Do you want to buy a property in a prime location, but the land prices are unaffordable? Leasehold plots seem to be the solution, yet they entail long-term financial commitments. This article shows you how to accurately assess the costs and risks.
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The topic briefly and concisely
Leasehold reduces the purchase costs, as the land is not bought, but it creates a decades-long financial commitment through the ground rent.
Banks only finance real estate on leasehold properties under strict conditions, often requiring a higher equity contribution and only if there is a long remaining term of the contract.
At the end of the contract, the property reverts to the landowner, with compensation often amounting to only two-thirds of the building's value and no entitlement to an extension.
The dream of owning a home often fails due to skyrocketing property prices, which in German metropolises can quickly account for 30% of the total price. Here, leasehold properties come into focus, as the purchase price for the land is eliminated. But what does this mean for your financial planning? You enter into a contract that often runs for 99 years and whose costs, the ground rent, can regularly increase. This guide analyses the significance of leasehold properties for buyers, quantifies the financial aspects, and provides you with a clear basis for decision-making to avoid costly mistakes.
Understanding the Foundation: What is a Leasehold?
A leasehold, colloquially known as 'hereditary lease', is the right to own a property on someone else's land. You therefore buy the building but lease the land only for a long period, typically between 75 and 99 years. This is regulated by the Hereditary Leasehold Act (ErbbauRG). Providers are often churches, municipalities, or foundations that do not sell their land but wish to generate income. Estimates suggest that about 5% of developed land in Germany is allocated on the basis of a leasehold. You therefore become a property owner, but not a landowner. This separation has far-reaching financial consequences that require a detailed analysis of the cost structure.
The costs in detail: Calculating the ground rent correctly
The main financial burden is the ground rent, an annual lease payment. This is usually between 2% and 5% of the current value of the land. With a land value of €300,000, a rate of 4% means an annual payment of €12,000. Crucial is the value preservation clause in the contract: it often ties the interest to the consumer price index. If this rises, the leaseholder can adjust the rate, but legally only every three years at the earliest (§ 9a ErbbauRG). In May 2025, the inflation rate in Germany was +2.1%, which makes future adjustments likely. This dynamic cost component must be incorporated into your financial planning over the entire 99-year term. A precise evaluation of the leasehold is therefore essential to avoid underestimating the long-term burden.
The Strategic Consideration: Pros and Cons for Buyers
The greatest advantage of leasehold properties is the reduction in acquisition costs. The purchase of land, which often accounts for 30-40% of the total investment, is eliminated. This enables the acquisition of properties in locations that would otherwise be unattainable. However, there are significant disadvantages to this. You enter into a long-term debt relationship, which continues even into retirement, whereas a standard construction loan is paid off after about 30 years. Additionally, the resale value may decrease, especially if the remaining contract term falls below 40 years. The initial savings are offset by a decades-long financial commitment.
A detailed comparison aids in decision-making:
Advantage: Less initial capital needed since the land price is omitted.
Disadvantage: Lifetime payment of the ground rent, which can exceed the original land value over the years.
Advantage: Access to properties in prime locations which are not for sale.
Disadvantage: Banks often require 10-20% more equity and financing is more difficult.
Advantage: The ground rent can be tax-deductible on rented properties.
Disadvantage: No benefit from the increase in land value.
These factors show that the decision heavily depends on your personal financial strategy and risk tolerance, which is why a precise cost analysis is crucial.
The Contract in Focus: Identifying Risks in the Fine Print
The ground lease agreement is the crucial document that establishes your rights and obligations for up to 99 years. Insufficient examination can lead to significant financial disadvantages. Particular attention is required for clauses regarding the so-called "reversion." This occurs if you breach the contract, for instance, by being in arrears with the ground rent for at least two years' worth of payments (§ 9 ErbbauRG). The property owner then has the right to terminate the contract prematurely. You will receive compensation for the building, but this is often limited to two-thirds of the market value (§ 27 ErbbauRG). A loss of over 33% of the property's value is a significant risk.
Before signing, be sure to check the following points:
Approval requirements: Does the owner need to consent to a sale, mortgaging, or structural changes? This can greatly restrict your flexibility.
Maintenance obligations: What requirements does the owner set for the condition of the building?
Compensation regulations: Is the compensation at the end of the contract clearly and fairly regulated (at least 2/3 of the value of the building)?
Pre-emption right: Does the ground lease holder have a pre-emption right if you wish to sell the property?
Adjustment clause: How precisely is the adjustment of the ground rent regulated and to which index is it tied?
The complexity of these contracts makes independent review essential. A professional valuation report can provide clarity here.
Securing Financing: Overcoming Barriers with Banks
Financing a property on a leasehold plot presents buyers with particular challenges. Many banks consider the transaction to be riskier and either reject financing or attach it to stringent conditions. Often, a 20-40% higher equity ratio is required compared to a traditional property purchase. Another critical hurdle is the remaining term of the leasehold contract. Most credit institutions require that the remaining term exceeds the loan duration by at least 10 to 20 years. If the remaining term falls below 40 years, financing for potential future buyers becomes almost impossible. This significantly restricts the resale value of your property. It is therefore all the more important to develop a solid financing strategy at an early stage and be well-informed about the banks' requirements.
The long-term perspective: What happens at the end of the term
A leasehold agreement with a term of 99 years seems endlessly long, yet the decision has consequences for generations. At the end of the term, your right of use expires, and the ownership of the property reverts to the landowner (“Heimfall”). You have no statutory right to an extension of the contract. Although you are entitled to compensation for the building value, this is usually limited to two-thirds of the market value. So not only do you or your heirs lose your home, but also about a third of the property's value. An extension is often possible, but the new ground rent will then be calculated based on the then-valid, likely significantly higher land value. Therefore, clarify in advance whether the contract provides for a right of renewal for you as the leaseholder (§ 2 No. 6 of the German Leasehold Act). A neutral assessment by Auctoa ImmoGPT can help you model long-term scenarios and make an informed decision.
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Leasehold properties can open the door to homeownership in expensive markets, but they are not a guaranteed way to save money. The initial savings from not purchasing the land outright are offset by decades of interest charges and significant contractual restrictions. Deciding for or against a leasehold agreement is one of the most far-reaching financial decisions you can make as a property buyer. It requires a careful analysis of the contract, a realistic long-term calculation, and an objective assessment of all risks. The importance of leasehold properties for buyers does not lie in the short-term price advantage, but in the long-term viability of the model. A data-driven, impartial analysis, as offered by Auctoa, is the best way to ensure that your dream of homeownership does not become a financial nightmare for the next generation. Make your decision based on facts, not merely out of necessity.
Additional useful links
Wikipedia offers a comprehensive overview of the leasehold law.
The Statistical Office (Destatis) provides information on construction prices and the real estate price index.
The Statistical Office (Destatis) offers detailed tables on house and land prices.
FAQ
Is it worth buying a house with a leasehold?
It depends on the individual case. It might be worthwhile if you have little capital and want to buy in an expensive location. However, in the long term, the ground rent payments often exceed the value of the land. A precise calculation and contract review are essential.
Who pays the property tax in the case of leasehold?
The leaseholder, meaning the owner of the property, is responsible for paying the property tax and all other public charges associated with the land.
How is the value of a leasehold property determined?
The valuation is complex. The value of the building (structural value) and the value of the leasehold (financial value) are determined separately. Factors such as the remaining term, the amount of the ground rent, and the contractual provisions play a crucial role and usually result in a lower market value than for a comparable property with land.
Can the ground rent increase indefinitely?
No. An increase is only possible if an adjustment clause (value protection clause) has been agreed in the contract. This is usually linked to the consumer price index. An adjustment due to increased land prices is only possible with new contracts or contract renewals. Furthermore, an adjustment for residential properties may only occur every three years at the earliest.
What is the 'Heimfall'?
The 'reversion' is the right of the landowner to demand the retransfer of the heritable building right if the tenant violates significant contractual obligations. A common reason is a payment delay of the heritable building interest of at least two annual amounts.
Do I have a right to extend my leasehold contract?
No, there is no legal right to an extension. The property owner freely decides whether to extend the contract. Sometimes the contract grants a preferential right to renewal, which puts you as the tenant in a better position but does not provide a guarantee.
