Real Estate market in Berlin and other big cities of Germany have been a hot topic in the last 5 years and even more, speculation has been brought up within the last couple of months when Senate proposed a further rent restriction in Berlin, that has alarmed the Real Estate investment industry.
Overall, the housing situation in the big cities of Germany is going through big changes. The drastic population increase has driven up demand for housing which has resulted in high rent increases and highlighted a huge shortage of properties. In 2015, the government addressed this issue by allowing the federal states to restrict rent increases if the city has a housing shortage. The imposed measure is called “Mietpreisbremse”. However, it did not bring the desired results and in mid-June this year, the Senate of Berlin proposed a further change into legislation. At the moment we have seen only a draft of legislation which will be brought to House of Representatives by the Senate in October, however, we saw some of the changes that they would like to introduce to the market. In short summary:
- Proposal of a five-year rent freeze for all apartments in Berlin and a limit of rates for re-letting apartments to the level of previous tenancy rate for new tenants.
- Bring the rental cap to the “Mietspiegel” level of 2013, with an option to reduce the existing rents which are above that limit.
At the moment, the high-level discussions are still ongoing on within the industry and political levels and so far the proposed changes have little support from both sides, as the main argument being that it won’t solve the main issue of the current housing shortage and won’t motivate the necessary investment for new construction.
As per the table below, the immigration levels are much higher than the completion of the new housing.
What are the current rent controls in effect in Germany?
While everyone is waiting for the decision in October, we would like to offer you the summary of current rent restriction laws (“Mietpreisbremse”) in Berlin and other big cities of Germany regarding rents:
- Tenant contracts are unlimited; however, the contract can be canceled in certain cases. Tenant eviction is only possible if the landlord wishes to use the flat personally, or for his family members, if the building is planned to be demolished, or the rental contract is not economically efficient, the tenant does not pay the rent or ignore the house rules after written warning.
- In Germany, landlords are allowed to terminate the lease in certain cases giving notice period. If the tenant has lived in an apartment less than five years, the landlord may give a period of 3 months. If the tenant has lived in apartment 5-8 years, the notice period should be no less than 6 months. If the lease has existed for more than 8 years, the landlord must grant a notice period of nine months.
- In central Berlin, if the landlord wants to convert tenanted apartment for self-use and evict the tenant, the notice period should be 10 years.
- Since 2015, the rental price for new contracts can’t exceed 10% than the average price in the city, published in “Mietspiegel” (average rent index of the city).
- The rent increase is also restricted for existing tenancies. There are two caps in place: rent can’t be increased higher than 15% within 3 years (from net rent) and not more than the average price in the city, as published in “Mietspiegel”.
- There are certain options for a rent increase that are allowed if the landlord has done a modernization and energy-saving measures for the property. Since January 2019, 8% of total investment costs can be distributed annually to the tenants, but it is restricted to 3 €/sqm monthly or 2 €/sqm if rent before modernization was below 7 €/sqm.
Does the current rental break works?
Majority aggress, that the rental price break has not brought in the desired effect and there needs to be additional measures to support tenants and increase support of construction of new housing. Furthermore, a lot of landlords ignore the rental break or use loopholes in law. There are also no penalties in place to punish for disregarding the rental breaks. The tenant association demands that legislation should tighten up the rental break even more.
What are the exceptions/loopholes of the rental brake?
- The rental cap does not apply if the previous tenant already paid more than 10% above the “Mietespiegel” rate.
- If the landlord has done modernization of the flat within the last 3 years, the rent cap can be exceeded by 11% of the investment costs for modernization.
Was the rental brake necessary?
To compare to other capital cities, rents in Berlin are still below the prices in Paris, London or even Munich, however, in 2018 alone, Berlin had the highest rent increase of 20.5% in the world, that puts city on the Real Estate market spotlight. The current rental cap measures are limited for 5 years but the tenant association already calls for them to be unlimited. They also ask for the abolition of all exceptions and loopholes (for example, for furnished apartments). The effect is also minimized by the fact, that since the landlords have no civil penalties in place, it is hard to prosecute them and motivate to obey the law. The overall mood in Real Estate industry does not believe that proposed legislative changes in October will go into full effect, however, till the decision is made nobody can be sure how the future of the Berlin property market will look like.