European property markets have a new hot spot: Munich.

A consortium of mostly German institutional investors led by property manager Patrizia Immobilien is paying €2.45 billion ($3.19 billion) for GBW, a listed portfolio of more than 32,000 apartments in Munich and around Bavaria. Patrizia says the equity investment should initially yield 4% to 4.5%, which is toward the low end for residential property in Germany. But even at these levels, the deal looks good given the strength of Munich’s property market.

Condominium prices in Munich rose 17% last year, according to Jones Lang LaSalle. And the boom likely has further to run. Munich is already the most densely populated of Germany’s major cities, while economic growth is attracting some 30,000 people to the city each year. The population is forecast to increase by almost 200,000, to 1.6 million by 2030. Meanwhile, the city suffers a housing shortage that is likely to persist. Development is constrained by a lack of space. And despite rising rents, up 9% on average last year, they aren’t high enough to make many new buildings viable.

That makes the 5% discount to GBW’s net asset value Patrizia is paying look all the more appealing. The discount is in line with that of GBW’s biggest listed peer, Deutsche Wohnen, despite GBW’s better quality portfolio. One-third of GBW’s units are in the Greater Munich area. The discount also likely reflects the nature of the sale, in which the European Union had ordered BayernLB to sell its 92% stake in GBW by the end of this year as a condition of taking state aid during the financial crisis.

Patrizia should also be able to sell assets to boost returns. The purchase price implies a cost per square meter of €1,300 when condominiums in Munich’s most reasonably priced district cost just under €4,000 a square meter, according to Jones Lang LaSalle. And GBW’s rents per square meter are below market rates, suggesting Patrizia will be able to continue raising rents by 3% a year on average for some time. That might bump yields on equity up to 5.5% over the next three years, notes Warburg Research.

Not bad for what should be a stable portfolio in the wealthiest region of Europe’s most robust economy.