Who owns the equity value of a rental deposit?
Will recent ruling in Berlin set a new precedent?
Who owns the equity value of a rental deposit? In a case that went before Berlin’s district court earlier this month, it was decided that a tenant does, thereby turning the DM800 deposit her parents paid 60 years ago into a staggering €115,000 today.
Could this set a new precedent in a market where more people rent than buy their own homes and where long-standing tenants are common? The court ruled that the housing association's (who has not been named) right of choice provided for in the old rental agreement was invalid. Section 551 of the German Civil Code stipulates that the tenant is entitled to income from the rental security, regardless of the form of investment chosen. The income from the form of investment selected here included not only dividends paid out, but also any price gains and any agreements deviating from this are invalid.
Moreover, according to the terms of the lease, the real estate company was allowed to invest the amount in its own shares, the court said, and the contract stipulated that the shares were to be surrendered after termination of the lease. The sum was transferred to a new contract in 2005. The market value of the rental security was €115,000 when the lawsuit was filed in December 2021.
However, there could be a protracted battle ahead, given that the housing company has been pushing to pay out just €409.03 - the equivalent to DM800 today - and the recent ruling is not legally binding. The lease ended in 2018, and when the plaintiff wanted the shares, the housing company refused. She subsequently invoked the lease agreement and instead paid €409.03, which corresponded to the original DM800. She went on to sue for surrender of the shares.
Berlin has witnessed some of the most sharply rising rents in Germany, with median rents soaring 66% since 2014, according to BNP Paribas Real Estate. By the end of the second quarter this year, average rents in the Big 7 Cities had reached €13.85 per sqm/month.
Berlin one of best performing cities globally
Berlin was one the best performing cities in Savills’ Resilient Cities Index 2022 published last month, up 7 places to 7th place, one of just three European cities in the current top 20, along with London (2nd) and Paris (11th).
“Berlin continues to prove itself as a magnet for German and international companies,” said Matthias Pink, head of research at Savills Germany. “We see companies increasingly relocating to the capital to benefit from the innovation dynamics and the large talent pool.”
New York retained the top spot, followed by London. LA moved up one spot to third place, replacing Tokyo, which dropped to 5th place.
The prime residential market’s strong performance at the end of last year continued into the first half of 2022, according to Savills’ World Cities Prime Residential Indices, which were published earlier this week. Across the 30 cities covered by the Savills World Cities Index, capital values grew by an average of 2.4%.
Between December 2021 and June 2022, 90% of the cities in the Index reported positive capital value growth. This growth has primarily been driven by continued positive market sentiment, still relatively low interest rates, constrained supply and the comparative attractiveness of prime residential property as an investment, according to Savills. In all but three cities - Cape Town, Barcelona and Mumbai - prime capital values have now exceeded pre-pandemic levels.
North American cities have performed the strongest in 2022 so far, followed by cities in Europe. Some APAC markets are still more acutely feeling the effects of the Covid-19 pandemic, while most global cities are experiencing the impact of geopolitical uncertainty, increasing inflation, and rising interest rates, albeit yet to materially impact pricing in the prime markets.
Changing working conditions boosting market
Changing working conditions since the pandemic are also boosting the market, according to Paul Tostevin, director of World Research at Savills. “Hybrid working is likely here to stay, so re-evaluating priorities and a changing of lifestyle have led prime purchasers to demand greater indoor and outdoor space, as well as focusing on purchasing the right property in a central, well-connected location,” he said.
In Europe, cities such as Berlin and Milan have benefited from diversified economic and cultural offerings, supporting a broad buyer base. Amsterdam and London, meanwhile, which are both characterised by a lack of stock, have continued to see growth, though fewer than expected international buyers slowed that growth in the first half of 2022, according to Savills. In Paris, prime residential stock with large floor plans in central locations are performing best. Paris also offers comparative value in a global context, with prime property prices reaching €15,500 per square metre, 25% less than Geneva and 15% less than London.