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Will Berlin’s rent ceiling change the market?

2 MIN READJune 21, 2019
The ruling coalition of Berlin is to propose drastic new measures in order to cap rent growth according to a report by Green Street; planning to freeze rent prices in the city for five years from January 2020. This new proposal would see the city’s organic rent growth over the next five years of ~4% p.a. almost halved should it be approved. Deutsche Wohnen’s recent share price drop of ~15% following this announcement would, to quote the Green Street report, “imply with 100% certainty a five-year rent freeze from 2020 is going to happen.” 
The most apparent explanation for the rent freeze would be because it is projected to surpass the average disposable income in Berlin; however, increased land price and a glaring lack of supply are also a problem. A high unemployment rate (7.6%), over double the national average, paired with Berlin apartments being €71,000 more expensive on average compared to the rest of the country are additionally contributing factors. 
Green Street report projects lower vacancy in the next year or two, before it equals out again as developers return to erect build-to-rent properties as a means of income. For example, the multi-family building occupancy rate is 99.3%, 2% higher than the rest of Germany. 

The new proposal will more than likely cause the build-to-rent market to be sought after from a renters point of view with ~350,000 of 1,000,000 new households expected to rent in the private sector. These are typically located in the large and densely populated cities, such as Berlin and Frankfurt. These are 45% owner-occupied, 35% private investor occupied and organisations, companies and co-operatives making up the rest. 
On a positive note, German residential has proved to be a very reliable inflation hedge over the last 20 years, especially in comparison to other asset classes. Some experts have gone so far as to claim that investors should “immediately ditch” offices and retail opportunities in favour of this infallible market, as residential is an extremely reliable way to cover currency depreciation. 
Rent caps, albeit toned down ones, already exist and are successful across other parts of Germany in more than 300 urban communes. In reaction to landlords questioning the legitimacy and legality of this bill, people have taken to the Berlin streets in tens of thousands to show their support for the bill. However, the polarising aspect of this may suggest a more toned down bill with compromises will be the likely outcome. 

In comparison to their global peers, Berlin and Germany, in general, are both performing very well. The spot value there is higher there than any other city. 
Berlin house prices have remained extremely consistent for the last 50 years in regards to inflation and have barely changed at all, especially when you compare it to London where even in regards to inflation houses are five times more expensive. The German residential sector has boasted 23% in total returns since 2014, compared to London’s 9%. Despite Berlin facing a rent freeze, a one bed apartment in Berlin (£880) is almost half of what a one bed would cost in London (£1550). It’s not an emergency stop, it’s a preemptive way of allowing Berlin’s residents to keep more of their disposable income. 

For more information on the current state of both the residential market in Germany and Europe as a whole, Europe GRI 2019 takes place 11-12 September in Paris and GRI Residential Europe 2019 takes place 26-27 November in London. 

Article by Matt Harris
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