One of the most intensely debated issues during recent elections in Germany, mirrored to some extent here, was the steep increases in rent for new residential lettings in certain local markets and the ways in which such increases can be limited in future.
On October 1 2014 the federal government in Germany published a proposal for tenancy law reform which includes rent controls in some cities; the new legislation is expected to enter into force in the first half of 2015.
According to the advice of the InterntionalLawOffice.com (ILO) this legislation will have a significant impact on prospective investors in the residential tenancy sector, and there’s doubt that the aim of the new legislation will be achieved, ie, that low-income households will still be able to afford housing in a prosperous city or area.
The anticipated effects of the rent control legislation in Germany:
“The proposal’s most important changes which will be of interest to investors are as follows:
– In case of a new letting the initial rent may not exceed the customary local reference rent by more than 10%.(1) This applies to (mostly urban) districts yet to be identified by the individual federal states in which “the possibility of adequately supplying the public with rented housing at reasonable conditions is particularly jeopardised”.(2)
– Housing used and leased for the first time after October 1 2014 or after an extensive refurbishment is excluded.
– If the previous tenant’s rent exceeded the customary local reference rent by more than 10%, this higher rent amount can still be agreed on (but no higher). This means that a landlord cannot be forced to re-let at a lower rent than the amount agreed with the previous tenant.
– If a tenant has paid more than the permissible rent, it may reclaim the overpaid amount. It has yet to be decided whether the tenant should be allowed to reclaim only those overpaid amounts which became due after a complaint was submitted.”
What will be the consequences?
The new rent control legislation applies to the re-letting of any property rented out before 1st October 2014 and located in an area characterised by a “tense housing market”.
It is therefore likely that owners of rented properties in prosperous cities will be unable to conclude new residential leases at the market rent, but rather at the average rent plus 10%.
According to the InterntionalLawOffice.com (ILO), the federal government in Germany expects that this rent restriction will result in residential tenants paying a total of €284.14 million less in rent per year. Correspondingly, this will be the amount by which landlords’ turnover will be reduced per year.
Therefore, taking into account that the average purchase price multipliers for rented residential units in good locations in German cities can reach up to 30 times in certain areas, this will lead to a €8.52 billion loss in value for owners.
This new legislation will likely affect not only property owners in prosperous cities and areas, but also corporate real estate companies with diversified portfolios of properties located in both declining and prosperous cities and areas. The result of this will be decreasing or stagnating rents in declining cities that will no longer be offset by those in more prosperous areas.
Investors seeking investment opportunities in prosperous cities and areas will have to consider the new rent control legislation in their business plans for future acquisitions.
The limited possibility of increasing rents, even in the case of re-lettings, reduces the potential cash flow of such properties.
This should be considered when calculating the purchase price. In light of this, the value of existing flats and residential premises in prosperous cities and areas is expected to be adversely affected.
From an investor’s perspective, the only positive aspect is that future residential developments are unlikely to be affected as the Government would not want investment in new housing projects in areas with insufficient housing to be jeopardised.
“There has been much criticism of the new rent control legislation (in Germany), especially from the real estate community. There is considerable doubt that the aim of the new legislation will be achieved (ie, that low-income households will still be able to afford housing in a prosperous city or area).
This is due to the fact that a landlord with several prospective tenants must ultimately choose just one tenant and it is expected that this decision will take credit worthiness into account. Thus, high-income households are much more likely to be chosen as tenants than those on a low income.
Despite the criticism it seems inevitable that the new legislation will enter into force in 2015. Except for project developments, the consequences should be considered by both owners and investors in the residential tenancy sector.”
(1) Customary local reference rent in Germany is the average rent paid in the same or similar municipality over the previous four years for housing of a comparable type, quality and size in a comparable location equipped with comparable fixtures.
(2) The individual federal state governments in Germany are entitled to identify certain areas characterised by tense housing markets (in which the provisions on rent control will apply for a maximum five-year period). However, these areas must be identified by December 31 2020.
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Effects of Rent Control Legislation in Germany are Likely to be Negative According to the International Law Office – http://t.co/0Wo7XTLRUK
— LandlordZONE (@LandlordZONE) February 20, 2015