Germany caps index rents as new housing stalls further

Germany is preparing a new law to limit how fast index-linked residential rents can rise. The draft bill, from Justice Minister Stefanie Hubig, would cap increases at 3.5% per year in cities where housing is scarce. The government’s argument is straightforward: inflation has made rents jump too quickly for many tenants, and the law aims to prevent sudden rent shocks in the future.

The bill also tightens the rules for short-term leases. These contracts could only be signed once for a maximum of six months, and only if the tenant has a specific reason for needing one. For furnished apartments, landlords would have to separate the base rent from the furniture surcharge. The surcharge must be reasonable, and could reach 5% of the net rent, or a flat 5% for fully furnished units. To balance these new tenant protections, landlords would be allowed to raise rents more easily for smaller modernisation projects, as long as the work costs no more than €20,000, an increase from the previous €10,000 limit.

Why investors care

The real story for real estate capital is not about rent formulas. It is about predictability and incentives. Across Germany, index clauses appear in only about 2.6% of rental contracts. But the share is far higher in new housing in major cities. Around 19% of leases in new-build apartments in the top seven cities signed since 2014 use index-linked rent. Developers and lenders like these contracts in new buildings because they help protect rental income against inflation, making future returns easier to forecast. Capping increases at 3.5% does not remove that protection, but it makes it less complete when inflation exceeds the cap.

New data from a representative Civey survey conducted for Heimstaden Deutschland highlights why this matters. The survey, based on responses from 5,000 adult residents and weighted to be representative, found that 38% of respondents believe that limiting index rents would lead to even fewer new apartments being built. Another 38% were undecided, and just 24% rejected the idea that the cap could slow housing construction. This sentiment adds empirical weight to the concern that interventions in contract terms can influence broader perceptions about supply and feasibility.

Landlord groups argue that blocking full inflation pass-through will make new housing projects harder to finance, because rental income becomes less protected than before. Tenants’ groups say the cap is still too high and want index clauses banned on new leases entirely. Economists point to a different problem: the average rent gap between older leases and new leases in big cities is around 25%, which keeps people “locked in” to their apartments and discourages moves. Their argument is that rent policy should spend more time on how to encourage new housing, not on the small details of contract types.

Implications for real estate

For existing residential portfolios in Germany’s largest cities, this reform is unlikely to change rents dramatically in the short term. But it could influence the type of rent contracts used in future new-build projects, and how lenders price inflation protection in loans. If developers feel less protected from inflation, lenders may apply higher interest margins to new projects to offset the weaker inflation hedge.

Germany is trying to stabilise rents for tenants at a moment when the country already builds too few new homes. The Heimstaden-Civey survey reflects a public perception that regulating index rents could deepen the housing shortage rather than ease it. The most likely outcome is more caution in development finance, more legal review of lease clauses, and continued limited new supply. Constrained supply supports rent and pricing power for standing residential assets in core cities, reinforcing the relative value of existing urban apartment portfolios even as the market adjusts to new contract dynamics.