Berlin’s Mietendeckel, or freezing of the city’s residential rents for the next five years, was supposed to have been the final blow for the aspirations of Deutsche Wohnen AG, Germany’s second biggest property company.
A host of other hindrances, ranging from Mietpreisbremse, or rental brake, Milieuschutz (measures designed to retain the original character and demographic make-up of a neighbourhood), down to an outright attempt to expropriate the listed company’s excessive residential holdings, have all been hurled in the way of Deutsche Wohnen and its capitalist running-dog peers in an attempt to cut them down to size.
A year ago, shareholders were dumping Deutsche Wohnen’s shares in droves, while investors were throwing their hands up in despair at the German capital’s suicidal moves to deter investment in its housing sector.
And now? Deutsche Wohnen’s market capitalization has propelled it into the prestigious DAX-30 index, ejecting Lufthansa from the premier league of German stocks. Its share price has risen by a third along the way, giving it a market cap of €14.5bn, with recent price movements bumping the share up against all-time highs. What’s going on?
The company has just invested €90m to buy 23 properties comprising 400 apartments, mostly in Berlin – and this despite the fact that the movement in left-leaning Berlin to dispossess large housing companies of their holdings is actually called “Deutsche Wohnen & Co. Enteignen” – leaving little doubt as to the intentions of the would-be expropriators. And many of Berlin’s politicians are supporting the campaign by residents and activists to expropriate more than 200,000 apartments from private landlords, of which Deutsche Wohnen is just one, albeit the biggest by a margin.
The city of Berlin has the right of first refusal on all big housing transactions, although in practice it’s often not in a position to exercise that right. But it can exert pressure on a buyer to comply with stringent conditions, or forfeit its right to buy. In this case, Deutsche Wohnen accepted the condition of having to wait for 20 years before it could sell any of the properties, nor can it convert any of them into private condominiums for sale later.
The fact that a company like Deutsche Wohnen can agree to these commitments, abide by the already restrictive terms of agreement with their inherited tenants, and integrate a maintenance program for 20 years, just shows how big investors with deep pockets can still see how the numbers will work out for them. Their long-term plans to gentrify the city remain intact, and they can sit it out while demographic mega-trends take hold.
As housing is not being built fast enough to satisfy demand, the result – already being seen in cities across Germany – is that smaller landlords sell out to the bigger players, and less rental properties become available. In a nation of renters, such as Germany is, this will lead to higher rents, accompanied by undesirable side-effects such as a black-market in unofficial sub-letting, and tenants who won’t move.
These are immutable facts, and the heightened daily battle for accommodation simply confirms what these ironclad economic laws predict, loudly and clearly. Tenants and apartment-seekers will be hurt by the measures designed to protect them. But by then we’re into another electoral cycle, and another set of vote-hungry councillors will be drinking the Kool-Aid, determined to say whatever it takes to get elected. ‘Twas ever thus.
Of more concern to us at REFIRE is the creeping smugness we detect around us, particularly in the bonhomous optimism of research departments, to put a gloss on the state of the office investment markets. We’ve had two quarters so far this year – in the first, signs of weakening markets were already apparent, and in the second we’ve all been so punch-drunk from the coronavirus that we really don’t know what’s going on. This doesn’t augur well.
Naturally it takes time for deals to NOT go through, and for companies to make realistic assessments of their likely future office needs. No, not all deals will collapse, and yes, for many companies it will be a form of business as usual for a while yet, hence no radical changes are yet in the offing. There’s even an argument that demand for office space will RISE (and for qualified broker advisory services, of course), given the panoply of new arrangements, including sub-dividing, sub-letting, accommodating new spatial distancing needs, and other appropriate forms of client-oriented leasing. And with the rise in demand comes a rise in the rent level, and hence valuations.
With some few localized exceptions, we think this is utopian. Worldwide, the economy is really not healing, and the outcome of the pandemic is highly uncertain – other than that it, and its effects, are likely to be with us longer than we had imagined.
Surely the inflationary expectations built into so many commercial real estate investment projections are now unrealistic, given the near-certainty of that wall of trouble coming down the pike at us when massive government supports are throttled back this autumn?
Stock markets and company valuations are struggling, apart from the highly-publicised stars like Tesla, and the prominent tech giants such as Amazon, Google and Co. But there’s only so much that swathes of day-traders can do to keep the markets from the overall correction that they are due.
All of this does not mean disaster, nor the collapse of commercial real estate markets. It will open up new opportunities for the most clued-in players. But it does mean imminent change, and having the flexibility to adapt to changed circumstances. There are always buyers and sellers, at an appropriate price level. But it’s hard to see that level being much higher than where it is right now, for a good while to come.
