How does the real estate market in Berlin respond to the rent cap? Reflections.

Nothing works in Berlin without the investment commitment of the housing industry and private owners. But money is a shy deer. How does the current development in Berlin affect the market?

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Rental price brake, expropriation debate, pre-emptive right, milieu protection and now the rent cover. In Berlin, government intervention in the real estate market is the new normal. Law scholars almost unanimously assume that the state of Berlin does not have the legislative competence to take this last step. Tenancy law is governed by civil law, for which the Basic Law has assigned responsibility to the federal government within the framework of its competing legislative powers. The Federation regulates the rent levels in the German Civil Code with comprehensive and final regulations. Even if the federal states still had a regulatory competence, experts believe that there would be no scope for supplementary regulations. In this case, federal law takes priority over state law.

Investor run?

The Senate's strategy appears to work: Introduce the rent cover and wait and see what happens. If, as is to be expected, a flood of lawsuits or a norm control lawsuit confirms the illegality of the rent cover, the Senate will acknowledge this with a shrug of the shoulders. After all, the mills of the judiciary grind slowly and until the ruling is overturned at the highest instance, a lot of time passes in which the rent cover, whether legal or not, has already been applied. In view of this increasingly non-transparent housing policy, which is characterized by tricks, there are more and more voices that are already seeing the purchase prices and rents in Berlin falling. There is a saying that money is a shy deer. If there is no quiet crackling in the undergrowth in Berlin, but rather the loud banging of the planned economy cannons, it could happen that not only one or the other deer will run away, but the whole pack. However, the Senate's joy at the intentional flight of investors would only be short-lived, as fewer investors mean less housing construction and fewer housing construction inevitably exacerbates the housing shortage. For the Senate, or at least for the building senator, the rent cover can therefore turn into a boomerang. The regulation not only discriminates against those looking for housing compared to existing tenants, because even fewer buildings are built than is already the case. The head of the department, Lompscher, is also pushing herself up against the wall politically, because in the next election it would be obvious that the left-wing housing policy with a planned economy orientation did not stimulate housing construction, but killed it off. It is doubtful that the voters will in the long run prefer regulation to housing construction.

More conversion?

It is to be expected that private landlords will again increasingly turn to the splitting model. The conversion of apartment buildings into residential property is made more difficult by the application of the Conversion Ordinance. The obstacles are predominantly of a time-based nature, such as the obligation of the owners to sell only to tenants for a period of 7 years. A typical feature of regulated markets is the build-up of market control mechanisms. The rent cap inevitably leads to less housing construction and more conversion. Politicians will try to counter the market's evasive movements with additional milieu protection areas and regulations, which in turn will lead to a further shortage. However, it is likely that the market for apartment buildings in Berlin will not remain unaffected by the rent cap. Apartment buildings must generate interest income and compensate for increasing costs for management, maintenance and modernisation. Every investment requires a minimum return in order to function. If the legislator denies owners and buyers the development and economic exploitation of an apartment building in the long term by regulations, or if it removes the possibilities of economic action from the owner, a downward spiral sets in. In 2019, the Senate forgot that it was the vast majority of private owners of apartment buildings in Berlin who, for generations, ensured that affordable housing was available at all, while the state gradually separated from the municipal housing stock.

Municipal or private: Buyers run into trouble.

For new owners, i.e. buyers of apartment buildings, the situation is even more drastic. The provisions of the BauGB § 24 to § 28 on the right of first refusal are instrumentalized as a threat against every buyer. The concessions demanded by the buyer in the averting agreements can hardly be afforded without a rent cap. With the rent cover on top, many transactions are no longer economically feasible. Financing becomes more difficult, equity ratios have to be increased. A further problem is that in averting agreements, purchasers are required to meet deadlines of 20 years within which they undertake to refrain from a series of measures on the building that may increase the rent, beyond the actual objectives of the maintenance statutes. The rent cover precedes the 20-year period by a further 5 years, which are missing "backwards". The problems are the same if advance purchases are made in favour of third parties, in most cases in favour of municipal housing associations. Municipalities also have to act economically, they also calculate their purchases taking into account rent increases within the scope of what is permissible. The result of this scenario is that the state systematically devalues private property under the pretext of the public welfare. In this way it deprives owners of their money, buyers into programmed instability and municipal preemptors into subsidy emergencies, which are carried out by the taxpayer. The system thus proves to be not only unjust, but also harmful to the public welfare.

Erosion of buildings and neighbourhoods

Frozen rents go hand in hand with the postponement of investments in the building structure. Owners who rent out no longer form provisions; the maintenance or improvement of the residential value becomes difficult to impossible, as the tenants' share of the costs is only possible to a limited extent. In this ideological construct, every landlord is attributed a fundamental interest in speculation, which must be combated from the point of view of left-wing housing policy. The consequences of the erosion of the housing stock are not only serious due to the value decline of the property, but also disadvantageous for tenants. Besides the declining quality of dwellings and a demographically insufficient housing stock, the maintenance backlog of the buildings spreads to the surrounding area. With the buildings, the neighbourhoods erode and lose their attractiveness. The result: residents with higher incomes emigrate in order to acquire ownership elsewhere. Segregation into neighbourhoods for tenants and neighbourhoods for homeowners is the long-term consequence. The danger of ghettoisation is not an exaggeration in this context. The past shows that long-term lack of investment ultimately leads to the formation of trouble zones and even lawless areas.

Public welfare?

In some Berlin districts, including Kreuzberg and Neukölln, the district offices systematically exercise the pre-emptive rights according to § 24 of the Building Code. The argument that pre-emption would be exercised for the public welfare is further undermined by the introduction of the rent cap. It is not possible to explain why tenement houses whose rent has already been capped by the rent cover should be withdrawn from the free housing market for the public benefit by pre-emptive buying. The state legislator and the districts are already regulating rents and the market in every conceivable way. It will have to be watched how the municipal housing associations, which already today have to be persuaded by the districts to various cases of pre-emption, deal with the rent cover in the profitability calculation. For the taxpayer, incalculable risks are already emerging as a result of the pre-purchase practice of the districts. If, in the case of advance purchases with a rent cap, the increasing coverage gap is collected from the taxpayer, it is only a matter of time before taxpayer associations will also have the practice clarified in court.

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