Realtor Realities

Rich Pickings for Real Estate Investors

residential real estate boni column_bloomberg-CHANGED
Raising the roof but not the rent, thanks to Germany's new rules.
  • Why it matters

    Why it matters

    The new rent control law will not have much effect on real estate investors. Germany offers solid, if not spectacular, returns and great growth potential.

  • Facts

    Facts

    • The new rent control law states that landlords may not raise the rent by more than 10 percent compared to the average price in the neighborhood.
    • Home ownership stands at only 43 percent in Germany,  as opposed to 70 percent or more in other large European countrie
    • The real cause of rising prices is the existing supply and demand gap.
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    Audio

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Germans tenants are a spoilt bunch. In a country where home ownership stands at only 43 percent as opposed to 70 percent or more in other large European countries, they enjoy unconditional support from lawmakers hungry for votes.

A new law capping rents known as the “Mietpreisbremse,” or rent-price-break, is likely to go through parliament before the end of the year. To some people, capping rents may seem reminiscent of centralized planning in Eastern Europe during the cold war. But actually rent caps in Germany are nothing new – they have been in place since 1954.

The key feature of this new law is that landlords will not be able to raise rents above 10 percent above the average price of the neighborhood when renting to new tenants. As a concession to landlords, new buildings and properties that have undergone significant renovations will be excluded in order keep investments coming in. Ironically, the new bill requires owners only, and not tenants, to pay broker commissions for letting flats. The latter is unconstitutional according to many industry experts, and may be struck off or modified before the drafted legislation will pass.

The new regulation ignores that Germany is making a slow but gradual transition from a nation of renters to a nation of owners.

Is this new law, even if passed as proposed, going to put investors off German real estate?

Professionals that invested in German residential real estate have already built the likelihood – or rather the certainty that this kind of legislation would come into force – into their business plans. So the answer is probably not.

Personally, I will keep on investing in German residential real estate for a number of reasons.

1)   There is a significant lack of residential accommodation across Germany, which has one of the lowest housing development intensities in Europe (43 percent below E.U. Average).

2)   Prices of existing residential real estate in many German cities, including its booming capital Berlin, are still below replacement cost and are well below historical averages.

3)   Germans can well afford to pay more rent.  Rents in the vast majority of German cities are still at 1995 levels, so it is hard to argue that they are unaffordable.

4) These caps and restrictions are not new; they are simply a political gesture aimed at slowing down the pace of rental and price growth. 

Are these measures going to be effective at stopping rental price growth? I don’t think so. Like most attempts to artificially control market prices without adequately addressing the existing supply-and-demand gap (the real cause of rising prices), they are likely to be ineffective at best and probably counterproductive.

Once approved at federal level, the law can be implemented in areas where the local government decide there is an accommodation shortage and upward pressure on rents, where tenants need the protection of the new law.

My guess is that cities like Düsseldorf, Hamburg, Berlin and Frankfurt may be affected. Landlords, however, will probably find ways around these restrictions, or choose to sell free apartments as opposed to renting them. The new law will therefore probably cause market distortions and unnecessary complications for the tenants, who still need a place to live, can afford to pay, but will find it more difficult to find a place to rent.

Germans can afford to pay more rent and are finally starting to buy apartments. It’s where I want to invest.

The new regulation ignores that Germany is making a slow but gradual transition from a nation of renters to a nation of owners. Rent prices are still rising, and tenants, especially in a low interest rate environment, are starting to realize that it is actually cheaper to buy rather than to rent.

German authorities tend to treat real estate investors as ‘locusts’, instead of turning them into long-term partners to address a growing structural problem: the lack of supply of middle-income housing. The crowd-and-voter-pleasing story is that German rents and house prices are becoming unaffordable and that politicians are putting legislation in place to ‘protect’ the tenants and stop rental prices from growing further.

But the starting values were so low that even after sharp increases rents are still low when compared to other European markets and German disposable incomes.

The truth is that Germans tenants and homebuyers have a much better deal than most other Europeans. The price of German residential properties today is 17 percent below the historical average price, as opposed to 27 percent above historical average in the UK; rents are 16 percent below historical average rents in Germany, as opposed to 38 percent above average in the United Kingdom.

While Germany has bureaucrats who can’t resist the temptation of regulating every aspect of the economy, including housing, it still looks to me like a safe bet.

The CBRE European Investor Intensions report 2014 ranks the United Kingdom first by investor interest – with Germany second and Spain third. Madrid and London are in the top ten most-favored investment cities – together with three German cities: Berlin, Munich and Hamburg. 

As a European real estate investor, I looked carefully at the top three contenders. Spain is a popular newcomer, but Spanish macro-economic data is terrible. Spain has suffered one of the most severe recessions in Europe, has very low salaries and 25 percent unemployment. Germany’s unemployment is below 5 percent, consumers have good earning power and yet Berlin is cheaper than Madrid. The UK is also very popular with international investors, but the price levels have hit historical records and the affordability indexes are frightening.

While Germany has bureaucrats who can’t resist the temptation of regulating every aspect of the economy, including housing, it still looks to me like a safe bet. Germany does not yet benefit from state-of-the-art property management. It has very few national real estate agencies and a relatively careful banking environment, slow in adapting to changing investment trends. It is affordable and it has a serious demand/supply gap of residential accommodation.All of which allows me to outperform without huge risk. 

 

Housing Supply Shortage (indexwise)

 

To contact the author: boni@rivaam.com

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