Tuesday 15 October 2019

Berlin risks returning to the 'poor but sexy' era with controversial rent freeze

Landmark: Berlin Cathedral and its surrounding streets. There are fears investment in the area could be scared away by the rent freeze
Landmark: Berlin Cathedral and its surrounding streets. There are fears investment in the area could be scared away by the rent freeze

Andrew Black

More than a decade ago, when Berlin struggled to attract investment, then-mayor Klaus Wowereit famously called the German capital "poor but sexy".

After a boom that drove up rents by more than 50pc since 2011, the city may return to that era.

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By freezing rents for five years, the local government is taking the most radical step yet to protect residents from the fallout of a housing crunch.

While the move could provide short-term relief, the risk is a bigger hit down the road. Capping rents threatens to scare away investment, stalling everything from upgrading windows to constructing much-needed new apartments.

"This will do immense damage to Berlin's image," said Klaus-Peter Hesse, managing director of Germany's ZIA real-estate lobby.

"It's bound to strain the city's relationship with investors; anyone planning a housing development may well be having second thoughts now."

Changing shape: Berlin has seen a property boom in the past decade. Photo: Krisztian Bocsi/Bloomberg
Changing shape: Berlin has seen a property boom in the past decade. Photo: Krisztian Bocsi/Bloomberg

Prodded by mass demonstrations and a grassroots initiative to force the government to buy out large landlords, Berlin is looking to suspend market forces in the housing sector.

The legislation, due to go into effect next year, will freeze rents for five years and set caps for each neighbourhood, so that people paying more can demand a reduction.

Still, real-estate experts and big landlords argue that relaxing construction regulations and accelerating approvals would do more to ease the crunch.

Building an apartment block in Berlin can take as long as 15 years from conception to completion, around twice as long as in the UK, according to Mr Hesse.

While Berlin's rent freeze is an extreme reaction, the lack of affordable housing has become a global issue.

Governments from Amsterdam to Vancouver are struggling to find ways of preventing tenants from being priced out of their own neighbourhoods.

The public backlash in cities including New York and Hong Kong has prompted political action as governments try to dampen the ire of voters.

Fingers point at stagnant wage growth, moribund government support, international buyers and surging purchase prices. These are some of the hallmarks of 21st century urban housing markets, and they are proving to be an unprecedented challenge for governments struggling to fix them with regulations.

In New York, state legislators just completed the biggest rewrite of rent regulations in decades, eliminating most tools landlords have used to raise regulated rents.

In Ireland, measures designed to curtail rents and the pace of increases have been introduced - but to somewhat limited effect.

So-called rent pressure zones operate in designated areas where rents cannot be increased by more than 4pc a year. This applies to new and existing tenancies, unless an exemption is applied.

"They are intended to moderate the rise in rents in these areas and create a stable and sustainable rental market that allows landlord and tenants to plan financially for their future," notes the Residential Tenancies Board.

The areas are in force in urban areas including all of Dublin and swathes of its hinterland, as well as parts of Cork, Galway and Limerick.

Meanwhile, apartments available for rent in Dublin city's swankiest and most sought-after areas such as 'Silicon Docks', which tech giants including Google call home, easily fetch €3,000 a month or more - way outside the reach of most workers and families.

Spain has also tried to control rents, but to limited effect.

In May, two months after the government imposed a battery of measures to keep costs down, rent increases actually accelerated to 7.5pc.

Spain's housing secretary Helena Beunza says rental rates will begin moderating as the state creates more affordable housing, and when new contracts kick in with the five-year caps, up from three years previously.

The new cap is seven years for institutional owners such as Blackstone Group, which bought Spanish homes when the market was plagued by overbuilding.

"The big institutional investors are specialists, they're opportunistic and will focus on where the outlook and conditions are most favourable," said Joe Lovrics, who runs Citigroup's Iberia markets desk in Madrid.

"They look at these rules and say: 'If this is permanent, we'll look elsewhere'."

Spain has one of the highest levels of owner occupancy, and with more than 95pc of rental units owned by individuals, rather than institutions.

"It would be a revolution if this worked in Spain," said economist Alejandro Inurrieta of the new regulations.

"There is so much under-the-table money here, and so many amateur landlords that don't have to adhere to any strategic plan with investors," he added.

Berlin's move also risks exacerbating the housing problem by discouraging investment.

That raises the prospect of at least a partial return to the days when Berlin was a real-estate backwater, marked by rows of dilapidated buildings.

"This will definitely have a big impact on everyone in the construction industry, from big developers to craftsmen such as parquet-floor makers," said Manja Schreiner, managing director of the Building Trades Association. "It's a big worry, particularly for the smaller companies."

While big landlords such as Deutsche Wohnen were defiant about the expropriation movement, they've stayed quiet about the rent cap.

Prior to the announcement, Germany's largest apartment owner, Vonovia, tried to bolster its image by highlighting its role in providing affordable housing with a "reformulated" business philosophy.

For now, they have little choice but to keep their heads down and hope for the best.

While Berlin's move is sure to be challenged in court, "a legal contest of such law can be lengthy and may only start after it's in place", according to Bloomberg Intelligence analysts Iwona Hovenko and Sue Munden.

Bloomberg

Irish Independent

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