trending Market Intelligence /marketintelligence/en/news-insights/trending/5S-bRv5FwzJNGeG5Kj0sUg2 content esgSubNav
In This List

Berlin's leadership of rent rebellion shows a city torn between past and present

Blog

Using ESG Analysis to Support a Sustainable Future

Video

S&P Capital IQ Pro | Powered by Expert Insights

Blog

Q&A: Streamlining Analytics for TCFD Reporting

Blog

Evergrande and the wider impact: a sentiment analytics based perspective


Berlin's leadership of rent rebellion shows a city torn between past and present

SNL Image

The Berlin Wall ran close to the Brandenburg Gate and divided the city for almost 30 years.
Source: Associated Press

The Berlin senate's recent publication of its draft bill to tackle the city's soaring residential rents was met with something akin to a sigh of relief from Germany's residential sector.

Relief among landlords like Vonovia SE, Deutsche Wohnen SE, and ADO Properties SA may be surprising, given that the proposal to freeze rents on some units for five years will almost certainly harm their businesses, but it indicated how radical some of the measures considered by the city have been.

Berlin is just one of many European metropolises struggling to keep its residents' cost of living down as demand for homes outstrips supply, pushing rents up. The city's development as a major European tech hub, and its reputation for offering an alternative lifestyle, has attracted hordes of young, tech-savvy professionals from around the world. This influx is causing the city's population to swell.

A 2017 report by the Cologne Institute for Economic Research estimated that the city's population would rise to 4 million from 3.5 million by 2035. "Berlin is growing in all respects: economically, demographically. There is no way back," said Till Johannes Brühöfener-McCourt, head of research at banking and real estate consultant Ziegert, a specialist in the Berlin residential market.

But as authorities in London, Paris and Barcelona mull how best to address the problem of rapidly rising rents as investors pile in to make the most of the favorable market conditions, Berlin is taking a decisive stand in defense of tenants. Its senate's draft bill is expected to come into law.

So what's behind Berlin's leading of the charge against landlords? "Berlin is totally different from the rest of Germany," Felix von Saucken, managing director and head of residential for Germany at Colliers International, said in an interview. "And Berlin was totally different in the past."

That past is largely defined by the city's separation into East Berlin and West Berlin after World War II. East Berlin, which was occupied by Russian forces at the end of the conflict, became part of the German Democratic Republic, a communist satellite state of the Soviet Union. West Berlin, occupied by U.S., U.K. and French forces, became part of the Federal Republic of Germany, or West Germany, even though it was surrounded by East German territory. An increasing leak of workers moving from East to West Berlin eventually led the East German authorities to build a wall in 1961 to stem the losses, making the city's division stark and seemingly permanent.

SNL Image
David Bowie, seen here performing in Berlin, was one of the many
artists and musicians drawn to live in the city in the 1970s and 1980s.
Source: Mediapunch

The unprecedented political dynamic between the two parts of the city had a profound impact on both. While East Berlin became part of a fully fledged Stalinist state with public ownership of everything from housing to industry, West Berlin's promotion by the West as an "island of freedom" made it a haven for progressives and creatives. Berliners were exempt from military service in the West German army, and large subsidies for cheap housing from the rest of West Germany were also an attraction, according to Andreas Polter, head of residential portfolio investment, Cushman & Wakefield Germany.

"Berlin citizens weren't considered fit for military service, meaning that throughout the 1970s and 1980s it was a big magnet for people who felt like living an alternative lifestyle," said Polter. "A big flock of people moved to West Berlin, including musicians and artists like David Bowie and others."

Rebels rebel

But around 50 years later, with Germany reunified and the Berlin Wall now a public museum piece, a legacy of the city's formerly opposing political mindsets remains, said Konstantin Kortmann, head of residential investment, JLL Germany.

"Those two streams of consciousness meet in the Berlin political establishment," he said. "One is the authoritarian, socialist, communist part coming from East Germany, and the other is the alternative lifestyle, green, hippy, socialist stuff from West Germany. And in the case of residential supply, they both agree it should be more or less for free." This consensus is manifested in Berlin's senate, which is controlled by what is known as the Red-Red-Green coalition, a combination of left-leaning parties consisting of the Social Democrat Party, The Left and The Greens.

Another legacy of Berlin's past is the size and affordability of its residential rental market. The publicly owned housing stock that was ubiquitous of both East and West Berlin has been largely privatized, but the city's residential market is still predominantly rental, with more than 80% of units let to tenants, according to a March 2019 German residential market report by real estate services firm Savills.

These tenants have long been accustomed to relatively low rents when compared with other German and European cities, said von Saucken. "The problem isn't that rents are so high in Berlin; the problem is that in the past, the rents in Berlin were very low," he said, adding that Berlin residents were used to paying between €4 and €6 per square meter per month before the recent surge in rents.

"Berliners think, 'We use to pay €4 [per square meter per month], why do we now have to pay €8?' For the same kind of flats in Munich, tenants have to pay €18 [per square meter per month], or in Hamburg €12," von Saucken said.

Ch-ch-ch-ch-changes

Proposals to increase supply to counter Berlin's rapidly rising rents are also unpopular with its residents. A plan to develop the historic 300-hectare Tempelhof Airport site near the city center, which is now a public park, was rejected by almost 65% of Berlin’s voters in 2014.

"People agree that rents shouldn't grow, but people do not agree that in order to prevent rents from growing they will have [to tolerate] a construction site right next to where they live," said Kortmann. Poorly staffed and under-productive local government building departments, along with complications arising from dealing with different building ministries across Berlin's 12 districts, also exacerbate the lack of supply in the German capital, sources said.

As Berlin's senate prepares to vote on its draft bill to tackle rising rents, the city's politicians and residents need to understand that only a massive increase in the supply of new homes is likely to have a lasting impact on the rental market, the sources added.

But Berlin, so defined by its history, might need a while before it can let go of the past, Ziegert's Brühöfener-McCourt said. "Give us a little bit of time to realize that we are not really a metropolitan area; we are a global city here, and we are moving on," he said. "That needs time."