Investment in new construction still pays off

Law on Rent Limitation in Housing in Berlin (MietenWoG Bln) is the somewhat unwieldy translation of the official title of the new law, more commonly referred to as the Berlin Rent Cap, which was passed by the Berlin Senate on January 30, 2020. The rent cap has made headlines across Germany – and worldwide. In fact, it was even the subject of a recent report in The New York Times. Whether the law will actually help relieve Berlin’s rental market is a subject of heated discussion. Moreover, it is not even clear that the state of Berlin has the legislative competence to set rents (formal constitutionality) or whether the state’s interference with landlords’ property rights is compatible with the constitution (material constitutionality). A majority of German parliamentarians has voted to refer the law to the Federal Constitutional Court. Now we all have to hold our breath and wait about six weeks until the beginning of April at the earliest, which is when the complaint can be filed. Months may pass before a decision is made – and uncertainty will prevail in the meantime.
But what does the Berlin Rent Cap actually regulate and how does it affect the purchase and sale of condominiums?

What the new rent cap legislation actually regulates

The law applies in Berlin and covers all rental apartments, including furnished apartments, short-term rentals and single-family homes. There are some exceptions: new buildings that were ready for first occupancy after January 1, 2014, publicly subsidized housing, student residences and housing for people with urgent housing and care needs. Also exempt are dwellings that were completely uninhabitable before renovation and for which the costs of modernization are comparable with the costs of a new building.
The law consists of two elements: an immediate rent freeze and an automatic rent reduction. The rent freeze means that rents for existing leases will remain at the level of June 18, 2019. This also applies to graduated and indexed rents.
The automatic rent reduction means that landlords will have to reduce all rents that exceed the official rent ceiling by more than 20 percent, without any need for action from tenants, within nine months of the law coming into force. The official rent ceiling is based on the 2013 rent index and lies between €3.92 and €9.80 per square meter. The rent ceiling is €1.00 per square meter higher for apartments with modern equipment. In order to qualify for the higher rent ceiling, at least three of the following five criteria must be met: a wheelchair accessible elevator, a fitted kitchen, high-quality flooring, low energy consumption and high-quality sanitary facilities.
If an apartment is subsequently rented out after law comes into effect, the landlord may not charge a rent that exceeds the official rent ceiling. As a result, landlords may find themselves having to charge a lower rent than that paid by the previous tenant.

The impact of the new law on condominium buyers

Of course, with the ink hardly dry on the new legislation, it is not possible to identify specific impacts just yet. But it is possible to start talking about trends and practical experiences. For example, it is already highly likely that there will be a noticeable decline in the construction of rental housing and the modernization of the existing housing stock.

Nevertheless, Berlin retains its status as a highly attractive city and its population will keep on growing. As a result, demand for apartments will continue to far outstrip supply, which is why we assume that purchase prices will continue to rise in response to the Berlin Rent Cap. And because the rent cap does not apply to newly constructed rental apartments, investments in rental housing will continue to be profitable. In the case of apartments ready for occupancy after 2014, it will therefore be possible to invest without the any impact from the new rent cap.

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