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Half-Year Report 2019

Our Contribution to the Current Debate

Comments on the Plans for Berlin-specific Tenancy law

Background

A position paper for a Berlin-specific tenancy law was published in early June. It mainly consists of the following points:

  • Rents for new and existing lease agreements are to be frozen for five years.
  • An absolute rent ceiling is to be defined.
  • The rent freeze is to apply in the whole of Berlin both for existing lease agreements as well as for new lettings. The only exceptions are new builds, apartments eligible for social security subsidies and economic hardship cases.
  • As a general rule, modernization cost allocations that will increase the gross rent, including ancillary expenses, by more than € 0.50 per m2 per month are to require prior approval in the future.
  • The authorities responsible will be authorized to prohibit landlords from charging excessive rents and to reduce the rent to the permissible level (rent ceiling) at the tenant’s request.
  • Breaches of the new rent legislation are to carry penalties (of up to € 500,000).

The position paper was approved by the Berlin State Government (“Senat”) on June 18, 2019 and the State Government’s Department for Urban Development and Housing has been commissioned to develop a draft bill by the end of August 2019. As the plans stand at the moment, corresponding legislation is due to enter into force in Berlin on January 11, 2020.

Problem and Solution

The background to the plans for the Berlin-specific tenancy law is that the Berlin residential property market, like those in many other cities in Germany, is characterized by rising demand on the one hand and insufficient supply on the other. This increasing imbalance is pushing up the rents charged when properties are relet, in particular. Many people are worried that they will no longer be able to afford rising rents and that they will no longer be able to find a suitable apartment if they have to move.

At Vonovia, we take these concerns very seriously and want to live up to our responsibility to play an active role in developing suitable solutions. With rent averaging around € 6.68 per m2, our apartments are in the affordable segment of the market and are certainly not one of the factors driving prices up. What is more, we are not involved in luxury modernizations and do not terminate tenancy agreements because we want to use the apartments ourselves. In many cases, the measures described in our Business Philosophy (https://www.vonovia.de/geschaeftsverstaendnis) actually extend beyond the statutory requirements. In addition, with 1,500 to 2,000 new rental apartments planned for completion this year alone, we are one of Germany’s biggest housing developers.

The plans for the Berlin-specific rent freeze legislation, however, are heading in the entirely wrong direction. The legislation does not solve the actual problem, namely the insufficient number of apartments, but rather serves to exacerbate it. The investment climate in Berlin will deteriorate further and future new construction activity is likely to decline. This is an issue that has now been raised even by the municipal housing companies in Berlin and the cooperative housing associations.

The sustainable long-term solution to this problem lies precisely in creating more homes. Imposing drastic regulations, however, will only achieve the opposite and will also have a negative impact on the building stock in general instead of improving it. This runs contrary to the climate targets that have been set and stands in the way of the necessary CO2 savings, the required investments in senior-friendly apartment conversions and the construction of new apartments, which is urgently needed.

Legal Assessment

We believe that the planned legislation, based on the key aspects that have been announced to date, is unconstitutional because the federal state of Berlin does not have the necessary legislative powers. The German federal government has exercised its competing legislative powers in the area of civil law with definitive effect in the rent legislation set out in the German Civil Code (BGB). The federal government has indicated that it also intends to retain responsibility for regulation in this area in the future, with the Federal Ministry of Justice presenting a draft bill stepping up the regulations associated with the rent cap as recently as in May.

In addition, this sort of legislation would breach the fundamental right to property (Article 14 of the German Basic Law [GG]) and would likely also be an infringement on the ban on causing financial loss covered by the fundamental right to property. What is more, the regulations would be out of proportion: the legislation does not help to create homes for people on low incomes. Given the shortage of homes, apartments would still be rented out to individuals on higher incomes. The federal legislator has a whole variety of alternative tools at its disposal that do not encroach upon constitutional property rights (e.g., targeted measures to accelerate the construction of new and affordable homes; targeted subsidies for lower-income tenant groups). These “milder measures” must be exhausted first.

In spite of the constitutional concerns, we currently expect the planned legislation to come into force in the form proposed by the Berlin State Government in January 2020. At the moment, it is impossible to predict to what extent the final legislation could deviate from the position paper.

No Major Impact for Vonovia

We expect the financial impact of the Berlin-specific rent freeze legislation on Vonovia to be limited given the relatively small share of our portfolio that is located in Berlin (around 10% of the overall portfolio) and due to the fact that we can offset any negative effects by redirecting investment funds to other locations. We currently see no reason to change our business expectations or our strategy.

We also believe that the risk of other federal states following Berlin’s example and trying to pass similarly restrictive tenancy laws is extremely low. We have published a detailed analysis of this matter on our investor relations website at https://investors.vonovia.de/news.

Where Do We Go From Here?

We are convinced that the rent freeze legislation that the Berlin State Government plans to implement is unconstitutional. However, it looks likely that it won’t be possible to take legal action in this regard until after the law has been promulgated.

In addition to administrative or civil law proceedings, another possibility would be proceedings concerning the abstract review of the planned law before the Berlin Constitutional Court. This would require the Berlin State Government or one quarter of Berlin’s House of Representatives (at least) to file a motion for a review of the law’s constitutionality. Another option would be proceedings involving an abstract review of the statute before the Federal Constitutional Court. This would require a corresponding motion to be filed by the German federal government, a federal state government or (at least) one quarter of the members of the German Bundestag.