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German residential market fears tighter rental rules


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German residential market fears tighter rental rules

Germany's residential landlords could face tighter rental rules if the center-left Social Democrats, or SPD, are successful in the upcoming federal elections.

Nearly half of Germans rented homes in 2015, according to Eurostat, the European Union's statistical office, and there is public pressure to address rising rents in major cities like Berlin and Munich. Real estate consultancy JLL recorded year-over-year asking rent increases of 12.3% and 9.7%, respectively, in the second half of 2016.

The SPD has not yet officially announced its election platform, but observers say it has floated numerous ideas that could impact landlords' abilities to raise rents. The most controversial proposal is an adjustment to the Mietspiegel, or "rent index," methodology to extend the reference period from four years to as long as a decade. The index is used to measure local comparable rents by collating rental values over the previous four years and is an important tool landlords use to increase rents.

Such a change could distort current rental values in areas that have seen strong rental growth in recent years. For example, real estate consultancy Savills said in a report that Berlin has a four-year average rent of €8.38 per square meter per month. However, an expanded eight-year average would be approximately €7.59 per square meter per month, representing a decrease of 9.4%.

Chancellor Angela Merkel's conservative Christian Democrats, or CDU, are against the proposed adjustment and the ZIA German Property Federation, an industry body for real estate and finance companies, says such a move could freeze rental growth in the country's biggest markets.

"A low increase is normal and useful for investors to get the yields they need for new investments and to run investments," ZIA spokesman Andy Dietrich told S&P Global Market Intelligence. "If you freeze rental levels in Germany, it could result in nobody investing new money in refurbishments or new buildings."

The SPD has also raised the idea of limiting the portion of modernization expenses that a landlord can charge a tenant to no more than about 8% annually from a maximum of 11%. Savills said the party would seek to introduce a cap so that rents could only be increased as a result of modernization works by a maximum of €3 per square meter per month within an eight-year period.

Further, the SPD has proposed extending the rent increase maximum of 15%/20% over a three-year period to four years — the lower 15% cap can be applied by local authorities with tight housing markets such as Berlin — and a change to the law that obliges landlords to disclose previous rents.

Curing the symptoms, not the disease

JLL's head of residential investment for Germany, Konstantin Kortmann, said in an interview that changes to rental regulations — such as the Mietpreisbremse, or "rental brake" law, passed more than two years ago — were just "curing the symptoms, not the disease" that was the long-running housing shortage. The number of households in Germany continues to grow, in spite of long-term forecasts of a shrinking population, due to new demographic trends such as the rising number of people living alone, Kortmann said. Metropolitan cities also face additional demand from domestic migration as young people relocate from regional areas into cities for employment and lifestyle purposes.

Since 2004, rents have grown at an average annual rate of 3.9% in Berlin and 3.5% in Munich — more than double the 1.7% increase recorded for Germany as a whole, according to JLL research. Kortmann said the response to the housing issue should be focused on addressing barriers to new supply, such as high construction costs and the limited supply of land for new developments.

LEG Immobilien AG CEO Thomas Hegel said in an emailed statement that about 400,000 new homes are needed every year, with approximately 80,000 units needed for social housing and 60,000 homes in the lower price segment. "There is great pressure on politicians to create affordable housing but support for the housing industry from politicians is unfortunately limited," he said.

Efforts aimed at creating more affordable housing should be the primary political objective, Hegel said. Steps such as allowing the construction of urban housing with greater density and developing neighborhoods outside of so-called "swarm cities," while helpful, are "far from sufficient" to address current challenges, he added.

"I hope politicians recognize that further regulation is counter-productive and send the right signals here," Hegel said.

The federal housing department is addressing the question of supply on at least one front and is looking to loosen planning laws for new residential construction in urban areas that were previously barred, JLL's Kortmann said.

"For this election, it's not a realistic idea"

While recent polls have shown that the SPD has narrowed the gap with the CDU, a change to the Mietspiegel is far from certain. JLL's Kortmann also said the party has been "surprisingly quiet" on rental regulations in recent weeks.

A spokesperson from a residential landlord company, who spoke on the condition of anonymity, argued that the SPD could only carry out the changes in a left-leaning coalition of the Left Party and the Green Party, minor parties that have also made proposals around rent regulations. The CDU's win in elections in the state of Saarland in March shows the electorate is opposed to such a left-leaning coalition, they said.

"For this election, it's not a realistic idea," the spokesperson said.