Which locations offer good apartment building investment opportunities?

Investors wishing to put their money into apartment buildings must know where their investment will make most sense. The focus in this regard should be on residential locations; their probable development; the structural condition of potential purchases; vacancy rates; the yield to risk ratio and many other factors.

Finding answers to general questions such as ‘Which town or city is the right one if I want to invest in an apartment building or a residential portfolio?’ ‘How is the market for Germany’s most important population centres, the Tier 1 cities, developing?’ ‘What dynamics characterise Tier 2 cities?’ ‘Why are investors increasingly turning their attention to regional population centres, the Tier 3 and 4 towns and cities?’ is almost harder than deciding on a specific district and residential location.

Engel & Völkers research analysts have carried out detailed analyses of the various categories of towns and cities for you. Click here to discover what the advantages and disadvantages of Tier 1, 2, 3 and 4 towns and cities are and which locations you could consider for investment in an apartment building.

According to the definitions for categories of town and city, Tier 1 cities are the most important centres in a country and are of national and international importance. In Germany the Tier 1 cities include Berlin, Düsseldorf, Frankfurt/Main, Hamburg, Cologne, Munich and Stuttgart. What is the market for residential investment properties like in these cities? How attractive are Tier 1 cities when it comes to deciding on where to invest in an apartment building?

In general, Tier 1 cities in Germany are characterized by a strong growth in influx and, accordingly, by continuous population growth. Rental losses due to long-term vacancies are nearly non-existent. In 2023, the average market-active vacancy rate was just half a percent. Secure cash flows are therefore very likely in Tier 1 cities and are ideally suited to risk-averse investors with a sufficient financial strength.

How is the market currently performing?

During the interest rate rally in 2022 and 2023, price corrections took place in the Tier 1 cities, as in many places. However, prices stabilized at a new level over the course of 2024. In very good locations, purchase price factors of over 30 of the net cold rent can still be achieved.

Due to the ongoing strong demand for residential space, the Tier 1 cities remain resilient to the crisis. In 2023, over 28% of the total transaction volume of all residential property sales in Germany were achieved in Top 1 cities alone.

At the same time, demand for rental apartments in Tier 1 cities continues to rise, as the high financing conditions result in some potential buyers of owner-occupied apartments continuing to rent in the first instance. This is compounded by insufficient construction activity and immigration, which means that the rental housing market in Tier 1 cities is likely to remain under great pressure in the coming years. This is also promoting the suburbanization trend, as more people are extending their search to the surrounding areas. As a result, rents will continue to rise both in the major cities and in the surrounding areas. In the second half of 2024, the average quoted rent in the Tier 1 locations was EUR 16.06 per square meter, which is 5.3% higher than in the previous year.

Due to their strong appeal, Tier 1 cities remain safe havens on the real estate market. The growing surrounding regions also offer potential for investors.

When it comes to the question of where it is worth investing in a multi-family house, in this section we look at the Tier 2 cities. In Germany, Tier 2 cities are large cities that are of national and regional importance. These include Leipzig, Hanover and Bochum, for example.

In view of the high demand for apartment buildings and residential portfolios in Tier 1 cities, investors active nationwide are also turning their attention to Tier 2 cities. Such cities offer them numerous opportunities and potential, as they also have solid social and economic infrastructures. Tier 2 cities are no longer just alternative locations.

In contrast to Tier 1 cities, the price level in Tier 2 locations is significantly lower. On average, the quoted price is even slightly lower than in the Tier 3 cities. In combination with the high demand, these are ideal conditions for core-plus and value-add investments. The investment risk remains quite manageable.

Nevertheless, the costs of future modernization should be taken into account and critically examined when deciding to invest. In many places, Tier 2 cities are characterized by clear disparities in terms of structural substance. It is not uncommon for properties in need of major refurbishment to stand next door to properties that have been extensively renovated and modernized in terms of energy efficiency.

For which investors are Tier 2 cities suitable?

All 14 Tier 2 cities in Germany are university locations and have predominantly positive population forecasts up to 2030. This should further increase the pressure on the rental market and rent increases are also very likely in the future. So is “Tier 2 city” the answer to the question of where investors should invest in an apartment building? Of course, it is not possible to say that in general terms. But one thing is clear: Tier 2 cities offer opportunities for every type of investor - from yield-oriented to risk-averse. Due to the low entry prices and mostly dynamic urban and neighborhood development, Tier 2 locations remain the focus of national and international investors.

By definition, Tier 3 cities are important German cities with regional and limited national significance and an important impact on the surrounding region. Tier 3 cities include Aachen, Erfurt and Potsdam, for example. What investment opportunities are available in cities in this category? Where is it worth investing in real estate?

Tier 3 cities are often located in agglomerations or close to the 15 largest German cities and participate in the demand pressure in the housing market there. Investors are increasingly being drawn from tight markets such as Hamburg to Lübeck or Kiel or from the Rhine metropolitan areas of Cologne and Düsseldorf to the nearby cities of Wuppertal or Mönchengladbach.

At the same time, the prospering cities surrounding the metropolitan areas are increasingly becoming the focus of those looking for a home.

Why are Tier 3 cities interesting locations to invest in?

Many Tier 3 cities also offer an attractive environment for students, which is why young people in particular are moving there. Over the past five years, Tier 3 cities have seen average population growth of 2.2 percent. This corresponds to the level of the Tier 1 cities. In addition, the average vacancy rate in the Tier 3 cities is one percentage point below the national vacancy rate of 2.5 percent.

Together with a positive population trend, a shortage of rental apartments is therefore expected to continue in the Tier 3 cities. For investors, this offers secure rental income in the long term. The rents on offer in the Tier 3 cities are even higher on average than in the Tier 2 cities. In Freiburg, moreover, rents are at the level of a Tier 1 city.

Following the price corrections of the past 2.5 years, property prices are now stable and a sideways movement is expected in the first half of 2025. The average quoted price in Tier 3 locations still exceeds the level of a Tier 2 city. In Regensburg, Freiburg and Mainz, factors in very good locations can also reach the level of Tier 1 cities. Thus, despite the adjusted price level, Tier 3 locations remain interesting for investors and opportunistic and portfolio-expanding investments are possible.

Tier 4 cities are described as small, regionally focused locations that nevertheless have a central function for their immediate surroundings. These include Chemnitz, Hanau and Ludwigshafen. What speaks in favor of a Tier 4 city when it comes to the question “Where to invest in an apartment building?”?

The real estate markets in regional centers have so far been strongly influenced by local players. In addition, urban development and infrastructure projects have a significant influence on future regional market development in Tier 4 cities. However, due to the lack of supply and lower yields in the largest German markets, interest in Tier 4 cities is also increasing among supra-regional investors. This is particularly noticeable in cities in the immediate vicinity of metropolitan areas.

For families, Tier 4 cities in the environs of Tier 2 cities are attractive residential locations because there is often a larger supply of rental apartments of a suitable size and at a moderate rent. This applies, for example, to Halle (Saale) near Leipzig, Oberhausen between Essen and Duisburg and Celle near Hanover.