A special fund of up to 500 billion euros for infrastructure modernization: What does that mean? The explanatory note to the law states that it specifically targets civil protection, transport infrastructure, hospital investment, energy infrastructure, investment in education, and scientific infrastructure, as well as research & development, and digitalization. It is clear that this primarily addresses the public sector. The focus is on bridges, roads, schools, administrative buildings. So what does it mean for the real estate industry?

The problem is that it’s not entirely clear yet. The coalition negotiations, in which details are expected to soon be finalised, are still ongoing. „What will be crucial is how targeted and investment-effective the funds are used“, says Dirk Wohltorf, President of the German Real Estate Association (IVD). Jens Böhnlein, Chairman of the professional association of real estate specialists, RICS Germany, shares a similar view. He is counting on the pull effect of the special fund, also to make the country more attractive for additional investment capital.

Sascha Klaus, CEO of Berlin Hyp, has a different emphasis. While he believes „positive effects“ of the special fund on the real estate industry are possible, he argues that „the framework conditions must first be improved.“ Klaus hopes for significant improvements in bureaucracy, tendering, and approval processes.

According to Konstantin Kortmann, CEO of JLL Germany, the infrastructure package will have an indirect but potentially much larger effect (than the defence package). „There is a natural connection between infrastructure and real estate, such as in the energy supply of residential areas or logistics", he says.

This intertwining of infrastructure and real estate is already one of the most important trends in the real estate industry, according to Phoebe Smith, Managing Director at Patrizia Infrastructure. She points to district heating networks in Berlin and Munich, whose expansion requires significant investment.

No question: Investments in schools, daycare centers, and public buildings are urgently needed. Private capital can support this through public-private partnerships. There have already been some initial steps, but much more is certainly possible. Ultimately, it depends on „how targeted and efficient the funds are used“, notes Sarah Červinka, Managing Partner at Knight Frank Munich.

As part of the 500 billion-euro package, 100 billion is allocated for states and municipalities. The exact share for municipalities is still open. Wiesbaden Mayor Gert Mende, in line with his counterparts, is calling for a „fair share“ for schools, sports facilities, climate protection, and the expansion of public transport. It is undisputed that 100 billion euros will not be enough. The need for renovations is much higher. To provide relief, Isabella Chacón Troidl of BNP Paribas REIM Germany calls for serial construction, digital approvals, repurposing of existing buildings, and technology-neutral climate strategies. This echoes recent calls from the German Property Federation (ZIA).

The expansion of roads, rail, airports, and digitalization could make office buildings in cities more attractive again. The improved connection to rural areas could in turn support demand for housing and help stop or even reverse the depopulation of rural areas. Sustainable mobility also contributes to climate protection.

A large portion of the infrastructure investment is to benefit sustainable technologies and climate protection measures. This could strengthen the trend toward „green“ real estate, which is particularly energy-efficient. This is urgently needed to achieve climate neutrality by 2045, although it currently doesn’t seem likely.

The programme will be financed through federal loans, meaning that the federal government will increasingly raise funds through government bonds on the capital markets. The increased demand will lead to higher interest rates, although they will likely be counteracted by the expansive policy of the European Central Bank (ECB) through interest rate cuts. Nonetheless, an increase in mortgage rates is expected overall. Experienced real estate researcher Günter Vornholz predicts that construction interest rates will be slightly above 4% by the end of the year. This will make (debt-financed) construction and purchasing more expensive, which will likely lead to higher prices.

To alleviate the „enormous pressure“ on the real estate industry, ZIA President Iris Schöberl calls for „targeted funding in a unified manner“ and digitalization as a given, so that „there is less delay between wanting to build and actually building.“

Higher interest rates, a reduced yield gap compared to government bonds, and the still prevalent caution from banks could slow down the upswing in the real estate investment markets, fears Nicolai Baumann of Avison Young Germany. However, the economic growth driven by the investment program and an increased focus of many investors on Europe and Germany – also due to geopolitical factors – could work in the opposite direction.

The increased demand due to the investment programme could also lead to higher construction costs. However, both civil and structural construction are already experiencing a lack of orders. At the same time, the construction industry is facing a shortage of skilled workers, which is already causing capacity bottlenecks in some areas. Paul H. Muno from Sicore Real Assets expresses concern that „a state investment program of this size could result in a saturation of constructions sites", which doesn’t seem unfounded.

Higher construction and financing costs could pose even greater challenges for project developers who rely on loans. Higher sales prices resulting from passed-on financing costs would be difficult to push through in the market. It could lead to more bankruptcies among developers.

What can be expected in the end from the 500 billion euro boost for the real estate industry? Slightly higher interest rates on one side and increased demand on the other. Real estate economist Vornholz does not expect a double dip, where a short recovery is followed by a return to recession, „but – if anything – a delay in the upswing.“ Most observers would likely agree with this optimistic conclusion.