From Insolvency to Investment: Germany’s Market Recalibration

Behind record developer failures lies one of Europe’s most compelling opportunities in real estate and private credit

Bernhard Hansen, CEO Arrow Germany

I have spent my whole career in real estate and development, and what I see in Germany today is a market unlike any other in Europe. On the surface, it is defined by turbulence: we currently have the highest insolvency rate in the European property sector, a statistic that surprises many. Yet beneath the headlines lies a story of misaligned incentives, structural imbalances, and ultimately, lasting opportunity.

A market recalibrates

The roots of today’s challenges go back to an era of almost free money. For more than a decade, Germany lived through an unprecedented stretch of near-zero interest rates. Projects were launched on the assumption that financing costs would remain negligible, while banks often provided more than one hundred percent financing of land and construction costs. Developers were neither required nor incentivised to put equity into their projects, and optimism became the default stance. Rising prices masked mistakes, and the market moved upwards without pause for nearly two cycles.

That reality came to a sudden stop when interest rates rose. Prospective house buyers who once expected to borrow at one or two percent were confronted with a new reality of higher financing costs. Demand did not disappear, but it froze. Because in Germany sales typically accompany construction through instalments, developers found themselves without expected inflows. At the same time, they faced higher financing costs and little equity cushion. Projects stalled, pipelines froze, and insolvencies spread across the sector.

From the outside, this might appear like a market in distress. From where I sit, it is a market in transition. The demand drivers remain not only intact but profound. Germany requires roughly 400,000 new residential units per year; for much of the past decade, we have delivered fewer than half that. The gap is structural and widening. Cities such as Munich are projected to remain undersupplied well into the 2040s, even under optimistic assumptions. And while the pandemic reshaped preferences for some, the pull of urban centres remains strong: jobs, healthcare, education, and cultural infrastructure continue to attract people back into cities.

“Germany’s real estate market is not collapsing, but recalibrating, and for disciplined investors, stalled projects are tomorrow’s opportunities.”

Distress as Entry Point

For investors like Arrow, this dislocation creates a rare window. Across the country there are half-finished developments, projects that can be revived, completed, and brought to market. These are not opportunities for passive capital. They require hands-on knowledge of construction, technical expertise, and rigorous due diligence across legal, commercial, and engineering. You need on-the-ground teams able to assess whether what has been built matches what was promised, whether quality meets code, and how to manage warranties and liabilities. But if you bring that expertise, you can step into projects that are already significantly advanced, reduce development risk, and still meet the clear demand for new housing.

Smaller and mid-sized projects are particularly interesting. Many of the developers who entered the German market in the past decade focused on schemes below €50 million, often building in neighbourhoods that buyers find attractive for their scale and character. When these projects stall, they present chances for experienced investors to step in, complete construction, and re-establish confidence with buyers who prefer to walk through a nearly finished unit rather than rely on a plan. In a market where trust has been shaken, financial strength and execution capability become decisive advantages.

Another dimension of opportunity lies in financing. Banks that once lent aggressively have pulled back sharply. Loan-to-value ratios that once exceeded 100 percent have been replaced with conservative limits at 50 or 60 percent, coupled with higher interest rates. Developers, already equity-constrained, find themselves unable to move projects forward. This creates space for alternative lenders and debt funds to provide financing solutions. At Arrow, we see significant opportunity to provide structured financing, often with equity support, in ways that traditional banks no longer can. For investors active in private credit, this is a moment to establish a foothold.

“Behind today’s insolvencies lies not retreat but renewal, a market resetting for those with capital and conviction.”

Structural Drivers Endure

Sustainability is another unavoidable theme. Over the past 15 years, both occupiers and regulators have steadily shifted expectations. Tenants want to be associated with buildings that signal environmental responsibility, and governments are mandating stricter efficiency standards. This is a necessary and important transition, but it must be managed pragmatically. The dialogue between policymakers and the industry needs to balance ambition with feasibility, ensuring that affordability is not sacrificed. Incentives in the form of grants, subsidies, and supportive programmes, are crucial in making green building not just aspirational, but executable.

Geographically, while Germany’s ‘big seven’ cities naturally attract most attention, I believe investors should not overlook the strength of smaller cities. Places such as Aachen, with its mix of residents and students, offer attractive fundamentals for products like student housing. Germany’s federal structure means that each of its sixteen states has distinct planning and approval processes: being truly local matters. That is why we have built Arrow’s presence through acquisitions in Düsseldorf and Berlin, and through expansion into Hamburg and Munich. Step by step, we are positioning ourselves to engage with these markets on their own terms, as local participants, not just external investors.

What is striking in the current moment is the divergence between German and international investors. Many German institutions remain on the sidelines, cautious in the face of turbulence. By contrast, we see increasing activity from international investors who recognise both the cyclical correction and the enduring fundamentals. They are not only entering Germany but often extending their strategies into Southern Europe, in sectors such as student housing and hospitality, where demand remains high.

For me, the lesson is clear. This is not simply a downturn; it is a recalibration. The German real estate market is dropping unsustainable practices born of an era of free money. Developers without equity, projects without discipline, and assumptions of perpetual growth are being tested. In their place emerges a healthier, more opportunity-driven environment for those with capital, expertise, and patience.

We cannot underestimate the challenges. Stalled projects require careful completion, buyers remain cautious, and regulatory obligations, particularly around sustainability, are real. But we also cannot ignore the structural undersupply of housing, the retreat of banks from lending, and the resilience of demand in Germany’s cities. For institutional investors in private credit and real estate, this is a rare moment: to step in where others have paused, to bring discipline and capability to distressed situations, and to create long-term value in one of Europe’s most important markets.

“Germany’s housing shortage ensures demand endures; the current turbulence is the entry point, not the exit.”

Germany today is a market in distress, but also one of the most compelling opportunities of the decade, and for disciplined investors, it is the moment to step in.