Real estate market: Newly built apartments are not worthwhile for landlords - or are they?
Construction costs have exploded, and newly built properties are becoming increasingly less viable as an investment. In this way, those willing to buy get more returns.
The literature quarter is being built in Essen. Photo: IMAGO/Markus Matzel
Newly built apartments are often not worthwhile for landlords due to high construction costs and low rental returns
According to experts, rental yields in large cities are often less than four percent and are not enough to cover the financing. High energy and additional costs prevent a simple rent increase to improve returns
Real estate projects are selling more slowly and investors increasingly have to rely on appreciation rather than rental income
When buying a new building, buyers should pay attention to the purchase price-rent ratio, long-term planning, tax advantages and the condition of the existing property. A middle ground can be a modernized existing apartment in order to avoid high renovation costs
Dusseldorf. In the Düsseldorf district of Flingern, an old building has to make way for progress. Ten new apartments and two townhouses are to be built here. The old house is currently being demolished. Its roof has already been removed and a mountain of rubble is piling up in the inner courtyard. The first new apartments should be ready for occupancy by the end of 2028. Costs: from 289,000 euros for 34 square meters of living space to 1.15 million euros for 125 square meters.
For similar new buildings, according to the project developer, rents would be around 26 euros per square meter per month. That's sporty, even for Düsseldorf. The current rent index only goes up to 17.35 euros per square meter, even for newer buildings.
At least high-priced apartments like the ones in Flingern are still being built. When it comes to affordable options for the middle class, things are looking worse. The federal government has set a target of 400,000 newly built apartments per year - and has so far missed this mark by a long way. Last year, just around 206,000 new apartments were built.
Cheap loans, tax relief, subsidies: None of the measures that politicians wanted to use to boost new construction have so far had a noticeable effect. The reasons for this are complex.
Several funding programs only apply to specific properties and are subject to numerous conditions. In some cases, changes to the conditions caused confusion. There are also regulatory hurdles that slow down construction projects. The biggest obstacle, however, is the massive increase in construction and financing costs.
For more new construction, investors would be needed to put money into real estate projects. But because both construction costs and loan interest rates are significantly higher than they were a few years ago, many new construction projects are no longer worthwhile for investors. Buy an apartment and then rent it out? This is often a losing proposition these days. Nowadays, sophisticated strategies are needed to make such an investment worthwhile.
Why new buildings become a losing proposition for investors
In the five largest German cities, rental yields for new apartments are below four percent. This mark is considered the minimum to make renting worthwhile. “With construction costs in Munich of 5,000 euros and more per square meter, the gross rental yield is often only 3.5 percent,” says Sven Keussen, managing director and head of investment real estate at Rohrer Immobilien in Munich. That is not enough to cover the financing costs.
A property as an investment is usually only worthwhile if the rent is sufficiently high. The only problem is that charging higher basic rents to improve returns is currently hardly possible, says Keussen. The increased energy and additional costs have driven up rents so much that living has become very expensive for many tenants.
Construction stops and sluggish sales are weighing on the market
The crisis in new construction is visible in the slow marketing of residential properties. Lothar Schubert observes this phenomenon in Hamburg, where he oversees projects in HafenCity, among other things. In the past, up to 40 percent of the apartments were sold before construction began, he says. “Today it’s zero percent.”
Schubert used to create new building projects himself with the developer DC Developments. At the end of 2024, he founded a new company, DCD Services: If a real estate project falls into difficulties and cannot be continued, Schubert and his team take care of the restructuring and make it “viable again”.
When interest rates were still low, investors in good locations often had enough rent to cover the repayment and interest on their loans. Today, says Schubert, investors have to rely on an increase in the value of the property again. This makes buyers hesitant.
Schubert is therefore relying on a different model: “We offer all the apartments that we don’t sell for rent.” The real estate professional advises his developers to calculate their new construction projects in such a way that renting out the apartments is also worthwhile. This requires the developer to have a longer-term business model and more equity. “But I have a safety net in case something goes wrong.”
From Schubert's perspective, HafenCity shows that the model works. “There is hardly any vacancy here,” he says. “If we had to sell all the apartments, things would look completely different.”
Like perhaps soon in the BEAT Tower, also located in Hamburg's HafenCity? Viewed from the outside, the residential tower is almost finished and the interior work is currently underway. The 62 condominiums and two penthouses in the BEAT Tower are scheduled to be handed over to their owners at the beginning of next year. The promise: Hanseatic luxury, with a view of the Elbe or the harbor.
The spectacular views, high-quality materials and curated gardens on every floor are intended to attract wealthy buyers. The 114 square meter apartment on the eleventh floor with a view of the Elbe is expected to cost around 1.95 million euros. But although it is almost ready to move in, it is still available - just like most of the other apartments in the tower.
Nobody wants to be stuck with an expensive apartment that is difficult to rent. But this exact scenario is becoming more and more common. To avoid it, investors should pay attention to five points when investing in real estate.
Five criteria for a profitable new building investment:
1. Shop smart
For many buyers, purchasing a property is a highly emotional act. But feelings are dangerous when investing. Emotional buyers are often deceived by the appearance of a property and take excessive economic risks.
The main thing that helps against financial adventures is arithmetic. The future rental income should more than outweigh the financing costs. This is the only way the rental provides a payment surplus.
Assume that a new apartment in Düsseldorf, three rooms, 75 square meters of living space, costs 450,000 euros. That's 6,000 euros per square meter, a not unusual price. In addition, the buyer must pay the property transfer tax of 6.5 percent and 1.5 percent for the notary and the land register. If the property is sold by the project developer, there is no broker commission.
The total acquisition costs are 486,000 euros. If the loan costs four percent interest and the basic rent is 26 euros per square meter, the rental will result in losses - whether before or after taxes, whether after one year, after 10 or even 20 years. In order for the landlord to break even, he would have to charge an impressive 31 euros in rent per square meter.
Nevertheless, the purchase can be worthwhile if the apartment is later sold for a profit. In the case of the model apartment, the increase in assets if sold after 20 years is 385,207 euros. In this calculation, the value of the apartment has increased by two percent per year. If, on the other hand, it remains constant, the increase in assets over the entire 20 years will drop to 175,278 euros.
“There is no guarantee that a new building will increase in value,” says Jeanette Kuhnert, vice president of the IVD real estate association. A loss in value is also conceivable. This makes it all the more important not to buy the property too expensively.
An indication of profitability is the ratio of purchase price to rental income: the multiplier. Which value is acceptable also depends on the interest rate level. The higher the interest rate, the lower the threshold at which a landlord makes a loss. According to a rule of thumb, the multiplier can reach a maximum of 20 with four percent interest.
2. Plan ahead
Even if investing in a new apartment makes economic sense, it can become a financial burden for buyers. Because it ties up liquidity that may be missing in an emergency. Thomas Teske, a fee-based construction financing consultant from Hilden, recommends that his customers first invest in renovating their own property before buying a rented apartment. Otherwise, if the heating in your home needs to be replaced later, you may not have enough money to do so.
Teske advises that real estate buyers should also carefully consider the risk of losing their job. Artificial intelligence is increasingly replacing even well-paid jobs, for example in management consultancies or the IT industry. The financing should therefore not be calculated too tightly.
Anyone who finances a property and initially only repays two percent often needs three decades or longer to get out of debt. As you get older, it becomes more difficult to obtain long-term financing from a bank. This makes an early investment all the more important.
3. Take added value with you
The Gute Stube in Hamburg's Altona district is not a pub, but a newly built apartment block. The red clinker building is actually intended to be reminiscent of the Hanseatic brick dreams of the good old days.
But because of its large, floor-to-ceiling windows, residents ridicule it as an aquarium. Not even the view is pretty: many of the windows look out onto a four-lane road.
The first plans for the lounge were already in 2018. At that time, buyers would only have paid a little more than one percent interest for a ten-year loan. Now it's a good four percent.
Despite high interest rates and questionable aesthetics, most of the 47 apartments in Altona have now been sold. This is also due to the “Ready to rent” offer, says Lucas Ziegemeier from the responsible Hamburg real estate agency Peters + Peters: The new apartment owner gets his first tenant with him. “We suggest suitable tenants from whom the buyer can choose,” says Ziegemeier. A fitted kitchen and glass shower screen are included in the purchase price and the apartment is ready to move into immediately. This means that the rent can flow directly, which is not a given.
The purchase price of an investment property should not only reflect its location, but also the general conditions. These may change over time. The current interest rate level is forcing buyers to take a closer look at new building offers. But the example of the Guten Stube shows that added value that other projects do not offer can be the deciding factor.
4. Take advantage of tax advantages
New construction properties offer tax advantages over existing properties. In addition to their usual depreciation, buyers can take advantage of a special depreciation of five percent per year in the first four years. At the beginning, the purchase can therefore bring high tax advantages.
Many project developers use this special deposit to attract buyers. However, it only applies if the building construction costs amount to a maximum of 5,200 euros per square meter of living space. Construction costs are often higher, especially for high-quality apartments. The special depreciation then does not apply. Even if construction costs remain below the limit, not all buyers benefit equally. “If you are not taxed at the maximum tax rate, the advantage of the special depreciation may be lower,” says Daniel Preis, board member of the Munich real estate investor Domicil Real Estate.
For new buildings where the building is more expensive than 5200 euros per square meter, there is an alternative: declining balance depreciation. Instead of always depreciating an equal portion of the purchase price each year, buyers are allowed to deduct five percent of the respective residual value per year. This applies to properties purchased before October 2029.
5. Switch to inventory
According to the real estate portal Immoscout24, existing apartments in Germany were available for an average of 2,650 euros per square meter in the third quarter of this year. They have a decisive advantage over new buildings: “Because there is no initial construction time, buyers immediately generate rental income,” says real estate investor Preis. This is particularly worthwhile in locations where the actual rents still lag behind the rent index.
Sometimes the best choice is a middle ground between an old and a new building: a modernized existing apartment, which is subject to correspondingly less expensive renovations.
