German rental cap debate puts pressure on resi stocks

A political drive in Germany to introduce rental caps on housing is depressing residential stocks.

A public outcry against rising residential rents in Germany’s large cities has prompted the main political parties to call for stricter regulations as the federal elections in September draw near. The debate is already weighing on the stocks of listed German residential companies, and has sent share prices down by up to 10% since the issue became a major factor in the election campaign.

‘Investors are worried that residential companies will not be able to grow their earnings and dividends as projected,’ said Dieter Thomaschowski, owner of Investment Research in Change IC in Erkrath. Georg Kanders, an analyst at private bank Bankhaus Lampe in Düsseldorf, agrees. He has put a hold rating on all listed German residential companies. ‘Investors are uncertain about what leeway residential companies will have to conduct their business in the future. The debate is anything but positive for those stocks.’

The debate will likely gain more momentum as the election date comes closer, Kanders said. He expects an accelerated IPO of Deutsche Annington, a residential company with a portfolio of 210,000 apartments owned by UK investor Terra Firma. Last year, Annington’s CFO Stefan Kirsten said an IPO was not likely before the end of 2013. ‘Now it seems as if Terra Firma may already want to list Annington in early July, way ahead of the most controversial political debates in the last two months of the election campaign,’ Kanders said. German media have cited 4 July as a possible IPO date for the company.

Wave of protest
Since 2007, residential rents in Berlin, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and other major cities have increased by more than 20%, according to recent studies by research institute F+B in Hamburg and Feri Eurorating Services in Bad Homburg. That led to a wave of protests by renters last autumn, prompting all the leading political parties to jump on the issue as part of their campaigns to win votes in the Bundestag elections on 22 September. ‘Rental rates are a major issue for German voters,’ Günther Vornholz, professor of real estate economics at the EBZ Business School in Bochum said. About 54% of German households live in rented apartments, he pointed out: this is the second highest rate in Europe after Switzerland with 63%.

Already, the incumbent coalition comprising the conservative CDU Christian Democrats and the FDP Liberal Party have made changes to the legislation governing rents. Under the reforms, which will take effect in May, the 16 German federal states have the right to curb rental increases on existing contracts to 15% within a three-year period in part or all of their territory. Under the existing regulations, rents may be increased by up to 20% within three years.

The opposition is calling for even tougher measures. In their election programme the centre-left SDU social democrats are proposing to cap the increase at 10% above the average rental rate, also for new contracts. The leftist party Die Linke wants to ban rental increases altogether for new and existing contracts in areas with low vacancy rates. The Green Party is calling for stricter energy savings measures to reduce heating costs which would force landlords to invest extensively in the insulation of their buildings.

Germany did not see rental rates rise at all between 1993 and 2007. Oversupply caused by the building boom after reunification in 1990 caused rental levels to hold steady in the large cities while rents in smaller cities fell. Residential companies and project developers reacted by massively cutting back on new construction.

Rise in construction
According to the German Bureau of Statistics, Destatis, the number of new apartments in multi-family blocks fell from 279,783 in 1996 to just 58,537 in 2008. Since then rising rents have led to an uptick in construction. Last year, the number of new apartments built rose to 96,000, up more than 13% on 2011. However, this is not enough to stem further rental increases, according to a new study by listed residential investment company Patrizia. ‘In order to meet demand we need a construction rate of 33,000 new apartments a year alone in each of the six largest cities in Germany,’ said Marcus Cieleback, head of research at Patrizia. Overall demand for new construction could add up to more than 250,000 newly built apartments per year.

But the ongoing political debate could turn project developers and residential companies away from new construction, said Andreas Mattner, president of the German Property Federation ZIA, an economic lobby group for the German property sector. ‘We don’t need rental caps to scare investors away, we need them to build more apartments.’ The German central bank agrees. ‘Rental caps bear considerable risks of lowering incentives for new residential construction,’ the national bank warned in its monthly report in February.

RICHARD HAIMANN
German correspondent PropertyEU

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