I. Introduction
The property market is set to face both new and familiar challenges in 2025. The upcoming federal election called following the collapse of the traffic light coalition in November 2024 will likely have significant impact on economic, construction and environmental policy and legislation. Assuming that it is possible to form a stable government in the near term, that government is likely to have a different set of policy priorities than the current one has had.
The election, scheduled for 23 February 2025, is taking place amid the backdrop of sluggish GDP growth of just 0.1% in Q3/24 compared to the same quarter of the previous year and a 25% increase in company insolvencies compared to the previous year, which is also a ten-year high. Notably, the number of major insolvencies – insolvencies of companies with more than 250 employees – has almost doubled. Manufacturing-sector companies, traditionally a cornerstone of the German economy, have been particularly affected.
Uncertainties surrounding future economic development are shaping the geopolitical outlook, which in 2025 will continue to be dominated by the ongoing Russo-Ukraine war, unpredictable events in the Middle East, and the rise of autocracy. The extent to which Donald Trump’s re-election as US President impacts transatlantic (economic) relations – and how relations between Germany/the European Union and China develop – are also likely to be of particular significance to Germany’s standing as a place to do business.
There is also an increasingly urgent need to limit increases in energy prices and consumer prices to socially equitable levels without sacrificing environmental concerns or the necessity to transform the economy to be more sustainable and secure Germany’s future economic viability.
Inflation has eased, falling to 2.2% between November 2023 and November 2024 from almost 6% in 2023. However, the ifo Institute forecasts inflation of 2.4% for 2025, slightly above the European Central Bank (ECB)’s target of 2%. That is increasingly also reflected in the ECB’s main deposit rate, which the ECB lowered for the fourth time in succession to 3.15% in December 2024 from 4.5% in January 2024. A similar trend can also be seen in Deutsche Bundesbank’s basic interest rate, which it lowered to 2.27% on 1 January 2025, taking it 1.35 percentage points lower than it was a year ago. Statements from the responsible bodies indicate that interest rates are likely to continue their trajectory and stabilise in 2025, although the primary objective is still to minimise inflation risks. The main refinancing rate’s impact on property interest rates is also increasingly clear, with ten-year fixed rates closing in on 3% (or even fall below in individual cases), down from just under 4% in early 2024 – even if another phase of very low interest rates like that seen before the COVID-19 pandemic is not currently on the horizon.
Together with slower increases in construction and energy costs than last year and depending on what priorities the new federal government sets, those developments are fuelling optimism that property deal volume will pick up again.
In the following, we look at this year’s key developments in the property market and discuss important legislative changes that are likely to shape the property sector in 2025.
II. Fresh approaches to increasing sustainability in the property sector
While legislative efforts for the property market were again dominated by environmental and climate protection in 2024, it is doubtful that these aspects will be granted the same prominence after the federal election (or will be able to be, given the difficult economic circumstances). Instead, it is becoming clear as the election campaign ramps up that several regulations that have entered into force in the past year will be either modified significantly or even abolished altogether in the near future.
1. GEG, GEIG & Co.
For example, that applies to the amendments to the Buildings Energy Act (Gebäudeenergiegesetz, “GEG”) that came into force on 1 January 2024. It is highly questionable whether the strict requirements for heating systems set out in section 71(1) GEG will be retained following the federal election. While their elimination could certainly result in significant economic relief for property owners and users in specific cases, it is not likely that the GEG will be gutted entirely because European Union law will continue to apply irrespective of the German governing coalition. It is also difficult to predict whether any relief will apply to tenants of commercial property only or also to residential tenants.
Stricter limits for particulate matter and carbon monoxide emitted from wood-burning appliances took effect on 1 January 2025. With expiry of the fourth and final deadline set out in the First Ordinance on the Implementation of the Federal Emissions Control Act (Erste Verordnung zur Durchführung des Bundes-Immissionsschutzgesetzes, “1. BImSchV”), the new emissions limits now apply to all small and medium-sized furnaces – with a few exceptions. Furnaces that do not meet these stricter requirements were required to be refitted or replaced by 31 December 2024. These measures exist separately from the GEG and do not depend on whether or not the GEG remains in force. Violations result in the automatic rescission of the furnace’s operating licence and may incur fines of up to EUR 50,000.
Since 1 January 2025, owners of non-residential buildings with more than 20 parking spaces have been obliged by the Building Electromobility Infrastructure Act (Gebäude-Elektromobilitätsinfrastruktur-Gesetz, “GEIG”) to install EV chargers. At least one EV charger must be installed per ten parking spaces. For new non-residential buildings or buildings that undergo significant renovation, the GEIG applies from six and ten parking spaces, respectively. The law also allows developers and building owners to take a neighbourhood-based approach to cooperatively equipping parking spaces with charging infrastructure. A further privilege applies to small and medium-sized businesses if they predominantly use the buildings in question themselves; the requirements of section 1(2) GEIG do not apply in such cases. Nor do these requirements apply if the cost of installing the charging infrastructure during significant renovation to existing buildings would exceed 7% of the total costs (section 14(1) GEIG). Not implementing the requirements of the GEIG adequately can incur fines of up to EUR 10,000.
The GEG and GEIG implement many of the requirements of the European Energy Performance of Buildings Directive (EPBD, newsletter) concerning the installation of charging infrastructure. The revised EPBD came into force in May 2024 and again tightens requirements for building owners regarding the energy efficiency of their buildings and the necessary EV chargers – and therefore requires another amendment to the GEG and GEIG. The revised EPBD is part of the European Union’s Fit for 55 package and aims to accelerate environmentally-friendly construction and reduce CO2 by 55% by 2030 compared to 1990 levels. The European Union has given national legislatures until May 2026 to transpose the stricter requirements into national law. It remains to be seen whether Germany will use the opportunity to introduce energy efficiency regulations beyond those required by European law or incorporate the European requirements in the GEG and the GEIG unchanged.
2. Further legal changes
There are also other legal changes that are likely to have indirect impact on the property market.
Carbon pricing will further increase in 2025, from EUR 45.00 to EUR 55.00 per tonne. As the relevant costs incurred are split between landlord and tenant based on the familiar tiered model, this will lead to a further increase in ancillary costs.
Another issue concerns the obligation to install photovoltaic systems, which currently predominantly affects new residential buildings and car parks. This obligation took effect under state law in Bavaria, Lower Saxony, North Rhine-Westphalia and Rhineland-Palatinate on 1 January 2025, having previously already applied in Baden-Württemberg, Berlin, Hamburg and Bremen in some cases – mainly with regard to roof overhauls. In its coalition agreement, the German government originally planned to introduce a nationwide obligation to install photovoltaic systems and extend its applicability to commercial buildings in addition to residential buildings. However, as it was not included in the amendment to the GEG in 2023, it is unlikely that the plans for uniform nationwide photovoltaic regulations will be implemented.
As of 1 January 2025, meter operators are also required to install smart meters in households with an annual electricity consumption exceeding 6,000 kWh, photovoltaic systems with an installed capacity of 7 to 100 kW, or controllable consumption devices such as heat pumps or EV chargers. These smart meters enable the digital monitoring of electricity consumption and utilisation times while being seamlessly integrated into a communication system.
However, it is more than questionable whether the long-awaited draft amendment to the German Building Code (Baugesetzbuch, “BauGB”), which was launched last autumn and sets out to cut red tape for vertical expansions and roof extensions to create more residential space, will actually be adopted in its current version.
Due to the abolition of the heat pump privilege in October 2024, landlords are now obliged to bill heating costs based on consumption if heat pumps are installed. Previously, electricity costs for buildings heated predominantly by heat pumps could be passed on to tenants in full and regardless of consumption, as heat pumps were listed as an exception in section 11 of the old version of the Heating Costs Ordinance (Heizkostenverordnung). Following this change, the installation of consumption metering devices is now also mandatory for heat pumps, and billing must comply with the requirements of section 7 Heating Costs Ordinance. Landlords now have until 30 September 2025 (transitional period) to install the necessary meters to ensure consumption-based billing from 2026 on.
III. Fourth Bureaucracy Reduction Act – does this spell the end for the written form?
Another key development for the real estate sector is the introduction of the Fourth Bureaucracy Reduction Act (Viertes Bürokratieentlastungsgesetz). This came into force on 1 January 2025 and heralds the end of the statutory written form requirement for long-term commercial leases. While the written form requirement under section 550 Civil Code (Bürgerliches Gesetzbuch, “BGB”) will continue to apply to residential leases, section 578(1) BGB provides for the modified application of section 550 BGB to commercial leases in future. Commercial leases concluded for a term of more than one year will therefore only need to comply with the text form requirement laid down in section 126b BGB. This means they will be valid and secure from premature termination even if concluded via e-mail, fax or other electronic means, provided that the declarations are made in a readable form, identify the person making the declaration and are stored on a durable medium.
However, commercial leases concluded before 1 January 2025 must still comply with the written form requirement until 31 December 2025, whereas text form will suffice for all amendments agreed after 1 January 2025. This will result in numerous leases being subject to changing formal requirements, making it essential to carefully check that the relevant minimum standards are being met.
Of course, parties can still choose to apply the written form requirement for commercial leases concluded after 1 January 2025 as well, but must then ensure that section 125, sentence 2 BGB is excluded. This stipulates that, in case of doubt, a defect in the form established by legal transaction will result (in the same way as a violation of a statutory form requirement) in the agreement being null and void. Excluding this (previously inapplicable) provision is vital to avoid jeopardising the validity of the entire lease due to a breach of the agreed written form.
It seems rather unlikely at this point that the relaxation of formal requirements will truly bring tangible benefits in day-to-day practice. Important commercial leases will probably continue to be subject to a (now voluntary) written form requirement because physical documents can more easily be used as evidence or for warning purposes. And compared to the time and effort involved in negotiating the agreement, which already routinely involves exchanging drafts electronically or holding conference calls/video conferences, actually executing the agreement requires only negligible effort, so the practical benefits are likely to be limited.
There are also a large number of issues that still need to be resolved in contractual practice and by the courts. For example: How can it be reliably determined which declarations made in text form are already binding and which are merely non-binding proposals? Which of the specific criteria established by the courts for maintaining the written form should remain in effect under the text form requirement? Is it still necessary to distinguish between essential contractual provisions and ancillary agreements? How can the secure exchange of contract information be ensured in the long term, and manipulation be prevented? And finally, what happens if the relevant declarations are no longer available or retrievable?
IV. Extension of the rent control law
Of particular importance for tenants, but also for property owners and property investors, is the discussion on extending the provisions on rent control (Mietpreisbremse) that were introduced in 2015 (sections 556d et seq. BGB). According to these provisions, in areas that are found by the federal states to have a tight housing market, new tenants may not be charged more than 10% above the local comparative rent. Under current legislation, ordinances ordering the application of the rent control law will expire on 31 December 2025. Against this background and despite criticism from the housing industry and business community, the German government adopted a bill in December 2024 according to which the federal states’ authority to issue ordinances will be extended until 31 December 2029. The draft also stipulates that in future the rent control law will also apply to new buildings that were first used and rented out between 1 October 2014 and 1 October 2019. It is impossible to predict whether and in what form an extension of the rent control law will actually be passed (and retained after the federal election). In any case, the discussions surrounding the rent control law are likely to continue having major impact on residential tenancy law in 2025.
V. Changes in the calculation of real property tax
What is also important for both property owners and investors is the real property tax reform, the detailed effects of which became apparent starting on 1 January 2025. This reform became necessary as a result of the Federal Constitutional Court’s finding on 10 April 2018 that the existing assessment of real property tax was unconstitutional as it resulted in different treatment of similar properties and thus violated the constitutional requirement of equal treatment. Irrespective of practical implementation difficulties, which are in some cases considerable, real property tax is now levied uniformly based on the new statutory provisions and, in particular, the adjusted assessment rates of the respective municipality. However, contrary to what the German government was expecting, this has not merely led to “individual shifts of the tax burden”, but instead, in some cases, to significant changes in the amounts due. It remains to be seen to what extent this situation will affect the willingness to invest in individual cases. However, since the real property tax can be passed on to the tenants concerned pursuant to section 2, sentence 1, no. 1 Operating Costs Ordinance (Betriebskostenverordnung), the changes will in many cases lead to a (further) increase in ancillary costs.
VI. More legal changes
The use of “e-invoices” in business transactions between companies (not just in the construction and real estate sector) became mandatory on 1 January 2025 under the Growth Opportunities Act (Wachstumschancengesetz), transposing the EU Directive for the promotion of digitalisation in accounting. To qualify as an e-invoice, an invoice must be issued, transmitted and received in a prescribed structured electronic data format as defined in EN 16931, and it must allow for electronic processing, i.e. it cannot be in PDF or Word format. Exceptions only apply to invoices for small amounts up to EUR 250.00, invoices for tax-free services in accordance with section 4, nos. 8 to 29 VAT Act (Umsatzsteuergesetz), and to small businesses.
The aforementioned Growth Opportunities Act also opens up the possibility of declining balance depreciation for new residential buildings constructed on or after 1 October 2023, which means that higher depreciation amounts (of 5% p.a.) can be applied. The Act also allows for the possibility of accelerated tax depreciation of up to 5% p.a. within the first three years for newly constructed apartments, which can also be cumulative.
The declared aim of the legal changes is an intensive support for housing construction, especially of energy-efficient new buildings. However, in view of the recent sharp rise in construction costs, particularly in order to ensure compliance with strict environmental standards, a glaring shortage of tradespeople and skilled workers as well as a noticeable reluctance on the part of private investors, it is doubtful that the desired effects will actually materialise. In any case, the German government has not been able to reach its ambitious goal of having 400,000 new apartments built each year. It also remains to be seen to what extent the non-profit housing scheme (Wohngemeinnützigkeit) newly introduced on 1 January 2025 can change this. This scheme aims to promote affordable and sustainable housing while providing tax benefits and access to subsidies for selected organisations.
VII. Outlook
2025 will bring dramatic changes to the property market. The upcoming federal election in particular is likely to have a significant impact on the economic and legal framework that applies to the property sector. It remains to be seen whether the new federal government will succeed in restoring confidence in Germany as a place to do business and thus probably in creating a more dynamic environment for property transactions. Multiple crises affecting the geopolitical landscape have significantly contributed to the continuing uncertainty. Thus, not only are there questions as to how much scope there will ultimately be for tax relief, public subsidies, and other incentives, but also as to whether environmental and sustainability aspects will continue to be prioritised as they were by the previous government. Moreover, the question of how case law will shape the revised text form requirements for commercial leases is also of particular practical importance. The coming year therefore offers the opportunity to focus not just on the risks, but also on the opportunities in the property market – even if not all hopes are fulfilled.
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