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Berlin’s Landlords Rebelling as ‘Nonsense’ Law Threatens Returns

Berlin’s Landlords Rebelling as ‘Nonsense’ Law Threatens Returns

Until last week, Thomas Groth had no trouble finding young couples to pay 715 euros ($780) a month for a one-bedroom apartment on Rauchstrasse, a quiet, tree-lined street in Berlin’s embassy district. Next time he signs a lease, he’ll have to charge 40 percent less.

Berlin has a new law prohibiting landlords from demanding rents that are more than 10 percent higher than the area average, in an attempt to keep housing affordable in a city that’s attracting 50,000 new residents a year. The rule relies on a disputed index -- known as the Mietspiegel -- that critics say is a statistical crapshoot.

“We could easily rent apartments on Rauchstrasse for 13 euros a square meter, but according to the new rules, we have to offer them at 9.40 euros,” said Groth, whose company manages 27,000 Berlin homes.

Landlords like Groth tolerated the Mietspiegel when it was used only to cap rents on existing leases. However, the index now applies to new tenancy agreements as well, and the investors are up in arms. Some are questioning its legality.

Berlin homeowners are rebelling against a pillar of Germany’s housing market that has helped keep rents and prices stable since the 1970s. This week, Berlin became the first city to implement controls that apply the index to new leases, a policy made possible by the German parliament in February.

“In the past, investors could count on certain rent increases when a tenant moves out,” said Julius Stinauer, a researcher at JLL. in Berlin. “Now these increases will be significantly curbed because the rent index reflects less than half of the gains in the actual market.”

Room for Improvement

While Berlin market rents have climbed between 5 percent and 8 percent annually, driven by new leases, since the housing boom began five years ago, the Mietspiegel has only risen between 2 percent and 4 percent per year, Stinauer said.

The German government has promised to improve the system, and the justice ministry in May convened a panel of experts to recommend changes. Until the issue is resolved, Berlin’s housing rally may be threatened as investors dial back their income expectations.

It’s “big, big nonsense,” Michael Zahn, chief executive officer of Deutsche Wohnen AG, Berlin’s biggest landlord, said of the index in a conference call with analysts in May. The database is “suspect,” he said, the calculation “highly influenced by lobbyists and politics.”

Pending Lawsuits

Deutsche Wohnen, which is also Germany’s second-biggest publicly traded property company, has several lawsuits pending in local court, claiming that the rent index doesn’t reflect market conditions, according to a person with knowledge of the matter who asked not to be identified because the cases are still undecided. A representative for Deutsche Wohnen declined to comment.

Berlin’s courts have traditionally been sympathetic to tenants. However, there have been exceptions. In a recent case, a local court in the district of Charlottenburg sided with a homeowner and ruled that the 2013 Mietspiegel is too statistically flawed to be used as a basis for setting rents. The judgment doesn’t set a legal precedent.

The most common complaints against the index are that it canvasses fewer than 10,000 apartments out of Berlin’s 2 million, and that some of the statistics are up to six years old.

For tenants, these imperfections are a boon. Partly thanks to the Mietspiegel, rents in Germany’s biggest cities are among Europe’s most affordable. An apartment in Berlin costs an average 800 euros per month, compared with 1,700 euros in Paris, and 2,200 euros in London, according to data compiled by Savills Plc.

Flattened Prices

The Mietspiegel has also curtailed price swings based on rent speculation. While prices in the U.S. and the U.K. have seesawed since the financial crisis, in Germany they’ve barely budged.

Reiner Wild, a member of the justice ministry’s expert panel that’s reviewing the methodology used to compile the Mietspiegel, wants the index to become even more conservative, with data reaching back 10 years. Wild is head of the Mieterverein, Berlin’s biggest tenant advocacy.

“If we simply followed market rates, then what would be the point of protective measures for tenants?” he said.

Karim Salameh, chairman of Beirut-based Real Capital which has been buying Berlin apartments since 2008, says he became more cautious about Berlin in 2014 when it became clear that German parliament would pass the new rent controls.

“The rent brake is essentially a transfer of wealth from landlords to tenants,” said Salameh. “Berlin will become less of a destination for international investors because capital doesn’t like to be constrained.”