ANALYSIS: Rental brake will not affect resi profits in Germany

The rental cap which Germany's newly elected government plans to introduce in the residential market will not affect investors' profits, PropertyEU has learned form market watchers.

Heiko Maas, Germany's new justice minister, is eager to book quick results in resolving what has become a thorny national issue. 'I will get legislation for a rental cap under way within the next 100 days,' the social democrat told reporters early this year.

There is a reason for the haste. Prior to the national election in Germany last autumn, the Social Democratic party (SPD) had promised to put an end to the double-digit increases in residential rents in large cities like Berlin, Hamburg and Munich. Now, being the junior partner in a coalition with Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), the SPD wants to deliver on its promise fast. 'We want the legal foundation for the new law set out before this summer,' declared Barbara Hendricks, the newly appointed minister of construction and also a social democrat.

Although the CDU, traditionally a supporter of business and landlords, bowed to the rental brake in the coalition negotiations, the party succeeded in squeezing in stipulations into the agreement that will protect the earnings of residential investors, experts believe. 'The rental cap will not affect returns in the foreseeable future,' said Georg Kanders, an analyst at private bank Bankhaus Lampe in Düsseldorf.

Buy recommendations
Kanders recently reiterated his buy ratings for listed residential companies Gagfah and LEG with target prices of €12 and €49 respectively. 'The rental cap will have no effect on the market,' said Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum.

Under the coalition agreement, the rental brake - known in German as the Mietpreisbremse - will not be put in place by the national government in Berlin. Instead, each of the 16 federal states will decide in which cities it will be implemented with city councils ruling afterwards what quarters will be affected. 'It will take months, if not years, to work out the legal procedures,' said Kanders.

Also, the rental cap will not prohibit investors from raising rents. 'The law will only forbid rent increases of more than 10% above the local comparative rent,' Vornholz explained. 'That will not affect the earnings growth of listed companies since they are for the most part not even collecting the comparative rent.' The comparative rent is mostly set by private landlords and small family-owned residential companies holding apartments of higher quality. 'For the most part, the residential stock of listed companies is at, or below, market quality,' Vornholz said.

New buildings
Newly constructed residential buildings will not be subject to the rental cap measures at all. 'Investors are free to set the rental price even way above the comparative rent,' said Michael Voigtländer, real estate economist at the Institut der Deutsche Wirtschaft in Cologne. Once a rental price on a new multiple-family dwelling is set it cannot be increased as long as it is above the comparative rent. 'That may dampen some investors' interest in new dwellings,' Voigtländer said.

However, there is a way to get around that stipulation. Graduated rents - which allow for periodic changes in payments rather than setting a fixed payment throughout the life of the rental contract - are still permitted. According to Kanders, Berlin-based GSW, which was taken over by Deutsche Wohnen at the end of last year, had already talked about the use of step-up leases in a conference call, signalling that their earnings will not be affected by the rental brake. 'We will likely see an increase in graduated rents in the German resi market in the years to come,' said Voigtländer.

It is no surprise, then, that analysts are again optimistic on Germany's listed residential companies whose share prices had fallen by up to 30% in the months leading up to the election with investors fearing a dramatic cut in earnings from the proposed rental brake. 'German residential will see rents increase over the rate of inflation,' said Timothy Leckie, analyst at JP Morgan, who has overweight ratings on Deutsche Annington and LEG.

Markus Scheuffler of Deutsche Bank also predicts steady increases in rental income at Deutsche Wohnen. 'With its focus on Berlin, Deutsche Wohnen is well placed for the future,' said Scheuffler, who has a hold rating on the stock after share prices rose by more than 14% following the election.

Richard Haimann
German correspondent