The two major political parties in Germany have included the key word 'Mietpreisbremse' – in other words, a cap or 'freeze' on rental increases – in their coalition treaty. The real estate industry fears market disturbances that could arise from such a concept, but then again it might never make into law.

Faced with extreme hikes in rents in certain major German cities during the election campaign, the conservative CDU and the socialist SPD had vowed to help people with the affordability of living. To fulfil their promise they have now included a cap on rent increases in the coalition treaty but the details remain vague.

It is not yet clear whether this will be a binding legal requirement and which cities will have to apply it, as the deal only states it should apply to regions with a shortage of apartments. Furthermore, the threshold has not been defined clearly, according to Thomas Zinnöcker, vice president of the real estate lobby group Zentraler Immobilien Ausschuss (ZIA) and CEO of Gagfah Group.

"We have 200 different rental tables in Germany which differ greatly," Zinnöcker explains.

Another open point is what constitutes a 'modernisation', as rental increases are to be linked to this condition as well.

The ZIA vice president warns not to overreact as "the current suggestions might not even make it into a law as there are also practical challenges". One question, for example, remains: will every rental agreement have to be filed with an authority to check that it adheres to the rental cap?

Zinnöcker and other industry representatives agree that a cap on rents is not the right cure for a shortage of living space. "We will try and help the government see that there are other solutions which are better suited to solve the problem," he says.

Manfred Binsfeld, heading real estate research at Feri EuroRating Services, favours providing a strategy to "support new construction" through tax incentives. He explains: "One of the main problems is that, in cities with a massive shortage of living space, too little land is assigned as building land, and the approval process takes a lot of time."

The land development plan should be geared towards socio-economic targets. "What is missing is a comprehensive residential policy," Binsfeld says. He warns of "examples where a cap on rents has led to an aggravation in the shortage of living space" as investors could pull out of such markets.

Marcus Cieleback, head of research at Patrizia, has raised a similar concern. "A rental cap makes it more complicated for investors to move in a market, which means costs are increasing and they will think twice about committing," he says. "Regulating rents can lead to more problems." The public should not expect the problems around a shortage of living space to be solved overnight as "it will take five to 10 years', Cieleback adds.

But despite these uncertainties, all market participants see the institutional interest in German residential properties – both domestic and foreign – unbroken. According to Zinnöcker, the "political risk" relating to the rental cap is not perceived as a severe one by most foreign investors. "They are looking at so many countries with various risks and Germany remains a stable market," he says.

Cieleback confirms that the "downside risk in good locations in the German residential segment is manageable".

The political pressure to implement a cap on rental increases has come at a time when fears of a housing "bubble" has emerged in Germany. Cieleback says there has been a "mismatch between supply and demand in certain areas", but does not perceive any bubble.

In fact, the price rises in recent years had been forecasted. "Five years ago, everybody in the German residential market said the prices have to increase," Cieleback says. "And that is what they did."

In a new study on German second-tier cities, research company Wüest & Partner found that most of these towns are most likely to remain unaffected by a rental cap.

Sven Graven, managing director at Wüest & Partner, says investor interest in second-tier cities was increasing as investments in the top locations were becoming more and more rare. "Interest in those second-tier cities could increase if a rental cap is introduced," he says. "The majority of those [cities] do not have a shortage of living space and rents have increased much more moderately than in the top-seven locations."