Adalbert Pokorski, CEO, Greenwater Capital GmbH
Affordable housing is in short supply across Germany, particularly in urban areas, where demand far exceeds supply. This situation has been made worse by a sharp decline in new construction. Even though inflation has cooled somewhat this year, the GdW (Federal Association of German Housing and Real Estate Companies) has warned that new construction hasn’t picked up. According to a recent GdW survey, the number of cancelled projects could double next year. For 2024, the IFO Institute predicts only 225,000 apartments will be completed. As a result, rents—especially for new builds—are climbing at record rates, now even in smaller towns.
Since 2020, the federal government has introduced several measures to promote social housing, with the budget increasing each year, reaching a historic high of €3.5 billion annually from 2025 onwards. Social housing refers to financial support provided by the government for building new housing (whether new builds, expansions, conversions, or first-time purchases within two years), as well as for modernising existing housing. Through the "Social Housing Construction 2024" programme—an agreement between the federal and state governments—€2.65 billion was allocated for traditional social housing in spring 2024.
Additionally, specific programmes have been introduced to reach further target groups. The “Young Living” programme, launched in 2023, funds the expansion, new construction, or conversion of residential units for apprentices and students. In 2024, €500 million will be invested in this initiative. Most of the financial support is offered through preferential loan terms or grants. Public and municipal housing companies can benefit, as can private housing companies, provided they comply with the occupancy and rent restrictions.
For private housing companies, subsidised housing construction offers an attractive way to create new living space or modernise existing properties while securing a decent return in a challenging market. A great example of this can be found in the funding opportunities available in the federal state of Hesse.
A roadmap for investors: Hesse as a case study
Since the Federalism Reform of 2006, housing promotion and social housing legislation have been the responsibility of the federal states. To legally facilitate federal financial support to the states, Article 104d was added to the Basic Law in 2019. The states supplement the federal aid with at least 30% additional funding and determine how to design and prioritise their social housing programmes, considering local laws and conditions. The states’ development banks usually handle the funding.
In Hesse, WIBank (Wirtschafts- und Infrastrukturbank Hessen) processes funding applications. However, the first point of contact for advice on funding opportunities is usually the housing promotion offices of the local districts and urban areas. In addition to social rental housing for low-income groups, Hesse also offers a programme targeting middle-income earners in the densely populated Darmstadt administrative district (southern Hesse), as well as a housing programme for students and apprentices. There is also financial support available to modernise rental apartments that have been occupied for at least 20 years. Subsidised modernisation measures include energy-efficient renovations, combining apartments to create more family-friendly spaces, or adapting them for elderly or disabled tenants.
Across all these programmes, subsidies generally include covering almost all interest payments over the fixed-interest period and providing financing support. For low-income rental housing, the maximum subsidy share is 40%, with a commitment period of 25 years. A key requirement for all projects is that there must be a local need for affordable housing for the relevant target groups.
Attractive returns
What kind of returns can housing subsidies offer? Let’s consider the construction of a 70-square-metre apartment in Frankfurt am Main. With construction costs averaging €1,943 per square metre in Hesse, this adds up to around €136,000. Land costs vary depending on location, but in Frankfurt, the average land cost is €1,200 per square metre in good areas. This would add an extra €84,000, bringing the total construction cost to €220,000. On top of that, ancillary construction costs, which typically account for an additional 20%, bring the total cost to €264,000. Depending on location and finishes, the cost could range from €247,200 to €350,000.
For low-income housing subsidies, at least four residential units must be built to qualify. With an average cost of €300,000 per unit, the total construction cost for four units would be €1.2 million. A subsidy of 40% would be granted for a fixed occupancy and rent period of 25 years. This would reduce the total cost for four units by €480,000, bringing it down to €720,000—€180,000 per unit. Further grants of €3,500 per unit could be available for additional work, like installing a lift.
What about demand?
Official figures show a shortage of 80,000 low-priced social housing units in Hesse. In our example, a family in Frankfurt would normally pay about €1,000 per month for a 70-square-metre apartment. However, with a certificate of eligibility for social housing, they could receive rental subsidies from both the social housing scheme and the city, reducing their monthly rent to just €385.
What’s in it for investors?
According to the guidelines for subsidising social housing in Hesse, the rent for a first-time social housing unit cannot exceed 75% of the local comparative rent. For example, the rent index in Frankfurt lists the local comparative rent for a well-located 70-square-metre apartment, with a fitted kitchen and balcony, at €13.08 per square metre. This brings the rent to around €916. However, the maximum rent for a subsidised apartment would be €687. For the investor, this translates into an annual gross return of about 5%. Additionally, investors can benefit from tax advantages linked to new residential construction.
The examples outlined above provide a rough guide for investors in residential property within the context of social housing subsidies. While not exhaustive, it should be clear that these subsidies present an attractive opportunity to achieve reasonable returns while contributing to the expansion of urgently needed affordable housing. In a sluggish new-build market, players who can operate as stable investors in the residential property sector, backed by solid framework conditions, are much needed.
About the Author
Adalbert Pokorski is the CEO of Greenwater Capital GmbH, a specialist in investment and asset management in the German residential sector.
