The True Reasons Why the Rent Freeze is Being Downplayed

Published on 2014/09/30
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Christian Democrats and Social Democrats have finally worked out a compromise. The modified draft bill is to be on tabled in the coming days, but its outline is already known. Project developers / principals may rejoice because new buildings will be completely exempt from the regulation – at least that is what a press release by the Christian Democrats of 23 September said. The statement reads that “all newly built apartments will be exempt for the time the law remains in force – not just the first time they are let, as originally planned by Justice Minister Heiko Maas.”

So where will the rent freeze apply? The German states will be authorised to pass decrees that substantiate the looming threat of a “strained housing market.” The Christian Democrats are selling the regulation under a revised bill as a major success in the interest of property owners. I beg to differ. The rephrased passages are no more than whitewash, because none of the German states will find it hard to “substantiate” the threat of a “strained housing market.” The draft bill lists four possible reasons that would indicate the emergent threat of a “strained housing market.” It would, for instance, suffice if a state decree argued that rent rates in the designated area of application are rising much faster than the national average. This happens to be the case in all major metropolises simply because the national average also includes municipalities where rent rates are flatlining or softening even.

The law favours new properties while discriminating existing ones. It makes investing in housing construction a comparatively attractive proposition for private and institutional investors because new leases signed for the units in these buildings will be exempt from the rent freeze. My guess is that this will motivate investors to opt for investments in construction projects, not least because these are not exposed to the risk of having to be retrofitted with costly energy refurbishments after a few years.

For owners of existing property, the rent freeze is bad news. There are no two ways about it. Why are the corporate players not saying so, and saying it out loud? It’s quite simple: Because they have no intention to frighten their investors. Virtually all property asset holders have let it be known that they are basically unaffected by the rent freeze. And still every property asset holder is vehemently opposed to the law. How do you explain this contradiction? Of course the companies are well aware that the rent freeze will curtail their yield opportunities – especially wherever there is a marked discrepancy between the rents on unexpired leases and the rents (that used) to be realised by signing new leases. But if you are worried that your investors could become uneasy, you might think it a good idea to downplay the consequences of the rent freeze in public.

It will be interesting to find out which of the questions below are actually addressed by the draft bill: What is a new building? How do you define it? And what about comprehensive modernisations? Just what qualifies a modernisation as “comprehensive”? Here as elsewhere, the devil is in the details: Are there clear criteria defining the term “comprehensive modernisation”? Or will this be a contentious issue for landlords and tenants to quarrel over in the courts of law?

It is not the only issue inviting dispute: What exactly does the term “local reference rent” imply? Is the rent table always definitive? Or will we see a slew of law suits initiated by landlords who doubt that the rent table provides a realistic picture of actual rents paid? If there is any precedent to go by, the reduction of the rent increase cap already led to legal action: In proceedings before the District Court of Charlottenburg over a rent increase, Professor Walter Krämer of the Institute for Economic and Social Statistics of the Dortmund University of Technology was appointed as expert witness. His expert opinion demonstrated that Berlin’s rent table is by no means compiled in line with accepted scientific principles. But this is precisely what Article 558 d, Section 1, German Civil Code, mandates for a qualified rent table.

Here are some of the other open issues posed by this rent control draft bill: What about municipalities that do not compile a rent table. Another one is this: Is it safe to assume that the rent freeze will be temporary only? Or is there a risk that the time limit now agreed will be extended as the limit approaches?

We will address these issues together with leading experts at an event hosted by the BERLINER IMMOBILENRUNDE panel on 03 November, a date by which more details will have come to light (given the overwhelming interest in this event, you are advised to sign up well ahead of time; to request your copy of the agenda, please write to info@immobilienrunde.de). There can be no doubt that the rent freeze will do harm. Just how harmful it will be for exactly which property asset holders is impossible to say until the questions I raised above have been answered.

I do not believe that the rent freeze will be in effect for five years only, the way the draft bill suggests. Just like the German Solidarity Surcharge, a tax that was introduced nearly a quarter of a century ago to help East Germany get back on its feet following the country’s reunification and that is still being levied, the rent freeze will be with us 25 years hence. Why? Because it cannot solve the issues on Germany’s housing market. Which policymaker will dare to come out in five years’ time and say “we no longer need the rent freeze”? He or she would be stigmatised as being “anti-tenant” and be accused of “social discrimination.”

A political consensus would quickly form to call the rent freeze a “mandate for social justice,” every bit as important and indispensable as all the other social hand-outs. For the body politic, keeping the rent freeze will have the added benefit of sparing the public coffers. Anyone opposing the rent freeze will be suspected of social bias and of being a pawn to the profit interests of slumlords.

The DMB German Tenant Union, one of the most powerful lobbies in the country, and arguably the initiator of the call for the introduction of the rent freeze, will see to it that the law is re-enacted as soon as it expires. Just how the rent freeze will be structured at a future date no one can say, as it all depends on the kind of coalition that will govern the country. If we were to assume for a moment that it is a coalition government of leftists and greens, it would certainly make it one of its priorities to tighten the rent freeze. Assuming conversely that the liberals were to win 53% of the popular vote rather then just 3%, they would probably repeal the rent freeze. If your imagination is vivid enough to believe the latter might happen, feel free to indulge in the dream that the rent freeze will be dead and gone in five years’ time.

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.