Departure of Berlin Housing Minister hailed as welcome by RE industry

The real estate industry in Berlin will have shed few tears at the resignation early in August of the city state’s building and development minister Katrin Lompscher of the hard-left party Die Linke. The controversial minister stood down over the issue of an undeclared €8,000 in annual expenses, after an enquiry initiated by the opposition AfD party. 

We have covered many of Frau Lompscher’s measures in the past in these pages of REFIRE, all of which involved massive state intervention in the city’s residential housing market. She introduced the Mietendeckel, or rent freeze, which caps Berlin rents for the next five years and threatens billions in rental clawbacks for tenants since coming into effect in February this year, and backdated to June 2019. The law affects 1.5m apartments in the city built before 2014, and caps rents at a maximum of €9.80 per sqm per month.

Among those quick to respond to the news of Frau Lompscher’s resignation was Jürgen Michael Schick, the president of the housing industry association IVD Immobilienverband Deutschland. Mr. Schick sent out a press release – which we think is worth repeating in full - saying the following:

"The resignation of Berlin Senator for Urban Development and Housing Katrin Lompscher (Die Linke) draws a line in the sand to a what has been a disastrous and highly destructive period."

• Her first official act was to bring Andrej Holm, a former Stasi employee, into her department as State Secretary. He defended Venezuela's economic policy as exemplary. Even after his forced resignation, Lompscher sought support and advice from Holm and other activists from the hard left-wing camp.
• Frau Lompscher was responsible for the stopping and blocking of many large settlement and housing projects in the entire Berlin city area, e.g. in the south of Blankenburg (5,000 housing units) and at Westkreuz in Charlottenburg (1,000 housing units). As early as 2017, as one of her ministry’s first official acts, she stopped the construction of a new high-rise residential building on Fischerinsel, where 200 residential units had been planned for the municipal housing company WBM.
• The number of approved apartments has been falling continuously since 2017. In 2019, the number was 7.0% below the previous year's figure.
• In approving new development plans, the city of Berlin, under the Senate administration she heads, now needs an average of just under eight years, with some districts requiring up to ten years to grant approvals.
• Instead of seeking an alliance with the real estate industry - as was the case in the red-green ruling Hanseatic City of Hamburg - and creating a triad of senate, districts and business, her department has deepened the rifts through its policies.
• She blocked the development legislation for loft conversions. As a result, considerable potential for re-densification was not exploited, which would demonstrably have provided more living space.
• As co-initiator of the Berlin rent cap, she introduced for the first time in the history of the Federal Republic an unconstitutional law aimed at introducing a planned economy into the housing market. It is already evident that modernizations and investments in the Berlin housing market are being cut back by billions. Even housing cooperatives have had to drastically reduce their new construction projects as a result of the rent cap.”

Schick added that statistics provided by the Investitionsbank Berlin (IBB) show by 2030 at least 145,000 apartments too few will be available in Berlin. These can only be recovered by a new concerted plan of action. Assessing the government’s political achievements, Schick concluded, "With the Berlin Senate's plan for the construction of affordable housing 'StEP Wohnen 2030', the outgoing Senator for Construction has failed miserably on all fronts. The governing mayor (Michael Müller) must now finally take the issue into his own hands. I can only hope that Mr. Müller, as former senator for urban development, has heard that message loud and clear.” (End of press release).

What is clear is that the city will also fall short of this year’s target for new-build apartments of 30,000 units, reaching only at most 23,700 by year-end, according to the Senate.

It is also clear that the loud warnings against Frau Lompscher’s Mietendeckel are also coming to pass as predicted. While the Mietendeckel may yet be overturned by the nation’s highest court, and thousands of landlords are issuing new tenants with so-called ‘shadow lease agreements’ in case it IS overturned, the market is developing largely along the lines predicted.

Landlords are increasingly looking to sell their apartments as condominiums, rather than seeking to rent them out to tenants. Urgently needed refurbishment is being delayed because the law also greatly reduces landlords’ ability to defray certain of their costs on to their tenants. Side agreements on new rentals are increasing -  predictably, and even before the Mietendeckel, apartment seekers had to come to expect they would have to take over a previous tenant's kitchen, for example, although long overdue for renewal, by paying ridiculous pin money to earn the right to take over the apartment.

Finding a suitable apartment now in Berlin has, anecdotally, never been harder. Although rents for new rentals in the capital have not surprisingly fallen slightly in the last twelve months - the supply of rental apartments advertised on Internet portals has fallen sharply, while the number of condominiums for sale has increased. Which was to be expected.

Another phenomenon making itself apparent is the rise of “Schattenmieten” or shadow rents, which landlords are making tenants sign in the event that the Mietendeckel or rent cap is judged illegal by federal judges. The reluctance of many to sign such agreements is leading to a generally greater unwillingness to move at all, compounding the effects of COVID-19 on more usual housing movements. The view of local tenants’ association BMV Berliner Mieterverein is that such shadow rents are illegal, while landlords are basing their position on a judgement of the German Constitutional Court in March which they interpret as allowing this second, theoretical rent while awaiting final judgement of the overall legality of the Mietendeckel. Lawsuits have already been issued, with a ruling expected by autumn.

The overall legality of the Mietendeckel is being contested by many interest groups at Land and Federal constitutional court level, including by the CDU and FDP parties. Landlords, who have already lowered their rents to comply with the Berlin law, have been warning tenants that, in the event the Berlin decision is overturned, they will be claiming back the difference in rent paid. Here also the BMV says that tenants are ‘probably’ protected should the law be overturned, but ‘it might be prudent to set aside savings, just in case”.

The rent cap that came into force on 23rd February this year provides for a five-year rent freeze backdated to 18th June 2019. In addition, from 23rd November 2020, rents exceeding the fixed ceilings by more than 20% are prohibited. From then on, there could be actual reductions in rents. 

Rent increases of up to 1.3% are possible for the first time from 2022, provided the ceilings are not exceeded. The rent cap does not apply to new buildings completed after 2014. 

Berlin know that it has been entering uncharted legal territory with the Mietendeckel, which it concedes is undoubtedly an encroachment on legal property rights, but in the view of its main tenants’ association BMV, “justifiable”. In doing so, the city is referring to the federalism reform of 2006, in which the federal states were assigned responsibility for housing.