Ministry initiates study to restrict foreign investment in German housing

In a development which will be viewed with alarm by all property investors, Germany’s politicians and government authorities are looking at whether the purchase of residential apartments apartments should be restricted by law.

A recent meeting in July by representatives of the Federal Ministry of the Interior and Building (BMI) and other federal and state ministries from Berlin and Bavaria concluded by commissioning a research study on the weighting of foreign buyers’ influence on the German residential housing market.The meeting, on the 22nd July, was convened to question whether “the purchase of apartments by foreigners deprives the German housing market of apartments" and whether this would result in "a need for action by the state authorities", i.e. an "overall regulatory framework in Germany for the acquisition of land and property by third country representatives" would need to be established. Such a study by the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) would to develop a method to document the extent and effects of housing purchases by foreign private individuals.

The central working hypothesis is that foreign buyers remove housing capacity from the local German market. The study would work on certain principles, firstly that the number of foreign persons as buyers on the German housing market is increasing. Foreigners are very active as buyers, especially in metropolitan areas. This also applies to vacation regions (Sylt or Berchtesgaden) and border regions with the Netherlands, Poland or France.

Secondly, this increasing number of foreign buyers creates additional demand which puts upward pressure on prices, thus reducing the affordability for potential German buyers as owner-occupiers. And thirdly, foreigners often buy apartments that they do not or barely use This leads to a deprivation to others of living space, so that the supply of housing in tight housing markets is made even more difficult.

Additionally, foreigners invest disproportionally in the luxury segment of the market, a segment which frequently involves new construction. This uses valuable building land, which could be used for more affordable housing.

There is also the assumption that foreign private individuals are more yield-oriented than German owners, leading to a tendency to buy and sell faster. They also have higher rental expectations. This more pronounced yield orientation and the shorter holding period lead to less emphasis on property maintenance. On top of that, it is argued that absentee owners have a different appreciation of German law than German nationals, resulting in more frequent legal disputes based on lack of understanding of tenancy law. 

Even before the introduction in Berlin of the Mietendeckel or rental cap earlier this year, Berlin’s governing mayor Michael Müller (SPD) had openly raised these argument in vocally positing the possibility of excluding foreigners from the capital’s residential property market to dampen the rapid rise in purchase and rental prices.

However, there are likely to be considerable hurdles to introducing legal restrictions for foreign buyers. These include freedom of capital movement and freedom of establishment laws under existing EU treaties. There would also be also data protection concerns. However, countries such as Denmark, Switzerland and Austria have already issued prohibitions or restrictions for foreign real estate buyers. New Zealand has also recently introduced such rules.

The lack of available data is also likely to present a major obstacle to changing the status quo. The meeting of the government ministries in July highlighted how the necessary data does not exist and/or would be difficult to obtain. No data are available on purchases by foreigners, summarised the BBSR briefly. Neither notaries' offices, expert committees, land registers or real estate offices systematically document citizenship. And even if they do, the figures are not available digitally. 

But as a result of the meeting, the BMI has taken the step of commissioning the Berlin-based institute empirica to collect data on foreign apartment buyers.

 Industry representatives are anecdotally said to be horrified at the plans of the BMI (Interior Ministry) to even consider excluding foreigners from owning private residential property in Europe’s largest and allegedly most pro-European economy. Initial reaction from the big property broker groups in Germany, who would be expected to have the most contact with foreign investors, suggests that the ministry’s initiative is not to be taken too seriously at this stage. Interior Minister Horst Seehofer is seen as having a political motivation in presenting himself as a hands-on minister on a sensitive subject for many voters, with federal elections coming up next year.