the creditor;
  • the interests of other creditors were directly prejudiced at the time the security was granted (it not being sufficient that they might have been prejudiced as a result of granting the security); or
  • the security interest was granted gratuitously.

If immediate and adequate consideration was received by the borrower for the transaction for which the security was granted, it can only be challenged by the insolvency administrator if the transaction was undertaken wilfully to discriminate against other creditors’ rights.

If a transaction is successfully challenged, the secured creditor must repay any amounts already received or release the respective security interest.

There are currently no taxes or levies in connection with real estate secured mortgage loans or mezzanine loans in Germany nor are there any proposals to impose those. Statutory notarial and land registry fees apply to any recordings in the land register, relevant for mortgages (see 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security).

In Germany, strategic planning and zoning are governed by federal statutory law and the relevant statutory law of each of the 16 German states, as well as regional and local development plans (Flächennutzungspläne, Bebauungspläne). Particularly important codes are the Federal Planning Act (Raumordnungsgesetz), the Zoning Codes of the German states (Landesplanungsgesetz), the Federal Building Code and the Federal Land Use Ordinance.

The design, appearance and method of construction of new buildings or refurbishment of existing buildings are governed by legislation, specifically the Federal Building Code and the Federal Land Use Ordinance. Regarding the safety of buildings (fire safety, layout and structural safety), the building codes of the respective federal states apply.

Municipalities are responsible for the regulation of the development and use of individual parcels of land. The federal government of Germany lays down “leading concepts‟ (Leitbilder), such as the guarantee of equal living conditions within Germany, the protection of the natural environment, and the necessity of correcting structural imbalances between former East and West Germany.

The federal states establish comprehensive plans (Raumordnungspläne) covering the entire state. These plans and their objectives are binding on all subordinate planning authorities. They mostly cover the requirements for the desired structure of settlements, the need for areas to remain undeveloped, and infrastructure locations and routes.

The municipalities’ planning functions are carried out at two levels:

  • the development plan for the entire territory of the municipality (Flächennutzungsplan), which lays down the main features of the various types of land use that will be permitted on the basis of intended urban development and the anticipated needs of the municipality, eg, areas earmarked for development, transport, public infrastructure, green spaces, etc; and
  • a detailed plan for individual areas within the municipality (Bebauungsplan), which designates the permitted land use and usually refers to the Federal Land Use Ordinance, giving a detailed description of the building areas (eg, residential, industrial, retail or business) and restrictions on the size, height and floor area of permissible buildings.

In order to obtain entitlements to develop a new project or complete a major refurbishment, an application specifying the planned construction work and the use of the land must be submitted. The responsible authorities will then forward the application to any other authority with potential interest in the planned project.

The responsible authority itself verifies whether the project complies with planning law. If it does, and if no relevant concerns are raised by the other authorities involved, the responsible authority must grant the building permission.

Legal action can be taken against the relevant authority’s decision to refuse planning permission. Third parties, such as neighbours, can commence proceedings against the issuance of a building permit if they can prove that the decision may unlawfully affect their rights.

Arrangements known as urban development agreements can be entered into between building owners or developers and the relevant municipality. In these contracts, the municipality undertakes to support the building owner/developer, or the building owner/developer undertakes to support the municipality in its planning goals.

If a building is not built or used in line with the issued building permit, the competent authority has the right to prohibit the use or – in a worst-case scenario – request the deconstruction of the building. The authority is obliged to exercise reasonable discretion (ie, it must adhere to the principle of proportionality). This means, if there is any way to grant a building permit to cover the actual building or use, it must be granted (after the usual application process) instead of a deconstruction order.

Generally speaking, any entity, including foreign entities, that has legal capacity can hold real estate in Germany, unless prohibited by law or court or administrative order. Limited liability companies (GmbH) and limited partnerships (KG) are most commonly used to acquire and hold real estate.

German law also recognises real estate investment trusts (REITs), which are listed real estate stock companies. However, there are only five REITs listed in Germany.

Limited Liability Company

A GmbH as limited liability company is a corporation acting fully independently of its shareholders, subject to rights and obligations. Only the company assets of a GmbH serve to discharge the company’s obligations vis-à-vis creditors, and any personal liability of the shareholders is excluded if the capital contributions have been fully paid. The applicable legal framework is quite flexible, and the company’s articles can be adjusted to specific needs. Its foundation requires a notarial act. The management is vested with one or more managing directors, who are generally bound by the instructions of the shareholders. The company may have a supervisory board (Aufsichtsrat). In order to establish a limited liability company, at least half of the mandatory EUR25,000 capital contributions have to be paid. Notarial, company register fees and fees for business registration amount to approximately EUR1,000.

Limited Partnership

The KG is a limited partnership under German law and must have at least two partners. The partnership agreement does not require notarisation, unless it contains obligations requiring the observation of specific form requirements (eg, contribution of real estate). It is characterised by having at least one general partner, personally liable without limitation, and one or more limited partner(s) only liable to the extent of their liable contribution (Hafteinlage) registered in the commercial register. Additional contributions can be agreed. Management is vested with the general partner.

There is no mandatory minimum contribution. Company and business registration fees as foundation costs amount to approximately EUR550.

Although German law recognises REITs, they are hardly relevant (see 5.1 Types of Entities Available to Investors to Hold Real Estate Assets).

German REITs are listed stock companies and cannot be structured in another form. They are tax-exempt on entity level. Distributions are taxed on shareholder level.

In addition to the Commercial Code (Handelsgesetzbuch) and the Stock Exchange Act (Aktiengesetz), the REIT Act (REIT-Gesetz) applies to them. In addition to being listed at the stock exchange, REITs must fulfill certain other criteria, such as a minimum distribution of 90% of annual profit, focus on real property investment (at least 75%), minimum diversification (no shareholder must maintain more than 10%, minimum free flotation of 15%), exclusion of real property trade and a minimum equity ratio of 45%.

The minimum share capital for a GmbH is EUR25,000. Capital contribution in kind is possible but is subject to further restrictions.

No minimum capital requirements apply for a KG.

No specific governance requirements apply to real estate investments as such. However, regulatory requirements apply if the investment vehicle qualifies as an investment fund under the German Investment Code (KAGB) – ie, any collective investment undertaking that raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and that is not an operative business outside the financial sector. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) supervises German fund managers and investment funds offered by such companies under the provisions of the KAGB.

The annual entity maintenance and accounting compliance costs depend on the individual circumstances of the entity and the property itself.

German law differentiates between Pacht, entitling the tenant to use the property and benefit from it, and Miete, which only entitles the tenant to use the property. For example, the leasing of a hotel, including all fixtures and equipment, and the right to operate the hotel is regarded as a Pacht contract.

There are no different types of commercial leases, apart from the general differentiation previously explained.

Leases are subject to the Civil Code, which regulates basic contractual matters. Within that scope, contracting parties may freely negotiate the contractual provisions, as long as they do not violate any mandatory law, eg, regulations on the maximum rent payable and its increase for residential leases.

Fixed leases typically run for a period of between five and ten years, and extension options are often agreed. It is possible to negotiate terms of up to 30 years.

The landlord is obliged to maintain the premises in the agreed condition – therefore, the landlord must bear all costs for repairs and decoration. It is market standard for maintenance and repair work to be undertaken by the tenant at its own cost. In most cases, the landlord remains responsible for structural and major repairs, and the tenant carries out internal repairs and maintenance as well as repairs solely for interior decoration.

Case law regards clauses that oblige the tenant to repair the roof and structure of the leased premises, to decorate at fixed intervals, to comply with unlimited renovation obligations at the end of the term, or to pay for renovation irrespective of the premises’ actual state at the end of term, to be unfair and invalid.

Triple net leases (in which the tenant agrees to pay all real estate taxes, building insurance and maintenance) are generally not permitted unless individually agreed; eg, in sale-and-leaseback transactions.

Rent is mainly paid on a monthly basis. In rare cases quarterly, six-monthly or yearly rents are agreed.

In principle, the parties are free to agree on the amount of the rent and its increase under commercial tenancy law. The parties generally agree on rent adjustment systems, such as indexation rent, graduated rent or turnover-linked rent. For residential leases, strict limitations apply to a possible rent increase.

It is usual to agree on the rent adjustment system in the lease agreement itself. It is seldom agreed to negotiate a new rental based on the then-applicable average market rent after a certain number of years, or if the tenant has exercised an option right. Generally, commercial rents are adjusted according to changes in the Consumer Price Index (Verbraucherpreisindex). A graduated rent will be raised by a specific amount after a certain period. A turnover-linked rent will be adjusted to the change of turnover of the tenant for a certain period; in order to mitigate the risk of falling sales, however, a minimum fixed rent is usually agreed.

In principle, rent is VAT-free, the landlord is hence not entitled to deduct input VAT. However, the landlord may waive the VAT exemption, resulting in its right to deduct input VAT. Such waiver is only effective if the tenant exclusively uses the premises to render supplies which do not exclude the right to deduct input VAT; ie, the landlord’s input VAT deduction depends on the tenant’s use of the property. Lease agreements therefore normally provide for a compensation claim if the landlord’s waiver fails due to the tenant’s use.

Rent securities, such as deposits or bank guarantees, are often requested before the commencement of a lease, if agreed upon in the lease agreement. In landlord-friendly markets such as Berlin, Frankfurt and Munich, landlords also increasingly demand a lump-sum payment for administrative costs of between 1% and 5% of the annual rent. Such lump-sum payment has to be made irrespective of whether such administrative costs have actually been accrued by the landlord.

Generally, the landlord must pay for the maintenance and repair of commonly used areas, provided no other agreement has been made in the lease. In commercial leases, those costs usually must be borne by the tenants in proportion to their leased area and are normally capped at 5–10% of the annual net rent.

The Civil Code provides for two ways of regulating such costs: either the actual costs can be allocated to the tenants on an annual basis, or an annual lump sum can be fixed to cover these costs. It is possible for specific utilities to be allocated to the tenant according to the actual consumption, and a lump sum payment agreed for other utilities. The parties can agree that the tenant will enter into direct contracts with the utility provider for specific utilities. Leases generally provide for a monthly utility cost prepayment together with the rent. The actual costs will be settled regularly within 12 months of the end of each rental year.

Real estate taxes, specifically property tax (Grundsteuer), are typically the responsibility of the landlord. The landlord is directly liable for these taxes since they own the property. However, it is common for landlords to pass these costs on to tenants through the ancillary charges (Nebenkosten). This only works if the specific tax is either explicitly allocated to the tenant in the lease agreement or reference is made to the Operating Costs Ordinance (Betriebskostenverordnung) which determines that ongoing public charges, in particular, property tax, are part of the operating costs of a property.

It is standard market practice for the landlord to procure an all-risk insurance policy for the building, usually covering the risks of fire, storm, hail, water damage and other natural disasters. The incidental insurance premiums are allocated to the tenant as part of the operating costs. The landlord’s insurance policies, however, do not cover any personal property of the tenant; therefore the tenant should cover possible damages with liability insurance. Landlords also often take out loss-of-rent insurance and, depending on the location of the property, terror insurance at their own cost.

Tenants are often obliged to conclude a business interruption insurance. However, according to a decision by the Federal Court of Justice (Bundesgerichtshof), such insurance does not cover closures of businesses on the basis of the Infection Protection Act (Infektionsschutzgesetz) due to COVID-19 as long as COVID-19 is not explicitly mentioned in the insurance policy as a relevant illness.

The specific use of the real estate is generally agreed between the parties in the lease agreement. Any change of use is usually subject to approval by the landlord. Public building law and the respective zoning plan also impose what uses are possible, and the building permit for the property is issued for a specific use based on this. If the tenant intends to deviate from the use granted in the building permit, a change-of-use permit must be obtained from the responsible building authority. Such permit might list additional building requirements to be adhered to. The agreement between the parties who bear the related costs and carry out the necessary measures very much depends on the market situation.

Regarding subletting, the landlord may restrict the use to the extent that it is only permitted with the landlord’s consent. Furthermore, the landlord generally lays down house rules – ie, general conditions for the use of the property – to avoid conflict between and with the tenants.

The tenant may not cause any damage to the real estate, which might also – from the landlord’s point of view – include any alterations or improvement. It is important for the tenant to clear the conditions the landlord has set in the lease agreement before starting to change anything substantially and irreversibly. Any alterations by the tenant are generally subject to the landlord’s prior consent.

Besides the Civil Code, there is no special regulation or law regarding the lease itself. However, operation of the tenant’s business on the premises may be subject to particular laws and regulations, which might have an impact on specific provisions in the lease. Furthermore, specific laws and regulations can apply to the rent payable by residential tenants and its increase. Regarding commercial tenants, the Federal Court of Justice (Bundesgerichtshof) clarified that a COVID-19 pandemic-induced closure of a retail shop does not constitute a defect in the rental object as such. Rather commercial tenants who are directly affected by the government’s protective measures to contain the pandemic may, depending on the individual case, claim a disturbance of the contractual basis (Wegfall der Geschäftsgrundlage) allowing for adaptation of the lease agreement to the specific new circumstances. This can lead to a reduced rent being payable for the relevant period; however, aspects of the individual case such as actual economic effects of the closure as well as possible state aid must always be taken into consideration so that there can be no generalised approach.

A landlord does not have the right to terminate a lease due to a tenant’s insolvency. A termination due to rent arrears is only possible before the opening of insolvency procedures over the tenant’s assets.

If an insolvency administrator is appointed for the tenant under insolvency legislation, the administrator has an extraordinary termination right regarding the lease. During the insolvency proceedings, any claims the landlord might make against the tenant must be formally filed with the insolvency administrator.

The Civil Code gives the tenant the right to occupy the premises even if the contractually agreed fixed term has ended, if the landlord does not object within two weeks after the official termination date. In this case, the lease will continue, and statutory ordinary termination rights (usually between six and nine months) will apply. Parties regularly exclude this provision in lease agreements. Leases do not typically contain any further stipulations to ensure that the tenant leaves on the termination date, as the tenant is obliged to vacate the premises after the lease has ended under statutory law. Therefore the landlord cannot arrange for timely eviction by the tenant in advance but can claim for damages if the tenant does not vacate the property on time.

The right to sublet to third parties is commonly accepted, and in the case of residential leases, it cannot be excluded. Subletting is usually subject to the landlord’s prior written consent which can only be withheld for good cause. The main tenant remains fully liable for rent payment and compliance with other obligations under the lease agreement vis-à-vis the landlord. It is sometimes agreed that the surplus rent generated in the sublease, or a certain percentage thereof, has to be paid out to the landlord. If VAT is payable in addition to rent, subletting is often permitted only to parties which must pay VAT as well Non-authorised subletting constitutes a serious offence and justifies extraordinary termination of the lease agreement without notice.

For transfer of the entire lease agreement to a third party, an agreement involving the landlord, the existing tenant and the new tenant is necessary. In commercial leases, a transfer without the landlord’s involvement is sometimes permitted for affiliated companies.

Commercial leases are usually agreed for a fixed term and ordinary termination rights are excluded. Sometimes break options towards a predetermined date are granted to the tenant. The Civil Code grants both landlord and tenant extraordinary termination rights if the other party cannot reasonably be expected to continue the lease, considering all circumstances of the individual case.

The tenant may terminate if:

  • the property is not handed over on time;
  • the tenant is deprived of its use; or
  • the landlord has increased the rent.

The landlord may terminate if:

  • the tenant violates the rights of the landlord by substantially endangering the property; or
  • if the tenant is in significant rent arrears (for two successive due dates or for payments amounting to at least two months’ rent).

The Civil Code also grants both parties the right to terminate the agreement 30 years after the start of the lease, with a statutory notice period of six to nine months.

In addition to this, in commercial leases, parties typically agree on further extraordinary termination rights in favour of the landlord, such as unauthorised subletting. If the property is sold due to foreclosure or the insolvency of the owner, the new owner has an extraordinary termination right.

There are no registration requirements for leases and a lease cannot be recorded in the land register. However, form requirements apply. Leases of a fixed term of more than one year need to be in writing, signed by each party, and contain all terms and conditions. If a lease contains a pre-emption right or is part of a sale-and-leaseback transaction, it needs to be notarised.

Tenant easements (Mieterdienstbarkeiten) preventing an early termination in case of the landlord’s insolvency or a forced auction over the premises, and permanent right of use (Dauernutzungsrechte), to which statutory lease law only applies if expressly agreed, must be registered in the land register.

For such registration, an approval certified by a notary is required. Statutory registration fees are applicable. The parties can freely agree who bears these fees and the costs are usually seen in the context of the entire commercial agreement. No matter what the parties decide, vis-à-vis the land registry, the party that files the registration application will be liable for the fees.

A tenant can be forced to leave after a lease agreement is effectively terminated or has expired. If the tenant will not leave voluntarily, the landlord can file for an action for eviction (Räumungsklage). If the tenant does not follow the court’s order, the landlord can file for a forced eviction (Zwangsräumung) with the local authorities. However, due to various regulations protecting the tenant and the inevitable court proceedings, this can be a long process and an average timeframe cannot, therefore, be given. Forced eviction as such is not affected by any COVID-19 legislation and the moratorium affecting concerning certain termination rights expired in the year 2022.

If the leased premises are sold due to the landlord’s insolvency or due to foreclosure, the buyer of the leased premises has a statutory extraordinary termination right regarding existing leases. In such instances, the tenant generally cannot claim compensation for lost expenditure but may be able to claim against the buyer for unjustified enrichment if the buyer is able to lease the premises to a third party for a higher rent than the rent agreed with the tenant.

Protection against such extraordinary termination right can be granted in the form of a tenant easement, which gives the tenant a right in rem to continue to occupy and use the premises in accordance with all the conditions set forth in the lease agreement, irrespective of the termination. The tenant easement is an encumbrance that needs to be registered in the land register.

In case of an extraordinary termination of a lease agreement due to tenant breach, the landlord is entitled to damages in the amount of outstanding rent and ancillary charges less saved expenses until the date of the next ordinarily possible termination. Additional statutory damage claims are not excluded.

As long as the tenant is not a very strong market player or a part of the public sector, the provision of a rent security is usually agreed in a lease agreement. The standard is an amount of three monthly net rents, but for commercial tenants up to six monthly net rents can be seen, in the form of a cash deposit, pledged account or bank guarantee or, less often, collateral promise or a parent guarantee.

For construction agreements, two types of prices are usually agreed on: either a unit price (Einheitspreis) for partial services or a fixed price (Pauschalpreis) for the completion of the entire project. If the parties choose to agree upon a unit price, all individual services provided to complete construction as a whole are listed separately. In this case, the price is not fixed in the beginning but will be calculated depending on the services and units actually delivered for construction. The construction contract, therefore, includes only a cost estimate, which is not final until the final invoice for the work is rendered.

Hourly rate contracts (Stundenlohnverträge), cost-plus contracts (Selbstkostenerstattungsverträge) and guaranteed maximum-price (GMP) contracts (garantierter Maximalpreisverträge) are relatively rare.

Often the responsibility is split between a constructor for construction work and an architect for the planning of the project. In this case, the cost of the architect’s remuneration is prescribed by law (HOAI, the official scale of fees for services by architects and engineers); for the constructor it is – as usual in German Civil Law – freely negotiable.

The other possibility is to instruct a general contractor for all construction services, including planning tasks. In this case, the HOAI is not applicable, although architect services are included in the general contractor agreement.

To manage construction risks on a project, a constructor’s all-risk insurance is a general liability insurance normally used to reduce risk. Additionally, the Civil Code offers a liability system, which usually applies to every construction, architectural and engineering contract. Furthermore, it offers a special liability system including a longer limitation period regarding construction contracts, taking the general terms and conditions for building contracts into account. The liability of a contractor is generally not limited. Some contracts provide limitation of liability in the amount of the insurance coverage or to the extent of purpose or gross negligence.

Under the Civil Code, the contractor is liable for construction delays if they are caused negligently or wilfully.

Furthermore, the parties may agree on contractual damages (Vertragsstrafe) for the delay of contractually agreed milestones. In this case, the parties agree on a certain amount the contractor has to pay for each day’s delay after the breach of a milestone, with a usual maximum cap of 5% of the overall fee. The parties may agree intermediate milestones or the finalisation date of the construction work, which will be subject to liquidated damages. According to High Court judgments, the maximum amount of damage per day may be 0.25% of the net purchase order for the finalisation of construction work, and 0.15% of the net purchase order for any agreed intermediate milestones. In any case, the liquidation damages must be deducted from any damages for delay of works under the Civil Code.

A warranty bond of 10% of the net fee is market standard to secure the performance of the contractor’s work until completion.

From completion onwards, a warranty bond of 5% of the amount of the final invoice for malperformance within the liability period is market standard.

Generally, warranty bonds are provided as bank guarantees.

Contractors of a construction project (or parts of such) may acquire a right over the property, comparable to a lien, in the form of granting a mortgage on the property to secure the contractor’s remuneration (Sicherungshypothek des Bauunternehmers). However, this is only applicable if the buyer is also the owner of the relevant property on which the construction work is performed and the work, the value of which is to be secured, has already been performed. In addition, the contractor may claim a lien (Werkunternehmerpfandrecht) on movable items the contractor has been instructed to create or modify for the buyer.

Once the contractor’s payment claim has been satisfied, it is obliged to approve the deletion of the encumbrance in the land register and to return the movable item to the buyer.

For all building projects, the necessary building permits must be obtained before the start of construction work. This includes the official approval of necessary fire safety standards and other technical certificates by the building authority or the responsible engineer. In some, but not all federal states, the building project is formally accepted by the building authority after completion.

In some instances, if the building is intended for a specific commercial or industrial purpose, a business licence must also be issued.

VAT is in principle not applicable to the sale of German real estate. If the property is sold business to business, the seller may waive the VAT exemption, triggering VAT at a rate of 19%. The buyer owes the VAT triggered to the tax authorities (reverse charge). If the buyer intends to use the real estate to render non-VAT-exempt supplies, the VAT triggered may be reclaimed as input VAT; hence no VAT would be payable.

These principles do not apply for operating facilities (Betriebsvorrichtungen), the transfer of which is always subject to VAT. Furthermore, no VAT would be triggered if the real estate is transferred by way of a transfer of a going concern (Geschäftsveräußerung im Ganzen) which is not subject to VAT by law. A transfer qualifies as a transfer of a going concern, if the buyer continues the VAT-able business rendered by the seller, which typically applies if the buyer continues the existing lease agreements.

German tax law does not provide any commonly used methods to mitigate the RETT burden in asset deals. Since the German legislator tightened the rules with effect as of 1 July 2021 (see 2.10 Taxes Applicable to a Transaction) RETT neutral share deals are significantly more difficult to realise.

The municipalities charge property tax which is assessed on a value (Einheitswert) currently usually below the market value, with the average tax rate varying between 1.3% and 1.5%, depending on the municipality. A new property tax act will enter into force on 1 January 2025 and significantly alter the determination of the assessment base. The federal states may make use of the opening clause allowing them to adopt their own assessment base for property tax; currently, seven federal states (including Baden-Wuerttemberg, Bavaria, Hesse, Hamburg, Saxony, Lower Saxony and Saarland) intend to make use of such clause.

The municipalities charge property tax which is assessed on a value (Einheitswert) currently usually below the market value, with the average tax rate varying between 1.3% and 1.5%, depending on the municipality. A new property tax act will enter into force on 1 January 2025 and significantly alter the determination of the assessment base. The federal states may make use of the opening clause allowing them to adopt their own assessment base for property tax; currently, seven federal states (including Baden-Wuerttemberg, Bavaria, Hesse, Hamburg, Saxony, Lower Saxony and Saarland) intend to make use of such clause. proportion of the lease income, ie, remain below a certain threshold in relation to the rental income, they are not harmful.

Trade tax is (i) levied by municipalities at rates varying between 7% and 17.15%, and (ii) payable by the corporation or partnership which is not deemed to be tax transparent for the purpose of trade tax. Similar principles apply to profits from the sale of real estate.

The sale of interest in a partnership is treated as a (partial) sale of the assets held by the partnership.

Capital gains from the sale of shares in a corporation holding German real estate are subject to German (corporate) income tax if:

  • the company is resident in Germany; or
  • more than 50% of the value of the shares in such company is based directly or indirectly on German real estate.

However, if the shares are held by a corporation, the German participation exemption regime providing for an effective tax exemption of 100% or 95% might apply.

Buildings are subject to depreciation at an annual rate of usually 2% or 3% on the acquisition costs. However, the Growth Opportunities Act (Wachstumschancengesetz) will provide for a degressive depreciation of 5% for the first six years after acquisition/construction of residential buildings whose construction commenced/commences between 1 October 2023 and 30 September 2029. Land and shares are not depreciable. Taxable rental income will be reduced by the costs incurred for rendering the lease (eg, interest and maintenance).

If an investor maintains a permanent establishment in Germany, profits from the sale of real estate allocable to this permanent establishment can be offset by accounting for a reserve that reduces taxable income, subject to specific conditions. This reserve will reduce the acquisition costs of real estate that are acquired in later years. Thus, the built-in gains of the sold real estate are not realised upon the sale of such real estate; hence, the tax on such built-in gains may economically be suspended by transferring the built-in gains to newly acquired real estate.

Tax benefits have recently been introduced regarding photovoltaic facilities. VAT-zero-rating applies to the supply of small photovoltaic facilities for residential buildings. Income from the operation of small photovoltaic facilities will be exempt from income tax.

Linklaters LLP

Taunusanlage 8
60329 Frankfurt
Germany

+49 69 71003 0

+49 69 71003 333

info@linklaters.com www.linklaters.com
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Trends and Developments


Authors



Latham & Watkins provides innovative solutions to complex legal and business challenges around the world. From a global platform, the firm’s lawyers advise clients on market-shaping transactions, high-stakes litigation and trials, as well as sophisticated regulatory matters. Latham’s real estate practice guides clients through complex and high-stakes real estate transactions of every kind everywhere in the world. It regularly advises a full spectrum of market participants, including public and private investors, private equity, institutional investors, developers, financial institutions, and alternative lenders. The firm’s capabilities comprehensively cover multi-jurisdictional real estate transactions, ranging from acquisition, disposition, and development of large properties or property portfolios to corporate and finance matters. These include corporate M&A, joint ventures, public offerings, and LBOs, as well as REIT and UPREIT transactions. Latham also advises on all elements of transaction financing, including construction financing, mortgage financing, mezzanine financing, securitisation, warehousing, loan-on-loan transactions, and mortgage debt portfolio acquisitions and financings.

Trends and Developments in Germany’s Private Equity Real Estate Market

Market overview

Germany’s private equity real estate (PERE) market remains a key player in European real estate investment, despite recent economic challenges. Interest rate hikes, inflation, and geopolitical tensions have significantly impacted deal volumes. Transaction volumes dropped by over 50% in 2023 compared to previous years, yet Germany remains the third most attractive real estate investment market globally. As investors adjust to new capital costs, opportunities in distressed assets, preferred equity structures, and high-growth sectors such as data centres and residential real estate play a vital role in the transactional landscape.

Investment structures: preferred equity and key players

Preferred equity investments

In Germany’s evolving real estate market, preferred equity has become an increasingly vital financing tool. As traditional bank lending tightens due to stricter regulations and risk aversion, investors are turning to alternative financing methods. Preferred equity, with its debt-like features, offers a hybrid solution, by blending debt and equity characteristics. It provides investors with priority returns while granting developers access to necessary capital without giving up full ownership. This shift is particularly evident in sectors like residential real estate, where demand remains robust and stable, but financing conditions with traditional methods have significantly worsened.

The rise of preferred equity aligns with the broader trend of alternative financing gaining prominence in Germany. While mezzanine loans have long been a popular choice for bridging financing gaps, preferred equity is gaining traction due to its unique benefits and flexibility. It often comes at a lower cost than common equity and can provide a bridge financing solution. Although preferred equity investors frequently do not share in the full upside of the property, a mandatory minimum return is a common feature.

Key legal aspects of preferred equity investments

  • Principal and debt service – capital contributions can be structured with mandatory monthly returns (hard pay), accruals (soft pay), or a combination.
  • Preferred (investor) shares – offer disproportionate dividend rights and potential minimum dividends, with tag-along rights in case of common shareholder exit.
  • Common shares – receive excess net cash flow after preferred distributions, with potential caps.
  • Security and remedies – often unsecured, preferred investors retain contractual rights to control assets upon default, enforced judicially rather than through foreclosure.
  • Call/put options – regular and default options at predefined dates and returns, with liquidity and default put options to third parties or co-shareholders.
  • Governance and control – shareholders’ agreements include reserved matters, deadlock mechanisms, and board representation rights, along with customary information rights and warranties.
  • Covenants and protections – include property management undertakings and financial covenants like loan-to-value (LTV)/loan-to-cost (LTC) ratios and operational milestones to safeguard investor interests.

Key private equity players in the German market

Germany’s PERE market features a combination of domestic and international players. While global funds have historically been active in the commercial real estate landscape, recent market shifts have prompted a stronger focus on distressed opportunities. Meanwhile, German institutional investors continue to lead in core and core-plus strategies, particularly in multifamily housing and infrastructure investments. There is also continued interest from cross-border investors in logistics, infrastructure, and alternative sectors, with increasing exposure to residential and digital assets reflecting broader shifts in investor priorities.

A common feature of the German PERE landscape is the widespread reliance on operating partner models. Private equity firms, particularly those entering from abroad, frequently team up with local operating partners who provide on-the-ground expertise in asset management, leasing, development, and navigating regulatory complexities. This model is especially prevalent in residential real estate, where deep market knowledge, technical knowledge, and tenant engagement are critical. It is also gaining traction in the data centre space, where local partners play a key role in site acquisition, securing power supply, and managing technical specifications and tenant needs. These collaborations allow private equity investors to scale efficiently and manage operational risk in an unfamiliar market.

Investment targets: data centres and residential real estate

Data centres: a high-growth sector

The demand for data centre investments in Germany has surged due to the rapid expansion of cloud computing, artificial intelligence, and digitalisation. Frankfurt has emerged as one of Europe’s largest data centre hubs, with Munich and Berlin also gaining traction as secondary markets. The increasing reliance on cloud services and digital infrastructure has fuelled the need for high-performance data facilities such as hyperscalers, attracting significant private equity and institutional investment. Legal considerations are crucial in this sector, particularly regarding zoning laws under the Baugesetzbuch (BauGB), environmental regulations, and compliance with data protection standards as outlined in the Bundesdatenschutzgesetz (BDSG). Investors must navigate complex permitting processes and adhere to stringent regulations concerning immission control (ie, the measurement of the concentration of substances in the atmosphere) and energy consumption.

Sustainability considerations and ESG compliance are also shaping the sector, as investors seek assets that integrate renewable energy solutions and energy-efficient designs. However, data centre investments are not without challenges. High energy consumption poses potential constraints, and the competition for suitable land in prime locations is fierce. Additionally, the rising costs of construction and materials have led investors to be more strategic in capital deployment. Legal frameworks around land use and construction standards require careful attention to ensure compliance with the BauGB and mitigate risks.

Grid connection and grid operator issues are critical for data centres, given their substantial energy requirements. Ensuring a reliable and efficient grid connection involves negotiating with local grid operators (network operators) to secure adequate capacity and favourable terms. This process involves compliance with the Energiewirtschaftsgesetz (EnWG), which governs energy supply and network access in Germany. Investors must address potential challenges related to grid stability and capacity constraints, 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 technology 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 generate stable rental income even during economic downturns.

Despite this strong demand, the sector is not without its challenges. The government’s emphasis 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 Kappungsgrenze (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 predictable rent adjustments, protecting tenants from excessive hikes while allowing landlords to manage rental yields. Exceptions may apply for significant property improvements, requiring landlords 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 development 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, integrating sustainability measures into new developments and refurbishment projects to access public funding and tax incentives. Simultaneously, some funds are targeting distressed residential 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 challenges 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 period of capital adaptation and sector specialisation in the German PERE market. The increasing reliance on alternative capital structures, including preferred equity and structured financing, is likely to persist as traditional lenders remain cautious. At the same time, investors will continue to seek out high-growth, technology-driven real estate investments, particularly in data centres and digital infrastructure.

Sustainability compliance is expected to become a major value driver, with real estate investors prioritising green-certified assets and energy-efficient refurbishments. The residential sector will remain a stronghold for investors, as supply constraints continue to fuel demand. However, regulatory compliance will be a key challenge, requiring investors to navigate policies surrounding rent control and affordability measures.

Germany’s PERE market remains highly attractive, albeit with a strategic shift toward alternative investments, flexible financing solutions, and ESG-aligned opportunities. Investors who can adapt to the evolving landscape will find high-quality, resilient assets capable of delivering strong returns even in a high-interest-rate environment.

Latham & Watkins LLP

Reuterweg 20
60323 Frankfurt am Main
Germany

+49 69 6062 6000

+49 69 6062 6700

carsten.loll@lw.com www.lw.com
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Law and Practice

Authors



Linklaters is a full-service provider offering international advice on legal and tax issues in the real estate industry, which gives it a leading edge in meeting client requirements and demands. The cross-practice team includes real estate experts and specialists in corporate, tax, finance, investment, competition and regulatory law. With more than 50 real estate lawyers in the Frankfurt, Munich and Berlin offices and over 350 real estate lawyers globally, the firm’s real estate team is chosen by leading global investors, developers, occupiers and financial institutions to advise on their largest and most complex or multi-jurisdictional real estate transactions and disputes. The German real estate sector, inter alia, advises private equity clients (eg, Blackstone, BlackRock, and Cerberus), funds and institutional investors (eg, Barings, BNP Paribas REIM, CBRE IM, GARBE, and DWS, GARBE, and Tishman Speyer), as well as a number of Asian clients (eg, Hanwha, Frasers, Huazhu Group, Samsung, and CapitaLand). The firm acknowledges with thanks the contribution made to this chapter by Isabelle-Carmen Weis of Linklaters LLP.

Trends and Developments

Authors



Latham & Watkins provides innovative solutions to complex legal and business challenges around the world. From a global platform, the firm’s lawyers advise clients on market-shaping transactions, high-stakes litigation and trials, as well as sophisticated regulatory matters. Latham’s real estate practice guides clients through complex and high-stakes real estate transactions of every kind everywhere in the world. It regularly advises a full spectrum of market participants, including public and private investors, private equity, institutional investors, developers, financial institutions, and alternative lenders. The firm’s capabilities comprehensively cover multi-jurisdictional real estate transactions, ranging from acquisition, disposition, and development of large properties or property portfolios to corporate and finance matters. These include corporate M&A, joint ventures, public offerings, and LBOs, as well as REIT and UPREIT transactions. Latham also advises on all elements of transaction financing, including construction financing, mortgage financing, mezzanine financing, securitisation, warehousing, loan-on-loan transactions, and mortgage debt portfolio acquisitions and financings.

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