Residential Real Estate: Recent legal changes and their potential repercussions for investments

Published 03 September 2019 by DSC LEGAL Rechtsanwaltsgesellschaft mbH

Istvan & Peter

Residential properties have soared to new heights, during a prolonged decade-long boom in the German real estate market.

While the German economy is currently standing on the verge of a recession, the real estate market does not yet seem to be affected by the economic slowdown. For example, Berlin has been identified by Savills as the European city with the fastest-growing prime residential property prices in 2019.

Rents have also risen sharply, particularly in metropolitan areas, at a rate twice that of salaries and wages. Tenants in metropolitan areas now have to allocate up to 48 per cent of their monthly household income to rent payments, which creates pressure on poorer households to move away from city centres to more affordable suburban areas or out of the town altogether. The rapidly developing urban hinterland of Berlin, especially along the regional railway lines, is a good example of such socio-economic developments.

Political pressure has led the government to introduce regulatory changes seeking to prevent further steep rises in rents and to expand the building of new apartments.

• The ruling government coalition has recently expressed its intention to prolong the existing ‘rent brake‘ law for another five years until 2025. According to this law, rents under new leases must not exceed more than 10 per cent of the local average rent, otherwise, tenants will be entitled to claim back overpaid rent for a period of up to 30 months. Newly built or comprehensively refurbished apartments are exempt.

• Furthermore, in order to better protect tenants, the government is planning to enact new laws by the end of the year, making the transformation of rental apartments into condominiums more cumbersome.

• In order to lower the financial hurdles for the acquisition of residential real estate, new regulation shall be introduced according to which the buyer is obliged to only pay up to half of the broker’s commission fee. In some regions, it is common to ask the buyer to carry the full fee, even if it was the seller who instructed the broker in the first place.

• Special allowances for depreciation have been introduced that apply to newly built residential properties for a limited period of four years. According to the new rules, up to 20 per cent of the building costs can be depreciated, additionally, provided that the property is rented out for a period of 10 years at least and the construction costs do not exceed EUR3,000 per sqm.

The stricter tenancy law regulations should slow down the upward trajectory of rental prices. However, due to the persistent attraction of metropolitan areas, especially to young people and immigrants, the population of metropolitan areas is likely to grow faster than the number of newly built apartments. In consequence, rents will continue to rise, even if it is not at the same speed as before. In any case, it is highly recommended that landlords check their potential for rent increases in light of the changing legal framework.

The high demand for rental apartments, together with the historically low-interest rates for loans, may lead to a further increase of prices and to even higher yield compression. Even if the overall number of real property transactions was lower than in the previous year, the overall transaction volume was higher again. Hence, investors may be inclined to sell their properties in order to realise profits. In the case of residential buildings that can be partitioned into condominium ownership, the sale of condominium apartments to individuals may be a preferred exit route for investors.

The regulatory changes are also aimed at providing a stimulus for the construction of new buildings. Investors may re-think their business strategies and start investing in development projects or enter into building activities. Due to the scarcity of building land in the top cities, major beneficiaries of further construction activities could be municipalities in the surrounding areas, provided they are sufficiently linked to the city.

This article is part of the IR Global Meet the Members Guide - Germany. To read the full publication, please click HERE