➤ Politicians would be wiser to introduce rent controls that benefit those in most need and not the vast majority of tenants who can afford to pay rents, Christian Windfuhr said.
➤ He believes left-leaning cities like Bremen and Thüringen are most likely to follow Berlin's example, but other larger cities could also do so.
➤ German authorities must provide more housing supply if rents are to come down, but landlords also have a responsibility to address the needs of struggling tenants, he said.
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Christian Windfuhr is CEO of Grand City Properties SA, a Luxembourg-based residential landlord that owns a portfolio of more than 80,000 units predominantly in neighboring Germany. The company specializes in value-add opportunities in densely populated areas, and aims to create value through targeted modernization and intensive tenant management and subsequently raising occupancy and rental levels. Before joining Grand City Properties, Windfuhr was CEO of Maritim Hotels and CEO of Mövenpick Hotels & Resorts. S&P Global Market Intelligence spoke with him as the German residential sector awaits the Berlin senate's vote on a draft bill to introduce more stringent rent controls in the city. What follows is an edited transcript of the conversation.
S&P Global Market Intelligence: The Berlin state's draft bill on residential rent controls is widely expected to come into law in January after a vote in the senate. Around 13% of Grand City Properties' rental income comes from its Berlin portfolio. What is your company's view on the proposed measures and what impact would you expect them to have on Grand City Properties' performance?
Christian Windfuhr:
Our take is once the bill is passed into law, and unless a lot of significant changes are made to it, companies will challenge it legally because it is considered unconstitutional. Let's wait until we know the final story and then respond to it and make calculations, because everything else is pretty much speculation.
One of the reasons we can afford to take that stance is that we have a relatively small exposure to Berlin, less than 10% of our properties are in the city. Our total rental income in Berlin is just under €50 million. If the worst-case scenario meant we can't increase rents in Berlin anymore, then this €50 million will remain €50 million rather than increase by give or take 2% annually to €55 million over the next five years. Considering our total run rate rental income of roughly €350 million, if we have the €5 million or not, it doesn't throw us off balance. For us, it's not as huge a topic as it is for some.
The overwhelming majority of the remaining Grand City Properties' assets are in other German cities. Are you concerned that these cities could adopt similar rent control measures to those proposed by Berlin?
The risk is definitely there. It can happen. I think it depends very much on firstly, whether or not the Berlin government will be successful, including overcoming the legal claims that will definitely follow. Probably some of the cities that want to do something like this are sitting on the fence watching how this Berlin thing unfolds before they decide to do it or not. And the politically Red-Red-Green [Social Democrat Party-The Left-The Greens] cities of Berlin, Bremen, and Thüringen, are probably most likely to do it because of their political affiliations. But other cities have mentioned it.
If rent controls similar to those proposed in Berlin were introduced in German cities where Grand City Properties has a larger footprint, what measures would you consider to mitigate the risk to the company? Would greater geographical diversification or diversification into other asset classes be considered?
No, we would not go into other asset classes. And we are already very well-diversified in terms of our regional footprint. There will be some areas where we may have stricter rent controls than the federal rent controls that already exist, and there may be areas where we don't. So, on balance, we do not expect any new rent controls to have a huge impact on our company.
And, at the same time, if it happens, it's not a significant competitive disadvantage because every landlord will suffer from it. So the entire market will be affected. At the moment, the problem seems to be limited to Berlin, and there are companies with more properties in Berlin than others, they are suffering the most. Deutsche Wohnen SE is an example, ADO Properties SA is another; both are focused on Berlin or have the majority of their flats in Berlin.
But we have to keep in mind that the impact of a worst-case scenario where we can't increase rents for five years is manageable. Yes, it will affect our results a little bit, it will probably affect valuation slightly also, but it won't throw the company out of the market.
What measures should German authorities consider to address the problem of rapidly rising residential rents that might satisfy landlords also?
The cure to the problem is not capping rents; the cure to the problem is increasing supply, getting the cities to approve building applications much faster than they do today, and making land available for housing.
If authorities introduce stricter rent controls, it impacts the willingness of investors to come to the country and invest in fresh housing, which is needed in most of the locations. And the lack of new housing is the reason for the rents going up the way they do.
There are a lot of willing investors, but they are all very frustrated with the red tape that they have to go through before they get a building permit. That needs to be corrected by the government. The government also promised some time ago that it would build so many new housing units and it would support the building of new homes; that promise hasn't been delivered — or it has to a much lesser extent than expected — and this is the real cause of the problem.
Prior to the publication of the Berlin senate's draft bill, Deutsche Wohnen proposed capping its rents at 30% of a household's income. Do you think landlords have a responsibility to be more sympathetic to tenants' financial circumstances? And, if so, what does Grand City Properties do to address this?
We have a very social spot in our hearts. If we have situations where tenants suffer for one reason or another, we try to help them solve their problem, and that includes not paying more than 30% of your salary for the net rent and other measures. We don't need to make big proclamations and big stories when we do it. We don't have to tell the rest of the world that we are doing it; we are just doing it.
At the EPRA European event in London two years ago, we were the first company to win the first prize when it came to our social engagement. That has been part of our business ever since we started because we take over buildings which are in very difficult situations, including the tenants themselves who have a hard time making ends meet. And rather than just throwing them out and finding new tenants, we have in the company social workers who help in solving their problems, whatever they are. This includes teaching them how to manage their finances or helping them to get more money from the city by making the right applications at the right place, which some of the tenants don't even know they could do.

