German real estate industry horrified at cancellation of state subsidy scheme

The German house-building industry was rocked back on its heels last week when the state's promotional bank KfW suddenly - and surprisingly - stopped its programme overnight of helping to promote efficient buildings, known as the Programm zur Förderung effizienter Gebäude, or BEG.

Prior to last week, anyone building or renovating houses has been encouraged by the government to place a priority on energy efficiency, and has supported these efforts with various funding programmes. Builders could apply via the state's promotional bank KfW (Kreditanstalt für Wiederaufbau) to avail of government subsidies to lower the cost of construction. This ended in the government's shock move, closing the programmes overnight.

The immediate upshot is that new applications for the subsidies are no longer being accepted, while a decision will have to be taken on how to proceed with funding applications already submitted, but not yet granted. For property owner who had counted on the subsidies for their financial planning, the immediate stop comes as a rude shock. Depending on which subsidy programme, the amount could be up to €75,000 in individual cases.

That the subsidy programmes were due to be phased out in their existing forms, was already known. In particular, the subsidy known as EH55 Standard had become so ubiquitous as to become the new minimum standard for housebuilding, and the government had announced back in November that that programme would be ended on 31st January this year.

This led to a flood of applications swamping the system, with more than €5bn of subsidies being approved in January alone - almost as much as in the entire year 2021, which saw disbursements of €6bn. With a total available budget of €20bn for the whole year being made available, the run on the EH55 Standard in January completely destabilised the overall subsidy pot, forcing the government to rapidly readjust, leading to it pulling the plug on the whole programme, including many other forms of energy efficiency subsidisation.

The bottom line is that no new applications for KfW funding programmes in the Federal Promotion for Efficient Buildings (BEG) are being accepted. This applies to all three KfW programme areas: Efficiency House /Efficiency Building 55 in new buildings (EH/EG55), Efficiency House /Efficiency Building 40 in new buildings (EH/EG40) and Energy Efficiency Rehabilitation.

Further BEG funding programmes running under the so-called BAFA (Bundesamt für Wirtschaft und Ausfuhrkontrolle, or Federal Office of Economics and Export Control) will, however, remain unchanged. The new coalition government said it would have to decide in the near future what would happen with its EH40 programme, and how they could get funds flowing for the project again as soon as possible. All three ministries involved - Economic Affairs and Climate Protection (under Green minister Robert Habeck), Housing, Urban Development and Construction (under Klara Geiwitz, SDP), and Finance (under Christian Lindner, FDP) - who are barely two months into power, will have to agree on a new plan, but no details have yet been agreed (possibly, let alone discussed).

It is unclear what will become of EH55 and EH40 applications that have been submitted but not yet approved, although it is unlikely that funds have been earmarked for them, given the wave of applications in January alone. This could well lead to some builders experiencing liquidity bottlnecks. The government did say that it is in discussion with KfW about a new loan programme to help out builders caught out by the sudden move, to help avoid chain reactions involving payment defaults throughout the industry.

The sudden government move drew forth a hail of criticism from across the whole real estate industry., with lobbying groups and housing company leaders saying it made a mockery of the new government's aspirations to create 400,000 new housing units annually, a level of production far ahead of anything achieved for many years.

Axel Gedaschko, the head of Germany's umbrella housing association GdW, said of the move that up to 300,000 apartment units across Germany would now not be built as planned, or renovated. Two thirds of these are new-build apartments.

"If 200,000 dwellings cannot be built or the complete planning for them is thrown out without notice, then the federal government can already halve its annual housing construction target. An elaborate rescheduling will cost a lot of time and money, even if the government launches a follow-up subsidy. This also applies to the 100,000 flats that could have been modernised and thus made more climate-friendly with the BEG subsidy," said Gedaschko.

"We are talking here about investment of 80 billion euros in affordable and climate-friendly housing that this funding would have triggered. Cancelling the subsidy will mean a rejection of the commitment of builders to future-proof housing. The result will be even longer queues of people looking for housing and a clear bend in the road towards climate neutrality," he said.

"The sudden stop of BEG funding means a full brake on climate protection in the building sector. The decision is a disaster for all those who are committed to affordable and sustainable housing. Not only future, but also already applied-for building projects for new construction and existing measures will thus be terminated overnight. What building owners need above all is planning security. This step is exactly the opposite of that, and is poison for the creation and preservation of affordable housing.

"As always, those who will suffer most are those builders who want to create and maintain affordable housing despite exploding construction costs, a shortage of skilled craftsmen and ever-stricter energy regulations. Above all, the socially-responsible housing companies throughout Germany are being carelessly thwarted in all their planning. As a result, tenants with low incomes, who are already finding it hard to find affordable accommodation in the face of rising costs everywhere, will lose out.

"Not to mention the climate targets - climate neutrality by 2045 is thus becoming an unattainable goal. The energy transition can only work if everyone can participate and no one is unduly disadvantaged. But if, as in this case, climate-friendly housing construction is made impossible on the backs of tenants and socially oriented housing companies, then that is above all one thing: deeply unsocial."

Andreas Ibel, the president of the Bundesverband Freier Immobilien- und Wohnungsunternehment (BFW), which represents a large part of the German private real estate industry, described the move as "a disaster, to say the least." After surveying his members, he concluded that "about 25,000 housing units of member companies are now hanging in the balance due to the subsidy stop.** There is currently no planning basis for the companies, he said. "If you want to make a good subsidy that really brings a lot, that means a lot of coordination and then we are in autumn," said the BFW president. But the industry could not wait that long, he said. He is calling immediately on the federal government to maintain the subsidy in order to avoid "corridor damage", as he put it.

The opposition CDU and CSU parties are also mobilising to get the decision reversed immediately. The CDU/CSU spokesman on building and housing policy Jan-Marco Luczak said: "We now need planning certainty as quickly as possible as to what will be funded in the future, under what conditions and to what extent." Without this, the ambitious new housebuilding targets announced by the coalition government has no chance of being achieved, he said.

There was also a wave of negative sentiment coming from the real estate industry at large, with several companies pointing to the "huge loss of trust" in the new coalition government, elected so recently with grand pronouncements as to a nationwide housing construction programme to combat the affordable housing shortage.

They represent the view that investors who want to invest their capital in housing construction make very long-term calculations, because housing investments often only pay off over the course of several decades. Summarised, within these long time frames, investors must be able to count on reliable framework conditions. But if the state increasingly changes these framework conditions, for example by introducing rent brakes for existing buildings that did not exist before, it forces investors to take additional risks into account. The result is higher rent demands and/or that many construction projects are completely abandoned because the risks are too great.

Dr. Wulff Aengevelt, of the Düsseldorf-headquartered brokerage group Aengevelt, commented: "The cancellation of the KfW funding programmes is another setback for housing construction. The builders of around 50,000 housing units have already factored the subsidy into their plans and profitability calculations and are now going home empty-handed. But the damage goes far beyond that. Anyone who invests in housing construction needs reliable framework conditions. But anyone who introduces rent brakes for the housing stock or cancels promised subsidy programmes shakes the confidence of investors in the reliability of the political framework conditions - a former strength of the Federal Republic that is being destroyed by such hasty decisions. How are we going to reduce the housing shortage if the subsidies that existed in the first place are also cancelled?"