Leasehold models regain appeal among Germany’s municipalities

Germany’s Erbbaurecht – or heritable building right – has long existed in a grey zone of institutional real estate investing: known, vaguely understood, and frequently ignored. Yet as municipalities, churches and foundations look to retain land ownership while unlocking value, and as developers seek ways to reduce upfront costs in an era of high interest rates, the centuries-old concept is undergoing a tentative revival.

Under Erbbaurecht, investors or developers lease land - typically for 50 to 99 years - on which they may build and own structures. The land remains the property of the lessor, while the leaseholder gains construction and usage rights, usually paying an annual ground rent (Erbbauzins) in return. At the end of the term, ownership of the buildings typically reverts to the landowner, often with some form of compensation. This setup has been a feature of the German legal system since the Weimar Republic, designed to promote housing construction by separating land from building ownership.

The appeal of Erbbaurecht has waxed and waned over the decades, but recent economic constraints have sharpened interest. A recent study by Berlin Hyp and consultancy bulwiengesa, titled "Erbbaurecht – zwischen Rendite und Renditeverzicht," highlighted a growing readiness among institutional investors to consider leasehold structures - provided the legal and valuation frameworks are clearly defined. "There is a noticeable rethinking going on," said study co-author André Adami. "With the right conditions, the heritable building right can be a valuable instrument for both sides."

Still, the arrangement introduces multiple complications. For one, ground leases are often seen as less attractive than freehold ownership, particularly when residual value at contract expiry is uncertain. Many banks remain reluctant to finance Erbbaurecht deals, or offer more restrictive terms. According to Ingo Strogalla, President of the German Hereditary Building Rights Association, "The key to market acceptance lies in the precise structuring of lease terms—especially around duration, ground rent adjustment clauses, and the rights of both parties in the event of default or redevelopment."

Valuation, liquidity and lender hesitancy

The issue of valuation also remains fraught. Since the land is not owned, the value of the investment lies in the superstructure and leasehold rights—leading to divergent treatment under German and international valuation standards. While some investors accept these constraints, others steer clear. As the bulwiengesa study points out, marketability and liquidity risks remain high without transparent legal frameworks and contract standardisation.

What is changing is the stance of public landowners. Increasingly, municipalities and other institutional holders are turning to the model as a way to retain long-term control over urban development while enabling private capital to fund construction. In cities like Munich, Freiburg and Berlin, local authorities are granting leasehold land parcels rather than selling them outright—a shift driven by the desire to maintain influence over land use and social outcomes.

In this context, a properly structured Erbbaurecht can offer predictable cash flows to landowners while helping investors avoid steep land acquisition costs. But contractual pitfalls remain. Terms vary widely, especially regarding escalation clauses, usage restrictions, and reversion rights. And once signed, these agreements bind parties for decades—sometimes generations.

Ultimately, Erbbaurecht is unlikely to become a dominant model for institutional investment. But in a policy environment where municipalities are under pressure to retain public land and reduce speculation, the model is resurfacing with renewed relevance. For ESG-focused investors, mission-driven housing developers, or long-horizon asset managers, leasehold structures may serve as a pragmatic tool—if the legal architecture is sound, the parties aligned, and the long-term risks fully acknowledged.