The rent cap is counter-productive

Pfandbrief banks criticise new legislation planned for Berlin

Pfandbrief banks have sharply criticised the bill passed by the Berlin Senate on the rent cap for the state of Berlin:

“Politicians are intervening in the market in a way that is inappropriate and unhelpful,”

stresses Jens Tolckmitt, Chief Executive of the Association of German Pfandbrief Banks (vdp).

While the scarcity of housing in major cities such as Berlin is rightly seen as one of the pressing issues facing politicians, the Pfandbrief banks believe the Berlin Senate has taken a wrong turn by taking matters into its own hands.

“The rent cap is counter-productive: instead of solving the real problem, it merely creates new problems,”

says a critical Tolckmitt.

“This measure will not lead to a single new apartment being built. Instead, the rent cap will actually tend to inhibit new construction activity” – with all that that entails: a limited supply while demand remains unchanged will lead to further rent increases for new apartments. “Rather than imposing rent brakes or rent caps, it is necessary to tackle the core of the problem by creating new housing,”

stresses Tolckmitt. This could be achieved by allocating new building land and issuing building permits more quickly. Only a larger housing supply can reduce rents and bring relief to the housing market.
 

Rent cap will affect property values

In the vdp’s opinion, the legislation planned for Berlin will have farreaching implications. Owners who have borrowed to buy their property will be particularly affected, as the rent cap will impact property valuations. Regulatory requirements under the Capital Requirements Regulation (CRR) for monitoring the values of financed properties stipulate that all properties in a region affected by substantial price corrections must be revalued. According to the Pfandbrief banks, such a situation could well arise in Berlin. Due to relevant valuation rules, rents which were set as part of the valuation process at the time the loan was granted might then have to be reduced. The resulting lower market values of the properties would result in higher loan-to-value ratios (LTVs), so that borrowers would violate possible covenants in loan agreements through no fault of their own. Borrowers would then have to provide additional collateral.

Pfandbrief banks also believe that the negative long-term impact of the plan is being underestimated. The Berlin property market has performed extremely well in recent years. Urgently needed construction investment has increased significantly. The rent cap will likely put an end to this positive trend.

Indeed, this year’s discussions have already deterred many investors from investing in Berlin. Their confidence in the stability of the political framework of the German rental housing market has been shaken. This is extremely risky, especially given the urgent need for investment, as it is difficult to regain lost confidence and year by year the real estate sector contributes one fifth of German GDP.

Background:

On 26 November 2019, the Berlin Senate passed a resolution to introduce an “Act to Regulate Legal Requirements on the Limitation of Rents” (Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung). It is planned that the act will be passed by the House of Representatives in January 2020, and it is expected to enter into force in March 2020.

The proposed legislation includes the introduction of a five-year rent freeze (retroactively from 18 June 2019), except in the case of new builds (so it applies to apartments built since 2014). Landlords can re-let apartments for no more than the rent effectively charged as at 18 June 2019 under the previous tenancy. If this previous rent exceeds the upper limits defined by law for the net rent without service charges, which depend on the year of construction and features of the apartment, with premiums or discounts for the location, it must be capped.

In a second step (nine months after the act comes into force), the tenant can apply for a rent reduction on existing rents if the defined rent ceilings are exceeded by more than 20 %.