Although the Expo REAL in Munich is primarily an event whose principal focus is commercial property, there are inevitably discussions about the state of the German residential housing market. That’s partly because there is a significant commercial component in the German residential sector, due to the particularity of housing portfolio transactions, and the nature of Germany’s listed property sector, which is now heavily weighted towards residential.
Last week saw the official passing of the draft bill to cap rental increases (the Mietpreisbremse) in German urban areas that are described as ‘tight’ housing markets. It will take some time for the individual Länder to implement the new law in pre-defined areas, and its implementation will be a bone of contention for litigious landlords and disgruntled tenants for years to come. Nominally the law is designed to defuse what is considered a ‘temporary’ situation, such as we are experiencing now after several years of steady upward rent increases, and the legislation envisages the measure being phased out after five years.
Experience suggests that this rarely happens in practice. What DOES happen is that it tends to fuse into the prevailing legislation, and in five years becomes almost indistinguishable from the myriad other clauses in the landlord/tenant relationship, so that nobody can quite remember what was introduced when and for what reason. By then it’s simply part of an overall body of constraints and restrictions that will make being a residential landlord a less attractive proposition.
With newly-built housing, and housing that has undergone extensive refurbishment to comply with Germany’s draconian energy-saving ambitions being exempted from the soon-to-be-imposed rental caps, the outcry from the real estate industry has remained muted. Rolf Buch, the new top man at Deutsche Annington, warned recently at a gathering that REFIRE attended of the imperative to limit the law to the agreed five-year period. The mathematics of being an institutional investor in German housing simply will not work otherwise, he said. Investors are still shrugging off their concerns, if they have any, and appear content to ride along on the recent forward momentum of the listed and unlisted housing sectors for the time being.
If it will be more difficult to make money in housing in the coming years, it should have been easy in Germany for the past five years, what with the market’s hefty price and rent increases and the cost of money being practically free, right? Not for most people. As we report in this issue, Germany’s prestigious DIW Deutsche Institut für Wirtschaftsförderung carried out a study for listed property group Wertgrund on the actual returns achieved by private investors in German real estate over the past ten years.
A third of all investors earned less than 0% yield, the survey found. A further 21% earned less than 2% gross yield annually, below the rate of inflation. Barely half of all private property investors were able to outpace inflation with their property investments, a miserable quota over a period which includes a number of years of steady price rises. Thomas Meyer of Wertgrund puts the poor performance down to investors’ grossly underestimating the frictional costs of ownership, such as involuntary vacancies, tenant handovers and the ongoing cost of maintenance. With transactional costs on acquisition of 12-15% for taxes, lawyers, broker commissions and other sundry charges not unusual, it can be difficult to come out ahead.
Indeed, there are strong indications now that the overall market may have peaked, just as measures to deal with its alleged overheating show up like an unwanted houseguest, right at the moment when everybody else is leaving. The previous supply bottleneck has been partially alleviated through new, much-needed construction. Housing completions rose in 2010 by 2%, by 14.6% in 2011, by 9.5% in 2012 and by 7.2% in 2013. But many new developments are selling out slowly now, with potential buyers balking at the frothy prices demanded. Rent levels are unlikely to fall much, however; Germans - whether owners or tenants – are getting used to paying a higher percentage of their net pay for their accommodation, for better or for worse.
The rule of thumb is that the so-called ‘cold’ rent, excluding utilities, should not cost more than a third of the household’s disposable monthly income. A recent survey by leading property portal Immonet shows that this relationship largely holds across the country, with two notable exceptions – Hamburg and Berlin. Both cities are highly desirable, and tenants seem willing to pay up to half their income for the privilege of living in such attractive environments.
But as a recent study by Deutsche Hypo shows, generalisations about the overall market are proving much less helpful than local analysis of the widely diverging patterns from one German city to the next. Much of the new construction in the cities is affordable only for the higher-earning segment of the population – the system is falling down, however, in providing adequate accommodation for lower earners, leading to the inevitable backlash that produces the aberrant Mietpreisbremse, a measure likely to further exacerbate a problem it was designed to resolve.
There are several proposals afoot, from amongst others, Hanover’s Pestel Institute and the IW in Cologne on which we have reported in these pages (and will return to), for providing tax incentives designed to increase affordable housing. In the current buoyant German climate, sadly, messing around with the tax code is viewed by the coalition government as likely to add fuel to the boom, and will simply not happen in this legislative period. Higher rent levels are – for now - here to stay.
