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Berlin's residential landlords weigh cost of city's latest move against rents

It has been a gloomy summer for Berlin's residential landlords as threats of a five-year rent freeze, made in June by the city's local government, hung in the air. Recent news of the Berlin senate's actual plans to tackle rising rents in the German capital will not have made their dispositions any sunnier.

Two Berlin newspapers, Der Tagesspiegel and Berliner Morgenpost, reported details Aug. 26 of the draft bill, aimed at taming Berlin's residential rental market, ahead of its publication before the end of August. The bill proposes absolute rent ceilings depending on the age and condition of a property, but not its location.

Rents would vary between €3.42 and €7.97 per square meter per month across 17 different classifications of rental property, according to the leaked details of the draft bill. The Berlin average index rent is €6.72 per square meter per month. The bill exempts homes constructed after 2013 from the caps. Further, apartments that have been modernized over the last eight years will only be subject to a rental cap of not more than 20% above the defined ceilings.

"Leaked details for the Berlin rent freeze draft law show that this might end up rather as a rent cut than a rent freeze," Thomas Rothaeusler, real estate equity analyst at global investment bank Jefferies, said in an Aug. 26 note. "It considers rather low rent ceiling levels, which would likely bring down Berlin rents on a broad base."

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Rothaeusler described the proposals as "a clear negative" to Jefferies' base case for investment in Berlin's listed residential landlords, which had forecast zero rent growth. "We view the draft as overdone and unconstitutional and expect it to trigger major headwinds," he added.

Vonovia SE, Germany's largest listed residential landlord, which owns and operates about 40,000 units in Berlin, said in a statement responding to the reports that the proposed measures would see its Berlin portfolio lose up to €25 million in rental income in 2020. This would represent around a 10% reduction in Vonovia's Berlin rental income, or 1% in overall rental income.

Vonovia said it is convinced that the Berlin state government's rent proposals are unconstitutional. The company said it will continue to pursue its value-add strategy in Berlin, but will adjust its investment plans in the city. "Going forward, we expect to redirect modernization funds that had originally been earmarked for Berlin regions within our portfolio so as to not lose any impact from our overall investment program," the statement said.

Impact assessment

Deutsche Wohnen SE, Berlin's largest listed residential landlord with more than 115,000 units in the Greater Berlin area, has yet to respond to the leaked details. S&P Global Market Intelligence contacted the company for comment but did not receive a response. In a recent earnings call, the company's CEO assured investors and analysts that it was prepared to respond to any escalation of the Berlin rent-freeze proposal put forward in June.

"If our efforts for a better end [to the debate over rents] and a new building policy should remain unsuccessful, you can be assured that we will react fast and comprehensively to possible interference," CEO Michael Zahn said during the Aug. 14 call. "In other words, we did our homework."

Neil Green, real estate equity analyst at JP Morgan Cazenove, said in an Aug. 27 note that while it is hard to quantify the rent ceiling proposals' potential impact on Deutsche Wohnen, there are a number of important factors to consider.

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Katrin Lompscher, Berlin senator for urban development and housing,
has led the push for tighter rent regulations.
Source: Associated Press

Green noted that, as of the first half of 2019, 69% of Deutsche Wohnen's residential units are in Greater Berlin and "hence susceptible to potential rent ceilings." Almost one-third of Deutsche Wohnen's total portfolio was constructed between 1950 and 1969. These assets partly coincide with the lowest proposed rent ceiling of €4.86 to €5.85 per square meter per month for buildings constructed between 1950 and 1964, he said.

Deutsche Wohnen's units that fall within the €5.50 to €6.00 per square meter per month range — its most common type at 17.3% of its total residential portfolio — could suffer rent reductions if they were constructed between 1950 and 1964 or are located in East Berlin and were constructed between 1973 and 1990, Green added.

"Potentially 46% of Deutsche Wohnen's Berlin units are located in East Berlin, where more restrictive rent ceilings have been proposed versus West Berlin [units constructed between 1970 and 1990]," Green said.

The average rent of Deutsche Wohnen's Greater Berlin residential portfolio is €6.82 per square meter per month, which is above all rent ceiling construction proposal periods except 1991 to 2013 and West Berlin 1973 to 1990, Green added. "The maximum amount of Deutsche Wohnen's portfolio built in these periods (where the rent ceiling is higher than the portfolio average) is 34% [as of the first half of 2019]," he said.

A step too far?

The senate is expected to vote on the draft bill in October, industry sources told S&P Global Market Intelligence, with the new measures potentially coming into law in January. Berlin's senator for urban development and housing Katrin Lompscher, a member of Linke, or The Left Party, is behind the reforms. Linke is a minority member of the coalition governing Berlin state, along with the Social Democrat Party and the Greens.

Reaction to Lompscher's proposals suggest that the draft bill might struggle to get the full backing of the coalition's members. The SPD's national representative for small and medium-size businesses, Harald Christ, called for Lompscher's resignation, according to Der Tagesspiegel. Lompscher had "failed miserably," he said, and that "miscast" in her role, she would "damage Berlin as a location for businesses."

Berlin Mayor Michael Müller should "stop this madness," Christ added.