Real Estate Location: Why Prime Locations Are So Popular
Why is the location of real estate so important for investors? The right location determines the value, rents, and future appreciation of your property. In this article, we will show you how to choose the best location and how A, B, and C locations differ.
The most important points at a glance
A locations are typically highly sought-after and economically thriving sites that offer stable rental income, low vacancy risks, and capital appreciation for investors.
B locations represent an attractive opportunity to combine moderate prices with high return potential, but they come with a higher risk compared to A locations.
C locations are associated with lower prices but carry higher risks and vacancy rates, which is why investors should exercise particular caution here.
What constitutes a good real estate location?
Choosing the right real estate location significantly influences the return and security of the investment. A key criterion for rental prices and business success is the location of the property.
When deciding on a real estate location, you should consider both your investment goals and the type of property. Whether residential or commercial real estate, each type has different requirements and potentials. Therefore, a thorough location analysis is essential to find the optimal location for your needs.
A, B, C locations compared for investments
Real estate locations are divided into different categories that reflect the relevance of cities for the real estate market. In Germany, the classification into A, B, and C locations is primarily based on population size and other criteria. This classification provides an initial assessment of the return and risk potentials in residential real estate.
A locations are often economically flourishing regions with high demand for housing. Here, property prices and rents are generally high. B cities like Leipzig and Dortmund also offer high real estate demand, but often with lower prices than in A locations. In B locations, the demand for housing often exceeds the supply, which leads to stable returns despite moderate price increases.
C locations are typically cities with 100,000 to 250,000 inhabitants and offer varying real estate demand. Property prices in C locations can carry significantly higher risks, as market development is less stable. These differences illustrate that each location category has its own advantages and disadvantages that must be considered when investing in real estate.
Characteristics of A locations
A locations are characterized by their high demand and international significance. These metropolises offer a quiet and central location, good transport connections, and numerous shopping opportunities in the center.
High demand and low vacancy risks
The high demand in prime locations results from their economic attractiveness and the advantages that metropolises offer. This demand leads to a low vacancy risk, as properties in sought-after locations are always in demand. For investors, this provides the advantage of stable rental income and a secure investment.
The concentration of jobs, high-quality educational offerings, and attractive housing options draws many people to these areas. This results in a high utilization density and continuous demand for residential properties, which keeps rents and property prices stable, especially in the various regions.
The concentration of jobs, high-quality educational offerings, and attractive housing options draws many people to these areas. This ensures a high utilization density and continuous demand for residential properties, which keeps rents and property prices stable, especially in the various regions.
Purchase prices in prime locations often rise disproportionately, as there are three strands of demand: residents of the city itself, people from the surrounding area, and investors looking to invest capital. For example, the prices for 80-square-meter apartments were €777,000 in Munich, €538,000 in Hamburg, €482,000 in Frankfurt, and €349,000 in Berlin.
High property prices and value appreciation
However, the investment costs in prime locations are also high, and the sellers' room for negotiation is often limited. Despite these high initial investments, prime locations offer attractive long-term returns through continuous value appreciation.
Purchase prices in prime locations often rise disproportionately, as there are three strands of demand: residents of the city itself, individuals from the surrounding area, and investors looking to invest capital. For example, the prices for 80-square-meter apartments were €777,000 in Munich, €538,000 in Hamburg, €482,000 in Frankfurt, and €349,000 in Berlin.
B locations are cities of national and significant regional importance, with a population between 250,000 and 600,000. These B cities offer moderate purchase prices and high return opportunities, making them very popular among investors.
High rents in prime locations contribute to investors being able to quickly generate their initial income. These stable and high rental prices are a significant advantage for investors seeking a secure return.
Moderate prices and good infrastructure
However, the investment costs in prime locations are also high, and the sellers' negotiating room is often limited. Despite these high initial investments, prime locations offer attractive long-term returns due to continuous value appreciation.
Investments in modern technologies such as fiber optics significantly improve the infrastructure in these cities. Bargains can be found especially in eastern Germany and the Ruhr area, although the risks are often higher here.
B locations: The best of both worlds?
The gross rental yield for real estate in Germany averages 2.5 percent. In B locations, the yield can be slightly higher, although the investment is usually lower. This makes B locations particularly attractive for investors seeking a balanced ratio of risk and return.
B locations are cities of national and significant regional importance, with populations between 250,000 and 600,000. These cities offer moderate purchase prices and high return opportunities, making them very popular among investors.
C-locations: Affordable Alternatives with Risk
C-locations are sites with weak infrastructure and low to moderate economic strength. These cities have less national relevance than B-cities and vary significantly in their development.
Lower real estate prices
The purchase prices for properties in C-locations are significantly lower compared to A-locations, offering investors attractive entry opportunities. In Erfurt, the purchase prices per square meter for apartments were 2,610 euros, and in Mönchengladbach, they were 2,010 euros.
In comparison, in A-locations such as Berlin and Munich, the square meter prices were 5,570 euros and 8,172 euros, respectively. These lower prices make C-locations particularly interesting for investors looking for cost-effective alternatives.
Higher risks and vacancy rates
However, in C-locations, there is an increased risk of vacancies and underutilization, which can jeopardize the profitability of real estate investments. The emigration of young people from C-locations is common, as they move to economically stronger regions.
These demographic changes increase the vacancy risk and diminish the attractiveness of C-locations as an investment. Therefore, investments in these areas should be carefully considered.
Location analysis and evaluation
Location analysis is crucial for assessing potential real estate investments. Factors such as maintenance costs, rental prices, and vacancy risk are decisive for location selection.
The following sections will explain the differences between macro-location and micro-location as well as the use of market reports and expert opinions.
Macro-location vs. Micro-location
Micro-location and macro-location are the two main types of locations that are essential for evaluating real estate. Macro-location includes aspects such as geographical location, infrastructure, and demographic data of the region.
Micro-location examines the immediate surroundings of a property, such as proximity to schools, shopping facilities, public transport connections, and recreational offerings. Both levels must be considered in location evaluation.
Micro-location examines the immediate surroundings of a property, such as:
the proximity to schools
shopping facilities
transport connections
leisure offerings
Both levels must be taken into account when assessing the location.
Utilization of market reports and expert opinions
Market reports provide comprehensive data and analyses that are crucial for investors. With the information from market reports, investors can identify trends and anticipate market changes.
Experts complement the data analyses and provide qualified assessments of market conditions. The combination of market reports and expert opinions offers a holistic overview that supports investors in their decisions.
Impact of infrastructure on the real estate location
Prime locations feature high economic activity, a wide range of educational offerings, and attractive neighborhoods. Infrastructure such as transport connections and shopping facilities enhances the appeal of prime locations.
The short accessibility to workplaces and shopping facilities leads many people to be willing to pay higher rents in prime locations. Overall, it is evident that infrastructure has a decisive influence on the choice of real estate location, particularly concerning prime locations and rental prices.
Future prospects and developments
For 2025, price increases of two to four percent for residential properties are expected, particularly in urban areas. Urban areas with high demand and limited housing are experiencing aggressive development of real estate and rental prices.
The ECB has lowered interest rates in recent months, making financing property purchases more attractive and boosting demand. After a decline in property prices, the market has shown initial signs of recovery since mid-2024, driven by reduced financing costs.
What we recommend
A-locations are the safest investment for real estate investors. However, the rental yield is often lower here due to the high purchase price. To have the best of both worlds, we recommend a concept rental such as Co-Living. For this, we can provide you with suitable offers through our developer network.
For those looking to purchase at a lower price, we recommend B-locations. We also have corresponding offers for you here.